The challenge

The introduction of the Long Duration Targeted Improvements (LDTI) accounting amendment imposed new requirements on the US market. In this new regulatory environment, defining and evaluating long-term volatilities is crucial for the valuation of local insurance products with high optionality.

In light of this change, a major American insurer needed the production of risk-neutral scenarios delivered with a time constraint of D+1. The publication time of US market data in addition to the production time needed to generate economic scenarios created a narrow turnaround window for this client. Only a tailored solution would successfully deliver.

The approach

Embedded long-term volatilities were essential for this insurer to perform valuation on their products on a monthly basis. With deep customization capabilities, Milliman Economic Scenario Generator (ESG) provided the long-term volatilities at the time required. Supported by automation, Milliman implemented innovative solutions for integrating volatility targets within Milliman ESG to adequately meet LDTI requirements at the speed of business.

Automation process for D+1 delivery

Large-scale automation of both reports and market data extraction optimized the production process to meet the time restraints of the insurer. Avoiding manual validation reporting, Milliman’s automated validation reports saved time and allowed the client to efficiently evaluate the quality of the scenarios.

Experienced support

Milliman’s team of experienced consultants quickly determines the reasons for a scenario set not being validated. This helps to speed the process of delivering validated scenarios when the client needs them.

Connected to data

Milliman extracts market data for the client using automated processes. API connects Milliman ESG to essential data providers, while Milliman ESG teams perform data quality checks and inform clients about any deviation due to unanticipated market conditions. These strategies make the ESG process more efficient and reliable.

The solution

Within a few weeks of partnering with the client, Milliman developed embedded long-term volatilities allowing the client to successfully valuate their products. Today, Milliman produces and delivers scenarios for this client monthly.

As part of an audit, an external consulting firm reviewed Milliman ESG for the client and noted the quality of the modeling. Milliman ESG teams provided expertise during the entire review process. Helpfully, Milliman ESG comes with comprehensive documentation of all financial models implemented as well as replicating spreadsheets that allow users to better understand the simulation process.

Throughout the audit, the scenarios were consistent with the LDTI evaluation framework. They are continuously evaluated with repricing tests, martingale tests and correlation tests in addition to being approved by a third-party consultant. The scenarios were immediately judged compliant; no adjustments were needed.

Learn more about what Milliman ESG can do for you, here.