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QBS 22 Financial economics, Caracteristics value affected by economic…

- - - - 1) Higher risk-adjusted discount rate
        
        Advantages Risk Adjusted Approach
        1) Acknowledge uncertainty
        2) Easily fits into financial economics
        3) Should provide the same result as explicit decrement
        
        Methodology
        1) Project unadjusted CF
        2) Set discount rates based that reflect risk-premium for default/reduced benefit
        3) Discount the unadjusted CF
      - 2) Explicit plan termination decrement
      - 3) Explicit estimate of future reductions
- - - - Valuing option
        
        Value either explicitly or implicitly with adjusted assumptions
        
        Add value of guarantee to value of the rest of the plan
        
        Technics
        1) Probability distribution
        2) Stochastic modeling
        3) Option-pricing techniques
      - Exemples
        1) Greater of benefits
        2) Floor offset plans
        3) COLAs with cap floor or non linear relationship
        4) COLAs that are activated when market returns exceed hurdle rate
        5) Flat $ min and max benefit
        6) Casf Balance with caps and/or floors on int creaditing rates
        -Capital preservation
        -3% cumulative int credit guarantee
        -Annual floor int credits