The Milliman Guarantee Index™ (MGI) provides volatility parameters that variable annuity (VA) guarantee writers can use for VA guarantee valuation and risk management. To construct the monthly MGI, Milliman reflects market data through an analytical process that produces a 1- to 30-year term structure of volatility and a correlation matrix for various market indices. The index provides volatility parameters for VA guarantee valuation on a monthly basis, incorporating a risk adjustment that reflects the uncertainty in the ultimate cost of funding VA guarantee claims.
The Milliman Hedge Cost Index™ (MHCI) provides the estimated hedging cost for a hypothetical lifetime guaranteed minimum withdrawal benefit (“Lifetime GMWB”) block, based on product specifications and modeling assumptions as described in the MHCI Methodology Document. The expected hedge costs are calculated using product features for a generic Lifetime GMWB in line with product designs common in the market. Likewise, the modeling assumptions are based on typical actuarial and behavioral assumptions widely used by VA writers in the market place. The Milliman Hedge Cost Index is a widely used reference point for insurance companies, investment banks, hedge funds, and others that participate in the VA marketplace as issuers or investors. Milliman conducts annual reviews of the product features and assumptions underlying the MHCI and will implement updates to the assumptions as and when appropriate to keep pace with market trends and industry practice. It is also available to Bloomberg subscribers under the ticker MLHCI Index.
For more information or questions about the Milliman Guarantee Index and the Milliman Hedge Cost Index, contact:
Ram Kelkar
Phone: +1 312.726.0677
Xiaohong Mo
Phone: +1 312.726.0677
Genesis of Milliman Guarantee Index (MGI) and Milliman Hedge Cost Index (MHCI)
Life insurers subject to U.S. GAAP accounting are currently valuing VA guarantees using methodologies that do not reflect the illiquidity of the guarantees.
VA writers commonly use data from the over-the-counter (OTC) options market for volatility parameters when valuing guarantees. However, VA guarantees have no cash value; therefore, life insurers are not exposed to the risk of forced liquidation. The OTC market is dominated by hedge funds and investment banks that are exposed to forced liquidation, which can trigger cycles of volatile option price movements.
Moreover, VA guarantees are commonly 20- to 30-year options, whereas the OTC options market is generally a 1- to 5- or 7-year market at most. Given that the liquidity characteristics of VA guarantees do not match those in the OTC options market, and given that there is no activity in the OTC options market in the 20- to 30-year maturity range, life insurers must look elsewhere to meet the requirements of FAS 157, which contains guidelines applicable to VA guarantee valuation.
Milliman developed the MGI to provide a set of volatility parameters for VA guarantee valuation incorporating a risk adjustment that reflects the uncertainty in the ultimate cost of funding VA guarantee claims. The methodology for MGI is aligned with the guidance in the FASB position papers FAS 157-3 and FAS 157-4, and the Practice Note on FAS 157 and FAS 159 issued by the American Academy of Actuaries.
In conjunction with the launch of MGI, Milliman also began publishing the MHCI to create a benchmark for VA hedging costs for a hypothetical Lifetime GMWB block, in order to provide a reference point for insurance companies, investment banks, hedge funds, and others that participate in the VA marketplace as issuers or investors. The MHCI is used by audiences such as equity analysts and risk managers to track and understand changes in VA hedging costs.
Disclaimer: The information contained on this Web page is provided for general informational use only and should not be construed as accounting advice. Subscribers to the Milliman Guarantee Index and users of the Milliman Hedge Cost Index should consult their own financial, accounting, and other advisors to the extent they consider necessary, and make all decisions solely based upon their own judgment and advice from their advisors.
