Practice Note for the Application of C-3 Phase II and Actuarial Guideline XLIII
Under both requirements, the actuary is also required to provide a certification and maintain documentation to support the certification that the hedging strategy designated as the Clearly Defined Hedging Strategy meets the requirements of a Clearly Defined Hedging Strategy including that the implementation of the hedging strategy in the stochastic cash flow model and any supplementary analysis does not include knowledge of events that occur after any action dictated by the hedging strategy (i.e., the model cannot use information about the future that would not be known in actual practice). A financial officer of the company (e.g., chief financial officer, treasurer or chief investment officer) or a person designated by them who has direct or indirect supervisory authority over the actual trading of assets and derivatives is also required to certify that the Clearly Defined Hedging Strategy is the hedging strategy being used by the company in its actual day-to-day risk mitigation efforts. In addition, AG 43 requires this individual to certify that the hedging strategy meets the definition of a Clearly Defined Hedging Strategy. Section A7.4 of AG 43 states “Additionally, the company shall demonstrate that, based on an analysis of at least the most recent 12 months, the model is able to replicate the hedging strategy in a way that justifies the value used for E. A company that does not have 12 months of experience to date shall set E to a value no greater than 0.30.” Q12.7 What does the certifying actuary do at the time of filing to confirm that the Clearly Defined Hedging Strategy is fully incorporated in the stochastic cash flow model? Are there other items the actuary should consider? A: Both Section A7.5) of AG 43 and Appendix 9 of C-3 Phase II require that the actuary certify as to whether the Clearly Defined Hedging Strategy is fully incorporated into the stochastic cash flow model. However, the actuary is not the individual who certifies that the Clearly Defined Hedging Strategy is the hedging strategy being used by the company. Both requirements (refer to Section A7.5) of AG 43 or Appendix 9 of C-3 Phase II) specify that this certification is to be provided by “a financial officer of the company (e.g., chief financial officer, treasurer, or chief investment officer) or a person designated by them who has direct or indirect supervisory authority over the actual trading of assets and derivatives…” Some actuaries believe t may be prudent for the actuary to confirm with the individual who certifies the Clearly Defined Hedging Strategy that the hedging strategy incorporated into the stochastic model is a reasonable representation of the actual hedging strategy being implemented based on the information available at the time of filing, and is consistent with the underlying principles of AG 43 and the C-3 Phase II report. In addition, Appendix 10 of the C-3 Phase II report and Appendix 7 of AG43 suggest the following specific considerations: As part of the process of choosing a methodology and assumptions for estimating the future effectiveness of the current hedging strategy, the actuary may review the actual historical hedging effectiveness.
American Academy of Actuaries
102
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