{1.2 points] KRW is a regional annuity carrier based in the [1.5. that specializes in the following products: 1 Fixed deferred annuities e Single premium immediate annuities You are an actuary reporting to KRWs CR1]. 'fou are provided with the following information regarding KR'W's ERM practice. I. Rislt management reports rislt metrics including economic capital {EC}, asset liability duration and regulatory risk-based capital ratio every six. months to senior management II. Capital levels are primarily based on regulatory capital requirements and are allocated by product line III. Current AIM and asset allocation are driven by cash ow matching I'd. Sensitivities on liability discount rate and mortality are performed annually by the valuation department KRW is interested in improving its overall rislt management framework. [a] (.2 points] Evaluate each of KRW's four current ERM practices given its current product portfolio. (b) (4 points) KRW decides to change its objectives for the asset allocation methodology to the following: Maximize net excess yield Minimize surplus volatility while constraining asset-liability duration gap You are given the following selected data: Current Portfolio Mix Return Volatility Duration Cash 5% 0.5% 1% Government Bonds 10% 2.5% 9 Corporate Bonds - AAA 10% 3.3% 4 Corporate Bonds - BBB 75% 6.7% 3 Equity 0% 8.0% 11% Real Estate 0% 7.0% 8.5% Total Assets 3.5 Total Liabilities 7.5 (i) Outline the steps in the process of implementing strategic asset allocation. (ii) Explain the trade-offs associated with changing the allocation to each of the following asset classes: Government Bonds . . . Corporate Bonds Equity Real Estate (iii) Recommend how each component of the current portfolio should change, considering the new asset allocation objectives. Justify your response.(c) (4 points) KRW's management decides to incorporate EC as a metric for its strategic asset allocation process. Its CFO recommends using the following shocks to derive individual EC values: Decrease mortality rates by 10% for all ages and durations Lower discount rate to 1% flat for all durations . Reduce the lapse rate to 0% for the first 5 durations The CFO suggests that aggregate capital levels would be determined by summing the resultant capital values produced by each shock. (i) Evaluate the appropriateness of the CFO's recommendations for the entire portfolio of KRW's existing products. (ii) Describe key considerations related to the implementation of the following alternative modeling methods: Stochastic Analysis . Sensitivity Analysis (iii) Additionally, KRW is looking into introducing a new traditional life product. Evaluate whether the shocks recommended by the CFO would be appropriate for the portfolio after adding the new product line. (d) (2 points) Recommend how KRW could mitigate financial risks using product design and asset allocation