1. What does Nationwide’s risk management department do?

Nationwide’s Quantitative Risk Management is an area within Nationwide Financial (a U.S. financial services company) devoted to hedging variable annuity financial guarantees. The department was formed in 2002 and is responsible for the entire variable annuity hedging practice.

Variable annuities are a form of retirement investment account. To protect these retirement savings, life insurers offer financial performance guarantees of varying complexity. These financial guarantees are a large source of systematic risk for insurers and must be hedged. The complexity of these financial guarantees and their entanglement with actuarial risks like mortality, contract surrender rates, etc. makes this hedging very challenging.

2. Why does Nationwide put its entire risk management departmental staff through the CQF?

These financial guarantees and hedging practices (beyond simple strategies like cash flow matching, duration matching, etc.) are relatively new to the insurance industry. There is no established pool of “quants” to staff and develop these hedging programs, no standard software for managing these hybrid actuarial/financial risks, no generally accepted practices, etc. The CQF program allows Nationwide to take capable individuals from other fields – actuaries, energy traders, mathematicians, economists, etc. – and quickly train them in the fundamentals of hedging and financial risk transfer.

3. What do you think the CQF offers that other programs and courses don’t?

The CQF program is technically rigorous and quickly develops the expertise and intuition for derivative instruments. At the same time, the program starts at a level that is reasonable for most technical professionals. Stochastic calculus, Martingale processes and other mathematical beasts often make for an intimidating initiation to this field. The CQF program focuses on the essential functionality for the financial practitioner and is quite flexible about working with students from varying backgrounds.
Nationwide especially appreciates the practical emphasis of the CQF that complements the academic training. Reality often deviates markedly from theory. CQF lecturers are the “rock stars” of financial derivatives and help to bring practical tools and instill a healthy respect for what can go wrong in practice. Classroom and distance learning in conjunction with on-the-job exercises and coaching quickly brings students to a point where they can tackle real-world problems.

4. What changes has Nationwide seen in its risk management staff once they have completed the CQF?

Junior candidates without the CQF are typically in a support role, working side-by-side with more experienced practitioners. Once a candidate has entered the CQF, however, they quickly begin to understand the “why” of their work. No longer are they simply running a set of calculations, simply developing a faster bit of code, simply running a set of reports, simply reconciling a set of trades.
Candidates begin to see the variable annuity guarantee portfolio as a large exotic derivative portfolio with an understandable set of behaviors. Markets move up or down, yield curves change, and the portfolio responds in understandable ways. When it doesn’t they recognize the unusual and can ask, “Why?” This begins a process of inquiry and learning that creates senior candidates.
Eventually, candidates begin to bring this same understanding to a broader universe of instruments and can begin thinking about hedge strategies. What instruments make natural hedges? When do those hedges break down? What risks are left? Can I do the same thing more cheaply?
Ultimately, this disciplined approach to financial risk is valuable throughout the organization and candidates find themselves recruited into more senior roles throughout the organization.