Reserve and capital requirements for registered index-linked annuities (RILA) under Valuation Manual-21 (VM-21) and non-variable annuities under VM-22 are heavily driven by asset-liability mismatch. Duration mismatch can drive losses in tail scenarios, and liquidity mismatch can result in forgone profits from an overly conservative strategic asset allocation (SAA) or punitive illiquidity cost from excessive allocation to illiquid assets.

This paper provides a case study on a block of RILA new business to illustrate how derivatives can play a key co-optimization role in SAA. It also presents an analytical framework to quantify the drivers of the VM-21 requirements and facilitate comparisons of candidate SAA portfolios.

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