VA Guarantee Reinsurance Market Direct Writers Perspective Kirk - - PDF document

Equity-Based Insurance Guarantees Conference

• Nov. 5-6, 2018

Chicago, IL

VA Guarantee Reinsurance Market – Direct Writer’s Perspective Kirk Evans

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VA Guarantee Reinsurance Market – Direct Writer’s Perspective

KIRK EVANS

Vice President – Sammons Financial Group

Monday, November 5, 2018 Session 1B: 1045 – 1215 hours

Agenda

• Background
• Product Design Considerations
• Risk Management Options
• Benefits of Reinsurance
• Conclusion

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Background

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Background

• Historically Focused on Spread Products
• Life Insurance
• Fixed Annuities
• 2012 Diversified into Fee Products (% AUM)
• Mutual Funds
• Variable Annuities
• IOVA Focused
• Limited market
• Desire to Expand VA Presence
• Hybrid VA – currently not an option
• Non-GLWB VA guarantees small % of market
• GLWB space still an opportunity

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Source: LIMRA Secure Retirement Institute, U.S. Individual Annuities survey, VA & Indexed GLB Election Tracking Survey VA GLB sales exclude GMAB sales Analysis includes new/existing sales and excludes sales of FRD annuities with a GLB rider

Guaranteed Living Benefit Sales

(in $ Billions)

$24.9 $27.6 $24.9 $21.3 $20.8 $19.0 $16.5 $13.5 $10.0 $3.9 $4.9 $4.6 $4.5 $6.5 $6.7 $8.0 $8.3 $7.4

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2011 2012 2013 2014 2015 2016 2017 2018

VA Sales - GLB Elected Indexed Sales - GLB Elected

$9.6

VA Sales With and Without Guaranteed Living Benefits (in $ Billions)

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$19.5 $20.6 $17.3 $13.5 $12.2 $9.8 $10.4 $9.3 $9.7 $9.8 $8.3 $10.0 $9.7

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2014 2015 2016 2017 2018

VA Sales - GLB Elected VA Sales - Non-GLB

$11.0

Source: LIMRA Secure Retirement Institute,: The Variable Annuity Market, Second Quarter 2018

$10.0

GLWB Opportunity

• Drivers of VA GLWB Sales Slide
• Limited upside – volatility controlled funds
• Limited benefit levels
• High fees
• Competition from FIAs
• GLWB Still About 50+% of VA Sales
• ~$45B annual sales
• Need an Innovative Product Design
• Unique GLWB benefit feature
• Need AV upside potential
• No volatility control funds

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Product Design Considerations

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Product Design Considerations

• Focus on GLWB
• Base VA, no DB
• Unique GLWB Design
• After a certain date LPAs continue
• No rider charges
• AV not reduced for LPAs
• GLWB Roll-up
• Unique participating roll-up
• 2% + Max[0, 75% of S&P500]
• Limit the fixed rate component
• Participating component adds upside potential

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Product Design Considerations

• Funds
• Provide upside potential for the AV
• No volatility control funds
• Up to 80% allocation to equity funds
• Hedgeable
• All equity funds are tied to S&P500
• All bond funds are broad based high quality bond funds
• GLWB Rider Charge
• Set to permit risk management
• Cover expected hedge costs
• Cover expected reinsurance costs
• Ability to change on inforce

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Risk Management Options Explored

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Risk Management Options Explored

• Go Naked
• Limit exposure via sales management
• Limits sales potential
• Not really risk management
• Outsource Hedging
• Limited ability to develop internal expertise
• Need scale to keep relative costs down
• Retain hedge “breakage” risk
• Build VA Hedging Platform
• Expensive
• Long lead time
• Questionable Cost/Benefit given low early sales
• Retain hedge “breakage” risk

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Risk Management Options Explored

• Capital Markets Reinsurance
• Investment Bank offered solution
• Does not cover actuarial risks
• Traditional Reinsurance
• Coinsurance across entire VA contract
• Does not modify risk profile
• Includes base VA - prefer to retain that exposure
• Coinsurance on GLWB only
• Coverage limited to risk of concern
• Covers capital market risks
• Covers actuarial risks

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Benefits of Reinsurance

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Benefits of Reinsurance

• Entered into Coinsurance on GLWB only
• Provide desired economic coverage
• Does not include transfer of base VA economics
• Covers GLWB Claims
• Reinsurance fee set at contract issue
• Minimize the uncertainty of GLWB claims cost
• Includes actuarial assumptions
• Cover funds’ basis risk
• Reserve Credit
• Reduces uncertainty of reserve impact under uncertain future market

conditions

• Certified Reinsurer in domiciliary state
• Meet risk transfer requirements (A-791)
• Meet NAIC guidelines “Credit for Reinsurance Model Regulation”

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Economic Profile Without and With Reinsurance

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Statutory Reserve Profile Without and With Reinsurance

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Conclusion

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Conclusion

• Invested Partner
• Structured Reinsurance to Meet Our Objectives
• Covered GLWB claims risk (LPAs payments made by us)
• Meet Risk transference requirements (reserve credit)
• Indirect Pricing Validation
• Actuarial assumptions
• Pricing scenarios
• Pricing models
• Provides Avenue for New Entrant/Small VA Player
• Lower upfront costs and less lead time than building internal hedge

program

• More certainty than hedging

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