US Products. Variable Annuities. International Products & Experiences

Transcription

1 Variable Annuities International Products & Experiences The Actuarial Profession One-Day Seminar Friday tember The Barbican, London René Cotting, ABN AMRO Paul Sauvé, RGA International Index 1. US Products 2. Asian Expansion 3. European Expansion 4. Hedging & Reinsurance 5. Other Environmental Factors 6. Lessons Learned & Remaining Unknowns 2 1 US Products 3

2 4 The Four GM Benefits Increasing Complexity Guaranteed Minimum Death Benefit (GMDB) Typical charges: 0-45 bps Guaranteed Minimum Accumulation Benefit (GMAB) Typical charges: bps Guaranteed Minimum Income Benefit (GMIB) Typical charges: bps Guaranteed Minimum Withdrawal Benefit (GMWB) Typical charges: bps Evolution & Competition Increasing Generosity GMDBGMAB Evolution Return of premium Fixed Increases Inflation-linked Increases High water mark Enhanced Earnings Benefits 5 Evolution & Competition Increasing Generosity GMWB Evolution (2002) Similar ratchets to GMDBGMAB Waiting periods 7% for 14.3 years (2002) Lifetime GMWB (2004) 6

3 7 Evolution & Competition Increasing Generosity Evolutions Common to all GM benefits Number and type of eligible funds Ability to switch funds Price Dollar cost averaging Commissions and surrender charges Automatic portfolio rebalancing Benefit Distribution 2005 Q1 Election Pattern GMIB 27% GMWB 27% GMAB 17% None 29% Source: Milliman 8 Charges Typical Variable Annuity Costs 2.50% Annual % of Fund Value 2.00% 1.50% 1.00% 0.50% 0.50% 0.25% 1.40% Guaranteed Living Benefit Enhanced GMDB Option Base Fees 0.00% 9

4 10 2 Asian Expansion Japan Asian Expansion Asia first is not a coincidence. Recent introduction in Japan has been very successful and the industry is growing at a rapid pace (85% CAGR). No signs of market saturation yet. bl JPY 15,000 12,716 VA Industry in Japan 10,961 Asset under Management Growth 10,000 Source:Hoken Mainichi Shimbun 8,122 85% CAGR 5, ,127 2,019 3, , Japan Total Assets of JPY 12.7 tr. ($114 bl.) in less than 4 years! 11 An Unfinished Story Asian Expansion Also activities in Taiwan, Singapore & Malaysia Japan Adopted U.S. policy designs Vanilla benefits, high fees Low interest rate - think of a ROP South Korea Adopted U.S. policy designs Even more vanilla benefits. (further behind on product evolution High equity vols (KOSPI) Hong Kong HSBC 10y term product, annual fees of 2.9% GMAB: Max of NAV, Premium, 105%@5y 120%@10y (GMDB): Max of NAV, Premium, 105%@5y 120%@10y + $

5 13 An Unfinished Story Asian ket Issues Asia ex Japan: focus on performance, not protection Very lean benefits, e.g. GMDB= 101% NAV, or NAV+ $1250 Local currency limitations Also activities in Taiwan, Singapore & Malaysia Liquid yield curve -10y Few long-dated equity options Low interest rate (Jap, Tw) Structural market changes, young indices limits value of back testing Challenge for pricing & hedging guarantees 3 European Expansion 14 ket Overview Europe Variable Annuities in Europe Large multi-nationals have only recently started to introduce VAs in Europe (example: AXA) Hartford first launched VAs from Dublin into the U.K. in 2005, Others have followed since (e.g. Aegon, Metlife and Axa) The unitindex-linked business corresponds to VAs without guarantees and is most likely to be converted AXA s VA roll-out schedule European Unit-linked (1) markets Country Launch Benefits Distribution Unit-linked % unit-linked U.S GMDB, GMIB, Tied Agents, Banks, Country premiums total life GMAB, GMWB Brokers, IFAs (EUR bl.) insurance Germany GMIB Tied Agents U.K % Japan GMDBWBAB ($) Banks France % Q1 07 GMDBIB ( ) Italy % U.K GMDBWB, Wholesale Germany % Q4 06 GMDBIB Luxembourg % Belgium Q1 07 GMWB Brokers, Agents Sweden % Southern Q1 07 GMDB, GMAB, Tied agents, Banks, Belgium % Europe GMWB Brokers Spain (2) % France Q1 07 GMWB Tied agents, Salaried workforce Switzerland % Poland % Source: Axa Total (1): including Index-linked Source: Milliman 15 (2): excluding index-linked

6 16 4 Hedging & Reinsurance Step One The Actuary: Hedging? The expected cost is nil. There is no real risk. Product Result: Low premiums. Not bad for now risk. Risk Management We can t afford to hedge anything. Don t hedge anything. 17 Step Two Hedging Becomes Reinsurance The Actuary: Hmm? Let s reinsure it. The reinsurance actuary: The expected cost is nil. There is no real risk. Product Result: Yes, we can pay you an override, but not too large. Risk Management We can t afford to hedge anything. Don t hedge anything. 18

7 19 Step Three We Should Have Hedged...between 2001 and 2003 VA investor beneficiaries received death benefits of USD 2.8 billion more than the value of the annuities... CIGNA takes a US$1.1 billion GMDB charge Reinsurance capacity dries up Companies can twon t stop selling product Self insure again Prices rise Hedging take seriously Benefit Distribution Proportion of companies hedging each benefit: GMWB 100% GMAB 65% GMDB 54% GMIB 72% Source: SOA & ALM Institute 20 Capital kets Considerations Switching, Forwards and Puts Switching: worst of option expensive Experience: low policyholder efficiency lower actual hedging costs to date But: remember lapse supported products & life settlement? How can an IFA provide good value? value puts forward guarantee smile! time 21

8 22 5 Other Environmental Factors ket issues Customization is key USA: Hedging decision influenced by US GAAP Accounting DB, IB: insurance WB, AB: derivative, mtm Germany & Italy: UK: Products sold from Ireland due to local rules Is lifetime GMWB an eligible pension product? Ger, Nl and others: Tax advantage of retirement savings insurance products over banking products Disappearing rapidly Europe & ww: Every market is different 23 6 Lessons Learned & Remaining Unknowns 24

9 25 Lessons Learned These products really do entail risk Partial surrenders lead to proportional reduction in guarantee base Most U.S. policy designs have been developed driven by marketing, before systematic hedging was developed Policyholder option execution efficiency is low, but Reinsurance and external hedging creates reporting lag and hence basis risk Hedging got a boost after equity market crash & introduction of reg. capital charges for secondary benefits Remaining Unknowns Policyholder behaviour in the tail (SOA study) Secondary markets? (hedge funds) Products are not risk adjusted: Free choice of asset, but one rider fee No actual mortality longevity underwriting Cross-subsidization? Anti-selection? 26 Disclaimer This presentation was prepared by ABN AMRO exclusively for the benefit and internal use of the recipient in order to indicate, on a preliminary basis, the feasibility of a possible transaction or transactions. This presentation is incomplete without reference to, and should be viewed solely in conjunction with, the oral briefing provided by ABN AMRO. The presentation is proprietary to ABN AMRO and may not be disclosed to any third party or used for any other purpose without the prior written consent of ABN AMRO. The information in this presentation reflects prevailing conditions and our views as of this date, which are accordingly subject to change. In preparing this presentation, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which was provided to us by or on behalf of the Company or which was otherwise reviewed by us. In addition, our analyses are not and do not purport to be appraisals of the assets, stock or business of the Company. Even when this presentation contains a kind of appraisal, it should be considered preliminary, suitable only for the purpose described herein and not be disclosed or otherwise used without the prior written consent of ABN AMRO. The information in this presentation does not take into account the effects of a possible transaction or transactions involving an actual or potential change of control, which may have significant valuation and other effects. 27