Session 57 PD, Annuity Product Development Trends and Issues. Moderator: John A. Adduci, FSA, MAAA. Presenters:

Transcription

1 Session 57 PD, Annuity Product Development Trends and Issues Moderator: John A. Adduci, FSA, MAAA Presenters: John A. Adduci, FSA, MAAA Guillaume Briere Giroux, FSA, MAAA Aatman Dattani SOA Antitrust Disclaimer SOA Presentation Disclaimer

2 057PD - Annuity Product Development Trends and Issues Part I - Overview of the Annuity Market Aatman Dattani October 24, 2016

3 Overview of the Annuity Market - Agenda Overview of the Annuity Market - Sales Variable Annuities Update on the Variable Annuity Market Variable Annuity Product Changes Global Response to Low Interest Rates Indexed Annuities Update on the Indexed Annuity Market Indexed Annuities with GLBs Overview Fixed Annuities Fixed Annuities Sales Book Value and MVA Fixed Annuities Sales- SPIA Deferred Income Annuities 2

4 Overview of the Annuity Market - Sales Sales in $ billions sales are annualized based on 2016 Q2 YTD sales Source: LIMRA 3

5 Variable Annuities

6 Overview of the Variable Annuity Market Variable Annuity Sales ( VA ) declined by 5% vs The VA sales to equity market correlation does not hold anymore Sales in billions of dollars Source: LIMRA 5

7 Variable Annuity Sales by Company There has been a reshuffling in ranks of the top 10 VA writers vs De-risking, diversification of product offerings, changes in regulation (fair value, DOL) likely impacted sales Sales in $ billions Source: LIMRA 6

8 Variable Annuity Guaranteed Living Benefit Sales The percentage of VA s available without GLB s has risen from 7% in 2013 to 17% in 2015 GLWB is the most elected rider (around 70% of the time) with GMIB a distant second (7-10%) 20% 17% 19% 17% 16% 16% 7% 9% 7% 9% 9% 11% 13% 9% 12% 15% 17% 14% 65% 67% 64% 59% 56% 52% 2010 ($141bn) 2011 ($158bn) 2012 ($147bn) 2013 ($145bn) 2014 ($140bn) 2015 ($133bn) GLB Elected GLB Available, Not Elected GLB Not Available Employer Plan Source: LIMRA 7

9 Variable Annuity Guaranteed Living Benefits Sales - Continued Independent Agents are the largest seller for GLWBs while Career Agents lead in GMIB and GMAB GLB elections, when available, have typically declined Rider Sales by Channel 2Q % 12% 19% 41% 7% 17% 8% 31% 44% 84% 63% 49% 34% 21% 13% 8% 11% 21% GLWB GMIB GMAB GMWB Hybrid Wirehouses Independent Career Bank Source: LIMRA 8

10 Variable Annuity Market Product Changes VA products in the last year have been de- risked using the following strategies: Increase in Rider Fees Limitations in Contributions Reduction in Benefits Benefits that Differ by Age Fund Allocation Limitations Links to VIX, Treasury Indexes New Products e.g. IOVA Closing Existing Products Volatility Control Funds 9

11 Variable Annuity Assets US VA Assets declined for the first time since the financial crisis Stagnant equity markets and negative net flows resulted in the drop Outflows exceeded inflows in all four quarters 2000 Dollars in Billions $972 $904 $815 $1,016 $1,136 $1,231 $1,397 $1,517 $1,151 $1,389 $1,561 $1,593 $1,762 $1,908 $1,967 $1, Source: LIMRA

12 Global Impact of the Low Interest Rate Environment on VAs Low Rates here to stay Move away from interest rate risk Focus on unit linked and protection products Pension reforms Q Sales dropped 8% in UK, 45% in France and 18% in Rest of Europe. GMWB sales dropped while GMAB sales rose. Product De-risking to blame? Low Rates here temporary Continue writing protection products Optimize capital efficiency and reduce costs Negative Interest Rates USD, AUD and NZD denominated products replaced GMAB (JPY) Strategic shift SPWL with VA Features Variable Life with GMDB converted to fixed life in years (FIT) Premium invested in two buckets during FIT: stable + aggressive Stable fulfills guarantee, aggressive allows for upside

13 Indexed Annuities

14 Indexed Annuities Sales Overview Indexed Annuity sales were $54.5 billion, up 13% vs Companies that were traditionally VA writers entered the FIA market Products with guaranteed living benefits continue to attract consumers The split between qualified and non qualified indexed annuities sales has widened Dollars in billions $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ % 65% 60% 55% 50% 45% 40% 35% 30% 65% 62% 62% 63% 60% 58% 42% 40% 38% 38% 37% 35% Qualified Non Qualified Source: LIMRA

15 Indexed Annuities with GLB Overview GLB offerings have increased but are facing headwinds In 2015, sales of indexed annuities with a GLWB elected rose only 3 percent, while sales of indexed annuities without a GLWB rider either elected or available, rose 33 percent 80% 70% 74% 76% 71% 69% GLB Election % 60% 64% 68% 68% 69% 67% 65% 59% 59% 50% 40% 30% 20% 10% Source: LIMRA 0% Q Q2 Q3 Q4 Q Q2 Q3 Q4 Q Q2 Q3 Q4

16 Indexed Annuities with GLB Overview - Continued GLB elections varied significantly by distribution channel Indexed annuities are positioned as accumulation and principal protection products at banks whereas they are positioned as income products with independent agents and broker dealers. 4% 28% 35% 9% 32% 23% 68% 32% 68% 50% 14% 59% 45% 15% 18% Ind. Agent Bank Career Ind. B-D Nat. B-D GLWB Elected GLWB Available, Not Elected GLWB Not Available Source: LIMRA

17 Indexed Annuities Index Options 2015 Allocation % Investment options have expanded in Indexed Annuity products Customized indexes, volatility managed funds, commodities are all offered It is interesting to note that over 12% of the indexed annuity AV was allocated to the fixed account in 2015 DJIA, 1% Commodities Russell 2000, 2% NASDAQ-100, 2% Other, 9% Fixed, 12% Volatility Managed, 23% S&P 500, 51% Source: LIMRA

18 Fixed Annuities

19 Fixed Annuities Sales Book Value and MVA Fixed annuity sales (Book value and MVA) were $8.5bn in 2015, 4.5% lower vs The low interest rate environment continues to pressurize fixed rate annuity sales Equity market volatility in the second half of 2015 resulted in a bump in sales The split between qualified and non qualified products has narrowed 70% 65% 60% 61% 65% 56% 57% 60% 57% 55% 50% 45% 40% 35% 30% 44% 43% 43% 39% 40% 35% Qualified Non Qualified Source: LIMRA

20 Fixed Annuities Sales- SPIA SPIA sales were $9.1 billion, 6% down vs 2014 but fairly robust vs historical sales The low interest rate environment and mortality table updates likely impacted sales The majority of SPIA sales include lifetime benefits 81% of SPIA s offered in the market include lifetime income options 10 Dollars in billions $3.0 $3.6 $4.8 $4.8 $5.3 $5.3 $6.1 $6.5 $7.9 $7.5 $7.6 $8.1 $7.7 $8.3 $9.7 $ Source: LIMRA

21 Deferred Income Annuities Deferred Income Annuities sales were $2.69bn Qualified Longevity Annuity Contracts (QLAC) compliant DIA s are increasingly being offered in the market 11 out of 17 companies offering DIA s had QLAC compliant products (introduced in Q3 and Q4 2015) The issue age and premium amounts are significantly different between QLAC and non QLAC products likely due to IRS restrictions on the limitations on investments in QLAC accounts Top 10 Companies DIA($mm) DIA w QLAC ($mm) New York Life 857 $83 Northwestern Mutual Life MetLife Massachusetts Mutual Life Principal Financial Group Guardian Life of America AIG Companies Pacific Life Thrivent Financial for Lutherans 47 7 Lincoln Financial Group 34 10

22 Thank you Aatman Dattani

23 ANNUITY PRODUCT DEVELOPMENT TRENDS AND ISSUES John A. Adduci, FSA, MAAA Vice President PolySystems, Inc.

24 Outline Review the state of the economy. Interest Rates Credit Spreads Equity Performance Focus on three major classes of deferred annuities: Variable, Fixed, Indexed. Review of annuity features - what has been selling, and why (or why not)

25 Federal Funds Rate, Projected In the United States, the federal funds rate is the interest rate at which depository institutions (banks and credit unions) lend reserve balances to other depository institutions overnight, on an uncollateralized basis

26 10-Year Treasury Yields Blue = Nominal Yield Gray = Real Yield (yield over inflation) - 4 -

27 Treasury Yields When will we find the bottom? - 5 -

28 Credit Spreads Through January 2016, relatively attractive yields (when compared to ultra low treasuries)

29 Equity Performance Domestic: Positive Long Term Trend International: Flat - 7 -

30 S&P 500: 5 year performance S&P 500: popular underlying index for indexed annuities - 8 -

31 Variable Annuity In general: Continued exit and scaling back of offerings in the market. Fixed Indexed Annuities are less risky to the company, and less costly to offer GLWBs. Indexed Annuities can offer slightly richer GLWB benefit at a slightly lower cost than on a Variable Annuity

32 Restructuring Living Benefits on Variable Annuities a little more detail Decreased withdrawal percentages and bonuses Increased charges Investment options more restrictive: X% in equities, let s say 80% only; Of your X%, you can t put all of it in a risky class (e.g., international small cap), you must diversify. Less competitive benefits richer ones pulled from the market Guarantees are still hot items, but becoming less important

33 VA: QIS, AG43 recommendations September 2015: Oliver Wyman report with ideas for improvements to current AG 43 and C3 Phase 2 reserve frameworks. In 2016, Quantitative Impact Study (QIS) to assess five sets of framework improvements: Align economically focused Hedge Assets with liabilities Reform Standard Scenarios (AG43 and C3P2) Align Total Assets Required (TAR) and reserves Revise asset admissibility for derivatives and DTAs Standardize capital markets assumptions More time needed for review, testing and commentary. Uncertainty regarding changes to the regulations

34 VA: Fair Value Accounting Impact Anticipated targeted changes to GAAP Accounting: VA riders recorded at fair value. Currently these are either SOP 03-1, FAS 133, or a blend of SOP / FAS 133. This will address current diversity in approaches Two largest drivers of reserve movement are risk free rates and fund performance Can be difficult to roll forward reserve from one period to next Fair value accounting, when it arrives, may be more volatile than even the existing accounting treatments such as SOP Few companies currently use FAS 159 fair value election to value underlying base VA contract

35 Fixed Deferred Annuity Deferred Annuity with a defined credited interest rate that periodically renews. Sales have been flat last few years; recent uptick Interest Rates low; where s the beef for consumers?

36 Fixed Deferred Annuity Fixed DA are a difficult sell because: Not very attractive to consumers Difficult for insurers to earn spread Spread: Unlike VA, which makes money on fees, spread is where insurer earns profit Product trends Market Value Adjustments Some fixed DA now include Living Benefit Riders GWB, GMIB Sales are up recently (Q2 2016) due to: Volatility in equity market Alternative to money market investments / CDs, credit spreads allow a little more credited interest MVA products alleviate disintermediation risk

37 Indexed Annuity Popular: sales record in 2015 Accounting regulations are less clear than Fixed DA and Variable Annuity Filed as fixed DA, not regulated by SEC Some properties more like a VA, especially new product designs Few regulations written specifically for indexed annuity; may soon reach critical sales mass to get more attention. Wide variety in how products are valued: Statutory / Tax: AG33, AG35, AG43, AG33 with modifications GAAP: FAS 133 / 157, FAS 91, FAS 97, SOP

38 Indexed Annuity Product Differentiation latest features Index Crediting Strategy Innovation European, Asian, Cliquet, Binary, Blended, Downside Floor, Downside Protection, Rainbow, and others Variety of indices available, including volatility control SP 500 is most popular, but also: Russell, DJIA, SX5E, EAFE, Custom Volatility Controlled, Other Riders: GWB most popular, but also GMDB, GMAB, GMIB, waiver of SC, ROP GWB/GMDB combo Agent commissions: generally higher than fixed DA

39 Insurance is SOLD, not bought Product Features not driven by consumer demand, for the most part. It is doubtful that consumers are clamoring for an exotic crediting strategy. 2 year cliquet index strategy based on a proprietary vol control index. Underlying includes both GWB and GMDB riders; charges based on the underlying GWB Benefit Base. Try explaining this product to your parents

40 Insurance is SOLD, not bought Few actuaries understand the nuances of these products; Do consumers understand what they are buying? Do insurance companies / agents have a responsibility to explain to the consumer the products they are buying? Should financial advisers and insurers consider the best interests of their customers when designing and selling these and other annuity products?

41 Annuity Product Development Trends and Issues Impact of DOL 2016 Society of Actuaries Annual Meeting Las Vegas, October 24, 2016 Guillaume Briere-Giroux, FSA, MAAA, CFA 2016 Oliver Wyman

42 Agenda 1 Overview of DOL fiduciary rule 2 Impact on product design 3 Impact on product pricing 2016 Oliver Wyman 1

43 Overview of DOL fiduciary rule Assets impacted Year-end 2015 US Retirement Assets ($ Trillions) Annuities (Other), $1.9 IRA (Annuities), $ (k), $4.7 IRA (Other), $ (b), $0.9 IRA (Banks and Thrifts), $0.5 Other DC Plans, $1.2 IRA (Mutual Funds), $3.5 Source: Investment Company Institute (2016 Investment Company Fact Book) 2016 Oliver Wyman 2

44 Overview of DOL fiduciary rule (continued) Key timeline October 22, 2010 fiduciary rule proposed April 20, 2015 rule reproposed April 10, 2017 new fiduciary definition effective September 19, 2011 proposal withdrawn April 6, 2016 final rule released January 1, 2018 full BIC compliance in place 2016 Oliver Wyman

45 Impact on product design Product Component Standardization vs. customization Impact on VA / FIA Shelf standardization (within) Shelf customization (across) Commissions Determine what s reasonable Industry benchmarking Likely drive down product commission Move towards fee-based model Surrender charges Pressure to reduce both the size and length of surrender charge Impact on Fixed-rate Annuity Lesser impact Lesser impact Lesser impact Product fees / interest margin Pressure to reduce M&E and rider fee on VA Pressure to reduce interest margin on FIA Minimal impact Minimum size Likely raise minimum contract size Minimal impact GLWB and other guarantees 2016 Oliver Wyman More difficult to offer if surrender charge is reduced and fees are lowered The justification to buy VA/FIA? Complexity Pressure to reduce product complexity (e.g. indexed crediting methods, volatility controlled features) Will GLWB become predominant? Minimal impact 4

46 Impact on product pricing Pricing Component Impact on VA / FIA Impact on Fixed-rate Annuity Commissions Lower strain Implications on pricing methodology Lesser impact Expenses Initial implementation cost to comply with BICE Ongoing compliance cost Limited compliance cost Average size Expect higher average size Do not expect material change Lapses Expect lower lapses Other policyholder behavior Expect lapses to become more dynamic Negative pricing impact if product/feature is lapse supported Expect more rational policyholder behavior such as GLWB utilization Negative pricing impact Profit margin Standardization vs. differentiation Shelf presence Capacity constraints Variation by channel Small to no impact Variation by channel 2016 Oliver Wyman 5

47 Key takeaways 1 Product repositioning 2 Pricing refinements 3 Outlook 2016 Oliver Wyman 6