Retirement Market Challenges & Opportunities. Tiffany Norman, FSA, CERA, MAAA Assistant Vice President, Actuary

Transcription

1 Retirement Market Challenges & Opportunities Tiffany Norman, FSA, CERA, MAAA Assistant Vice President, Actuary Southeastern Actuaries Conference Jekyll Island, Georgia, June 2017

2 Topics of Discussion Market Trends and Challenges Opportunities for Insurers Focus for Reinsurers 2

3 The Need for Retirement Income Solutions is Greater than Ever % of U.S. Population age 65+ Changing demographics Retirees without private pension plans (Source: U.S. Census Bureau) Less certainty around Social Security Increased healthcare costs Increased longevity 3

4 How Do People Think About Retirement Today? 4

5 Industry Challenge #1: The Insurance "Market Share of the Wallet" is Shrinking The US life insurance industry has not grown nearly as much as the broader financial services industry and now has a relative market capitalization that is about 60% of what it was 30 years ago 1. Capital once available to insurance companies is going elsewhere, looking for better return More competition from others in what was traditionally the insurance market space 1 The Life Journey US: Winning in the Life Insurance Market (Agrawal, de Gantes, and Walker) 5

6 Industry Challenge #2: The Ability to Meet the Need and Grow Profitably Over the past 30 years, individual annuity products have grown to consume more than 1/3 of the industry s capital, but they have created less than 20% of the value creation for these companies. Focus has shifted from rebuilding capital positions post-crisis to optimizing return on capital in the face of new and evolving competition 6

7 The Evolution of Insurance Company Balance Sheets Life and health insurance company reserves over time 8% 36% 15% 2% 20% 1% 29% 4% 1% % 72% 8% 3% 51% 45% Life Health Individual Annuity Group Annuity Supplementary In 1970, 15% of insurance company premium income was generated by annuities, and 85% by life insurance. In 2011, 68% of premium income was generated by annuities. Source: 2016 ACLI Life Insurers Fact Book 7

8 Opportunities for Growth An Expanding Market Need! Financial Assets by Age and Retirement Status in Trillions Source: LIMRA Secure Retirement Institute analysis of 2013 Survey of Consumer Finances, Federal Reserve Board,

9 Opportunities for Growth An Expanding Market Need! Financial Assets by Age and Retirement Status in Trillions More than 75% of individual financial assets are in pre-retirement, partial retirement, or early retirement stage and are looking for retirement income solutions. Source: LIMRA Secure Retirement Institute analysis of 2013 Survey of Consumer Finances, Federal Reserve Board,

10 Where do the retirement dollars go when an employee retires? Distribution of Retirement Rollover Dollars in % Annuity 8% CD 6% ETF 2% All others 7% Managed account 28% Managed account Mutual funds Individual stocks Money market fund Money market fund 11% Percent of Retiree Rollover Dollars Invested Annuity CD ETF All others Individual stocks 11% Mutual funds 27% Source: Asset Retention: Keys to Success in the Rollover Market; LIMRA Secure Retirement Institute, Based on percent of dollars. For this study, retirees are defined as those who had retired within the previous three years and had been participating in a voluntary retirement savings plan at the time of retirement. "All others" includes real estate investment trusts (REITs) and individual bonds or Treasuries, payout annuities, and other investments. 10

11 Pre-retirees Still Don t Have a Plan for Their Retirement Focus remains on assets vs. income Non-retirees intended usage for DC plan assets in retirement Make withdrawals directly from plan(s) Roll money to an IRA and take withdrawals from that account The market for IRAs and DC assets has tripled in the last 30 years. Convert some or all of balances into guaranteed life income Do nothing/ no intention to use in retirement Something else Don't know 15% Market surveys indicate that guaranteed lifetime income is the single most important concern for those preparing for retirement 0% 10% 20% 30% Source: Moving Pieces: Assets, Decisions, and Security Before and After Retirement, LIMRA Secure Retirement Institute, The survey is based on 1,975 consumers between ages 45 and 75 with household investable assets of $100k or more. 11

12 Challenge #3: Regulatory Environment Increasing Capital Standards VA Captive changes DOL Fiduciary Rule New Reserving Rules Dodd-Frank Solvency II 12

13 Annuity Market Trends 2016 Annuity Sales Annuity Industry Estimates (in billions) Variable Q Q Pct Chg Q4/Q4 YTD 2015 TYD 2016 Pct Chg 2015/2016 Separate accounts % % Fixed accounts % % Total variables % % Fixed Fixed-rate deferred % % Book value % % Market value adjusted % % Indexed % % Fixed deferred % % Deferred income % % Fixed immediate % % Structured settlements % % Total fixed % % Total % % Industry estimates reported for the fourth quarter 2016 based upon data from 63 companies, representing 96 percent of total sales Source: LIMRA Secure Retirement Institute, U.S. Individual Annuity Sales Survey (2016, 4th quarter) 13

14 The Individual Annuity Market... The Lost Decade? U.S. Annuity Sales - Fixed vs. Variable in USD billions Fixed Variable Source: LIMRA Secure Retirement Institute, U.S. Individual Annuity Sales Survey 14

15 Annuity Market Trends 2017 Annuity Sales Variable Q Pct Change Q4-Q1 Pct Change Q1-Q1 Separate Accounts % -7% Fixed Accounts % -12% Total Variable % -8% Fixed Indexed % -13% Other Fixed % -16% Total Fixed % -15% Total % -12% Sales continue to decline year over year Indexed sales may have peaked, this is 3 rd consecutive quarter of decline Variable sales may have started their plateau, but still at lowest point in almost 20 years Source: LIMRA Secure Retirement Institute, U.S. Individual Annuity Sales Survey (2017, 1st quarter) 15

16 Product Trends for Fixed and Indexed Fixed Rates Index Options Premium Bonuses GLWB Rates Liquidity options New products 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% Average Fixed Credit Rates 16

17 Product Challenges Companies Face in Growing the Market Low interest rates / portfolio returns Reducing the funding costs of new business Funding Excess regulatory capital requirements Significant and competing liquidity needs Lower than targeted Return on Capital The need to optimize tax efficiency Managing accounting standards that can distort economic results Managing ratios and metrics important to regulators and rating agencies 17

18 Reinsurance Solutions For the Annuity and Retirement Market Reserve & Capital financing New business financing Coins / ModCo Retirement market reinsurance solutions Longevity swaps Divesting blocks Liquidity financing 18

19 Structured Financial Solutions Usauge by product line Anticipated usage by product type in % of respondents 100% 8% Decreasing usage 75% 57% 58% 50% 75% 50% Stable usage Increasing usage 25% 35% 39% 50% 25% 0% Permanent Term Annuities Other 2015 NMG SFS Survey 19

20 Fundamentals of Financial Reinsurance for Annuities Concepts and application borrowed from Life Insurance solutions Efficiently finance different layers of capital Allow companies to retain control of product management and long-term profits Collateralized Lending - finance new business using embedded value Provide alternative source of liquidity Use reinsurance as an asset with no financial leverage Measurable increase in IRR or competitiveness of product 20

21 Longevity Solutions The Focus in the Future Will Be Much Different... Industry RBC Developments: Longevity Risk Subgroup of LATF and Life RBC Working Group AAA Longevity Risk Task Force Groups charged with recommendations for stat margins on reserves and RBC Proposals related to RBC charges for longevity risk Proposed results suggest additional capital charges as much as 10-15% of current longevity-related reserves. Market is growing and there is increased longevity risk accumulating on companies balances sheets 21

22 Meeting the Challenge Ahead But that s the challenge to change the system more than it changes you. -Michael Pollan 22

23 Thank you for your time! Tiffany Norman, FSA, CERA, MAAA AVP, Actuary, Financial Solutions Hannover Life Reassurance Company of America, 200 S. Orange Ave, Suite 1900, Orlando FL Office , Mobile

24 Disclaimer This presentation does not address the investment objectives or financial situation of any particular person or legal entity. Investors should seek independent professional advice and perform their own analysis regarding the appropriateness of investing in any of our securities. While Hannover Re has endeavoured to include in this presentation information it believes to be reliable, complete and up-to-date, the company does not make any representation or warranty, express or implied, as to the accuracy, completeness or updated status of such information. Some of the statements in this presentation may be forward-looking statements or statements of future expectations based on currently available information. Such statements naturally are subject to risks and uncertainties. Factors such as the development of general economic conditions, future market conditions, unusual catastrophic loss events, changes in the capital markets and other circumstances may cause the actual events or results to be materially different from those anticipated by such statements. This presentation serves information purposes only and does not constitute or form part of an offer or solicitation to acquire, subscribe to or dispose of, any of the securities of Hannover Re. Hannover Rück SE. All rights reserved. Hannover Re is the registered service mark of Hannover Rück SE. 24