UPDATE ON ANNUITY PRODUCTS

Transcription

1 UPDATE ON ANNUITY PRODUCTS SOUTHEASTERN ACTUARIES CONFERENCE Timothy C. Pfeifer, F.S.A. Milliman, Inc. November 12, 2004

2 Variable Annuity Overview Strong VA sales over first six months Equity net flows have rebounded Suitability concerns Continued focus on Guaranteed Living Benefits (GLBs) 2

3 Variable Annuity Statistics According to VARDS, YTD VA sales for 2004 were $68.1 billion, 8% higher than comparable VA sales in 2003 Industry VA assets totaled $1,047 billion as of June 30, 2004 compared to $1,000 billion as of year-end 2003 The top four VA issuers ranked by new sales as of 6/30/04 were Hartford, TIAA-CREF, MetLife, and AXA 3

4 Variable Annuity Share Class Distribution Product Type 12/31/01 12/31/02 12/31/03 6/30/04 A-Share 1.1% 1.2% 1.7% 2.1% B-Share 77.8% 66.6% 67.7% 30.4% C-Share 14.9% 16.5% 6.5% 4.6% L-Share 5.9% 14.9% 20.2% 16.6% Multiple CDSC Options 0.2% 0.7% 3.9% 3.5% Bonus % Closed % Group % 4

5 GLBs Still Command Attention of VA Market Guaranteed Minimum Withdrawal Benefits continue to attract the most attention, but there has been strong focus on Guaranteed Minimum Accumulation Benefits A number of carriers have introduced combination GMWB/GMAB products GMIBs have lost momentum (ManuLife/Jackson decisions) 5

6 GLBs Still Command Attention of VA Market Asset allocation programs continue to be an increasingly common requirement for GMWBs and GMABs GMWB designs are proliferating Bonuses Automatic step-ups Lifetime withdrawal guarantees Refund of fees 6

7 GLBs Still Command Attention of VA Market Hedging programs continue to replace reinsurance as the risk management strategy Sophisticated seriatim hedging being performed is dynamic, not static OTC hedging Rating agencies and regulators eyeing more closely, as new RBC approaches 7

8 Hedging Programs Advances in hedging will likely create broader creativity with guaranteed benefits in the long term VA guaranteed benefits may become more heterogeneous since various kinds of hedges will likely suggest new, innovative product concepts EIA/VA guarantee combinations may make sense» VA guarantees are put-based benefits, paying off when the market is down» EIAs are call-based benefits, paying off when the market goes up» A coordinated hedging program may allow for efficient lower-cost hedging of both products 8

9 Other Guaranteed Benefit Issues NAVA conducted an industry survey to quantify the amount of GMDB benefits paid over the last few years ($ in millions) Total , , ,875.7 Net amount at risk GMDB charges 9

10 Other Variable Annuity Issues L-Share VAs continue to grow in market share, although concerns about lapses and profitability remain Upfront commissions have nudged higher and appear generous relative to the length of the surrender charge period L-Shares are no longer stripped-down vanilla designs, and now offer many of the optional benefits seen on B-Shares 10

11 VA Regulatory Issues Regulators at the June meeting of the NAIC decided to postpone implementation of the C-3 Phase II RBC and new reserve requirements until the end of 2005 LHATF The task force exposed VA Reserve Work Group s Actuarial Guideline VA CARVM with a 3 year phase-in period and the latest standard scenario proposal from the NY State Insurance Department Capital Adequacy Task Force exposed Recommended Approach for Setting Regulatory Risk-Based Capital Requirements for Variable Annuities and Similar Products 11

12 VA Regulatory Issues In general, there has been a slower pace in product development in the VA market, with many carriers dealing with the regulatory environment VA issuers have been dealing with various proposals from the SEC and NASD impacting VAs in areas such as: Sales practice standards and supervisory requirements Disclosure Training Market Timing 12

13 Fixed Annuity Overview One year rate products continue to be the most popular, often with bonuses, while MVA have slipped Strong growth in EIA products Continued refiling of fixed annuity products to take advantage of lower guaranteed minimum interest rates Continued interest in LTC, CI combos with annuities 13

14 Fixed Annuity Statistics According to LIMRA, fixed annuity sales decreased 9% to $43.0 billion for the first half of 2004, compared to the first half of 2003 Year to date fixed deferred annuity sales for 2004 were $37.4 billion, a decrease of 11% from 2003 Plus $17.4 billion in fixed subaccounts of variable annuities Plus $2.4 billion in fixed SPIAs Plus $3.2 billion in structured settlements YTD 2004 fixed deferred annuity sales by product type were: Book value: $24.9 billion EIA: $8.9 billion MVA: $3.6 billion 14

15 Equity Indexed Annuities According to Advantage Compendium, EIA sales during the first half of 2004 were nearly $9.5 billion New direction in the EIA market is lower sales compensation Design elements of interest Annual ratchets with caps Home-run designs Volatility friendly constructs 15

16 Equity Indexed Annuities Distribution of EIAs is still dominated by independent agents and brokers, but banks and wirehouses are beginning to make room for EIAs in their offerings Recent entrants in the EIA market were American National, Physicians Life, AIG, EquiTrust, and Principal 16

17 Immediate Annuities Idea being considered regarding VIA floor guarantees involves the establishment of a side fund if returns exceed a specified rate such as the inflation rate If the VIA earns a return in excess of the specified rate, the excess goes into a side fund to stabilize payments and to keep future payments from dropping Continued discussions about mild underwriting for SPIAs Fixed SPIA design work and pricing evaluation are intensifying 17

18 Deferred Income Annuities Recently, deferred income annuities have generated a considerable amount of interest A number of companies are currently developing deferred income annuities MetLife recently unveiled a deferred income annuity that is available to employees through payroll deduction (Personal Pension Builder) 18