Longevity Insurance. Objectives. What is longevity insurance? What are the actuarial implications of the product design?

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1 Longevity Insurance November 22, 2013 Harrison Weaver, FSA, MAAA Objectives What is longevity insurance? What are the actuarial implications of the product design? How does this product fit in the current retirement landscape? 11 November

2 1 Longevity Insurance Overview Illustrative assumptions Male, age 55 $100,000 premium 2012 IAM Basic table Spot rates based on 11/1/2013 US Treasury Strips 3 2

3 Single Premium Immediate Annuity (SPIA) $5,800 SPIA Cash Flows $5,600 $5,400 $5,200 $4,800 $4,600 Premium = $100,000 Payments continue for life PV(Payments) = Premium No expenses or commission $4,400 $4, SPIA vs. Longevity Insurance Assuming 10 year deferral period $10,000 $9,000 $8,000 $7,000 $6,000 $4,000 $3,000 $2,000 $1,000 SPIA Cash Flows Longevity Insurance Cash Flows $10,000 $9,000 $8,000 $7,000 $6,000 $4,000 $3,000 $2,000 $1,000 $ $

4 The two forms of Longevity Insurance Pure longevity insurance and pension replacement $10,000 $9,000 $8,000 $7,000 $6,000 $4,000 $3,000 $2,000 $1,000 Pure Longevity Cash Flows Pension Replacement Cash Flows $10,000 $9,000 $8,000 $7,000 $6,000 $4,000 $3,000 $2,000 $1,000 $ $ Death Benefit Payout 6 Compact filing highlights Individual Deferred Paid-Up Non-Variable Annuity Contract Standards (Commonly marketed as longevity annuities) 1 Liquidity 2 3 Flexible Premiums Death Benefits 4 Income Commencement 5 Income Options No cash values or withdrawals No commutations Payment acceleration can be approved Allowable, but not required May place individual and lifetime limits Income purchased is based on attained age and then current purchase rates Can have guarantees on future purchase rates Future premiums must be applied to same income option and commencement date Not required May be: percentage of premiums paid, premiums + interest, flat dollar amount, combination Must incorporate initial and supplemental premiums Selected at issue May place limitations on ability to change date, or disallow entirely Must specify charges associated with changing income date Must show table of income benefit available at different dates, or method for determining actuarially equivalent value Must contain life contingency (no period certain options) May have certain + life options Can allow or prohibit changes, or apply limitations 7 4

5 2 Actuarial Aspects Interest rate considerations 4.50% 11/1/2013 US Treasury Spot Rate Curve 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00%

6 Mortality as an investment 6.00% Investment Return vs. Mortality Return for a 55-year old male 5.00% 4.00% 3.00% Mortality "Spot Rate" Interest Spot Rate 2.00% 1.00% 0.00% The power of deferral 10.00% Compounding effects of interest and mortality 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% Deferral "Spot Rate" Mortality "Spot Rate" Interest Spot Rate 3.00% 2.00% 1.00% 0.00%

7 Corporate integration of risk Longevity risk Investment risk 12 Longevity risk: the life insurance offset Unexpected increases in longevity are not always harmful to insurers. Not a perfect match Age distributions Anti-selection Increased longevity payouts Decreased death benefit payouts 13 7

8 Investment risk: product pairing $15,000 Period Certain + Longevity Insurance Cash Flows $10,000 Longevity Payout Period Certain Payout $ Proper cash flow matching can increase profitability for both products Retirement Planning for Longevity 8

9 Current retirement environment People are living longer Defined benefit has been replaced by defined contribution The majority of retirement advice is focused on accumulation The burden of retirement income has increased and shifted to unprepared investors. 16 Comparison to GLWB Why the discrepancy in sales? Longevity Insurance Guaranteed cash flows for life GLWB Guaranteed cash flows for life Limited withdrawal flexibility More freedom to access money Concerns about getting nothing Attractive marketing rate (10% rollup!) Modest (and final) commission Higher commission, potential for more 17 9

10 Two proposed retirement models Model 1 Accumulated Wealth Lump sum at retirement 20 years of controlled spending Pure longevity insurance of tail risk Use 10% of assets to purchase pure longevity contract Invest remaining 90% appropriately Spend down retirement pool over clearly defined time period At age 85, longevity insurance benefit payments commence for remainder of life Maintain flexibility while defining your retirement needs. 18 Two proposed retirement models Model 2 Income Planning Pension replacement funding Target income level Retirement on defined benefit Contribute 5% of paycheck to pension replacement longevity product beginning at age 35 Use guaranteed income benefit to gauge appropriate retirement date Retire with desired salary replacement level achieved Guarantee your current lifestyle

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