Where Less is More: Reducing Variable Annuity Fees to Benefit Policyholder and Insurer*

Transcription

1 Where Less is More: Reducing Variable Annuity Fees to Benefit Policyholder and Insurer* Temple University 2017 ASTIN/AFIR Colloquia, Panama City * Research supported by Fundación MAPFRE

2 Page 1 / 28 Table of Contents 1 Motivation 2 Financial Model 3 Results for Innovative VA Provider 4 Results for Competitive Market 5 Conclusion

3 Page 2 / 28 Motivation 1 Motivation 2 Financial Model 3 Results for Innovative VA Provider 4 Results for Competitive Market 5 Conclusion

4 Page 3 / 28 Motivation Variable Annuity (VA): Popular long-term savings vehicle (in U.S.) Investment flexibility + favorable tax treatment + downside protection Recently: decline in demand

5 Page 3 / 28 Motivation Variable Annuity (VA): Popular long-term savings vehicle (in U.S.) Investment flexibility + favorable tax treatment + downside protection Recently: decline in demand

6 Page 4 / 28 Motivation Many financial advisers advocate against buying VAs. Why??? Forbes: 5 Reasons Why You Should Never Buy A Variable Annuity: 1. You ll Pay High Fees Kiplinger.com: The high costs of variable annuities [... ] usually makes them an awful deal for investors. The Motley Fool: Your broker s Ferrari is getting a little long in the tooth, and you want to make sure he can afford a shiny new one....

7 Page 4 / 28 Motivation Many financial advisers advocate against buying VAs. Why??? Forbes: 5 Reasons Why You Should Never Buy A Variable Annuity: 1. You ll Pay High Fees Kiplinger.com: The high costs of variable annuities [... ] usually makes them an awful deal for investors. The Motley Fool: Your broker s Ferrari is getting a little long in the tooth, and you want to make sure he can afford a shiny new one....

8 Page 5 / 28 Motivation Why are VA fees so high? Fee charged at level rate in proportion to VA account value Fee covers expenses & costs of guarantees Insurer pays acquisition expenses, recovers them through VA base fee Frequent policy lapses further increase the fee rate If VA is lapsed, insurer loses future fee income Market reentry ( 1035 exchange ) triggers new policy acquisition expenses Simply reducing VA fee rate could make product unprofitable Our proposal: Time-dependent fee structure Reduce VA fee after some policy years

9 Page 5 / 28 Motivation Why are VA fees so high? Fee charged at level rate in proportion to VA account value Fee covers expenses & costs of guarantees Insurer pays acquisition expenses, recovers them through VA base fee Frequent policy lapses further increase the fee rate If VA is lapsed, insurer loses future fee income Market reentry ( 1035 exchange ) triggers new policy acquisition expenses Simply reducing VA fee rate could make product unprofitable Our proposal: Time-dependent fee structure Reduce VA fee after some policy years

10 Page 5 / 28 Motivation Why are VA fees so high? Fee charged at level rate in proportion to VA account value Fee covers expenses & costs of guarantees Insurer pays acquisition expenses, recovers them through VA base fee Frequent policy lapses further increase the fee rate If VA is lapsed, insurer loses future fee income Market reentry ( 1035 exchange ) triggers new policy acquisition expenses Simply reducing VA fee rate could make product unprofitable Our proposal: Time-dependent fee structure Reduce VA fee after some policy years

11 Page 5 / 28 Motivation Why are VA fees so high? Fee charged at level rate in proportion to VA account value Fee covers expenses & costs of guarantees Insurer pays acquisition expenses, recovers them through VA base fee Frequent policy lapses further increase the fee rate If VA is lapsed, insurer loses future fee income Market reentry ( 1035 exchange ) triggers new policy acquisition expenses Simply reducing VA fee rate could make product unprofitable Our proposal: Time-dependent fee structure Reduce VA fee after some policy years

12 Page 6 / 28 Motivation Benefits of a Time-Dependent Fee With level fee rate, policy lapses are free for PH Example: You purchase VA with single premium (& guaranteed amount) 100 You pay level fee rate φ each year, in proportion to (random) account value If VA account value increases to Guarantee value is low & fee payments are high = Lapse-and-Reentry: Exchange VA for identical product (to upgrade guarantee) Guaranteed amount stepped up to VA account value All other VA specifications (incl. fee rate) are identical = Arbitrage! With time-dependent (front-loaded) fee, lapsing is costly Lapse-and-reentry makes policyholder forego (or delay) fee reduction = Fewer lapses = Fewer expenses = Finances fee reduction

13 Page 6 / 28 Motivation Benefits of a Time-Dependent Fee With level fee rate, policy lapses are free for PH Example: You purchase VA with single premium (& guaranteed amount) 100 You pay level fee rate φ each year, in proportion to (random) account value If VA account value increases to Guarantee value is low & fee payments are high = Lapse-and-Reentry: Exchange VA for identical product (to upgrade guarantee) Guaranteed amount stepped up to VA account value All other VA specifications (incl. fee rate) are identical = Arbitrage! With time-dependent (front-loaded) fee, lapsing is costly Lapse-and-reentry makes policyholder forego (or delay) fee reduction = Fewer lapses = Fewer expenses = Finances fee reduction

14 Page 6 / 28 Motivation Benefits of a Time-Dependent Fee With level fee rate, policy lapses are free for PH Example: You purchase VA with single premium (& guaranteed amount) 100 You pay level fee rate φ each year, in proportion to (random) account value If VA account value increases to Guarantee value is low & fee payments are high = Lapse-and-Reentry: Exchange VA for identical product (to upgrade guarantee) Guaranteed amount stepped up to VA account value All other VA specifications (incl. fee rate) are identical = Arbitrage! With time-dependent (front-loaded) fee, lapsing is costly Lapse-and-reentry makes policyholder forego (or delay) fee reduction = Fewer lapses = Fewer expenses = Finances fee reduction

15 Page 6 / 28 Motivation Benefits of a Time-Dependent Fee With level fee rate, policy lapses are free for PH Example: You purchase VA with single premium (& guaranteed amount) 100 You pay level fee rate φ each year, in proportion to (random) account value If VA account value increases to Guarantee value is low & fee payments are high = Lapse-and-Reentry: Exchange VA for identical product (to upgrade guarantee) Guaranteed amount stepped up to VA account value All other VA specifications (incl. fee rate) are identical = Arbitrage! With time-dependent (front-loaded) fee, lapsing is costly Lapse-and-reentry makes policyholder forego (or delay) fee reduction = Fewer lapses = Fewer expenses = Finances fee reduction

16 Page 7 / 28 Motivation Benefits of a Time-Dependent Fee Time-dependent fee can make both parties better off Policyholder pays lower fee rate VA provider: expense savings outweigh reduced fee income By eliminating transaction costs (i.e. repeated policy acquisition expenses) Discourages lapse-and-reentry, but also pure lapses VA provider less exposed to policyholder behavior risk Improves hedging of embedded guarantee (Kling, Ruez, and Russ, 2014) Easy to implement on new and existing policies: Customer loyalty

17 Page 7 / 28 Motivation Benefits of a Time-Dependent Fee Time-dependent fee can make both parties better off Policyholder pays lower fee rate VA provider: expense savings outweigh reduced fee income By eliminating transaction costs (i.e. repeated policy acquisition expenses) Discourages lapse-and-reentry, but also pure lapses VA provider less exposed to policyholder behavior risk Improves hedging of embedded guarantee (Kling, Ruez, and Russ, 2014) Easy to implement on new and existing policies: Customer loyalty

18 Page 7 / 28 Motivation Benefits of a Time-Dependent Fee Time-dependent fee can make both parties better off Policyholder pays lower fee rate VA provider: expense savings outweigh reduced fee income By eliminating transaction costs (i.e. repeated policy acquisition expenses) Discourages lapse-and-reentry, but also pure lapses VA provider less exposed to policyholder behavior risk Improves hedging of embedded guarantee (Kling, Ruez, and Russ, 2014) Easy to implement on new and existing policies: Customer loyalty

19 Page 7 / 28 Motivation Benefits of a Time-Dependent Fee Time-dependent fee can make both parties better off Policyholder pays lower fee rate VA provider: expense savings outweigh reduced fee income By eliminating transaction costs (i.e. repeated policy acquisition expenses) Discourages lapse-and-reentry, but also pure lapses VA provider less exposed to policyholder behavior risk Improves hedging of embedded guarantee (Kling, Ruez, and Russ, 2014) Easy to implement on new and existing policies: Customer loyalty

20 Page 8 / 28 Financial Model 1 Motivation 2 Financial Model VA Product Features Policyholder s Decision Making Valuation to VA Provider Numerical Implementation 3 Results for Innovative VA Provider 4 Results for Competitive Market 5 Conclusion

21 Page 9 / 28 Financial Model VA Product Features Implement typical (B-share) VA from U.S. market Face amount/premium $100,000 Time-t account value: A t (A 0 = 100,000) Includes return-of-premium GMDB Guaranteed amount denoted by G t G 1 = 100,000; G t changes only upon lapse-and-reentry If PH dies in year t, receives max (A t, G t) at time t If PH survives to maturity (time T ), receives A T 7-year surrender schedule 7% in year 1, 6% in year 2,..., 0% for t 7

22 Financial Model VA Product Features, cont d φ ini, m t < Annual fee rate φ t = φ red, m t Page 10 / 28 m t is the time (in years) under the current VA policy Fee charged continuously in proportion to A t PH can lapse on policy anniversary dates Re-enters market by acquiring identical policy Begins new policy with m t = 0; same A t (minus surr. fee); G t+1 = new A t Expenses are paid by insurer For policy acquisition (incl. reentry): ɛ ini Annually recurring: ɛ rec Assessed at beginning of year in proportion to A t

23 Financial Model VA Product Features, cont d φ ini, m t < Annual fee rate φ t = φ red, m t Page 10 / 28 m t is the time (in years) under the current VA policy Fee charged continuously in proportion to A t PH can lapse on policy anniversary dates Re-enters market by acquiring identical policy Begins new policy with m t = 0; same A t (minus surr. fee); G t+1 = new A t Expenses are paid by insurer For policy acquisition (incl. reentry): ɛ ini Annually recurring: ɛ rec Assessed at beginning of year in proportion to A t

24 Financial Model VA Product Features, cont d φ ini, m t < Annual fee rate φ t = φ red, m t Page 10 / 28 m t is the time (in years) under the current VA policy Fee charged continuously in proportion to A t PH can lapse on policy anniversary dates Re-enters market by acquiring identical policy Begins new policy with m t = 0; same A t (minus surr. fee); G t+1 = new A t Expenses are paid by insurer For policy acquisition (incl. reentry): ɛ ini Annually recurring: ɛ rec Assessed at beginning of year in proportion to A t

25 Page 11 / 28 Financial Model Policyholder s Decision Making Continuation value of VA policy: V cont t (A t, G t, m t ) = Ṽ (t, A t, G t, m t ), With intermediary function Ṽ (t, At, G t+1, m t) = ] q x+t [A t e φm t + Put(A t, G t+1, φ mt ) + (1 q x+t ) e r E Q [V t+1 (A t+1, G t+1, 1 + m t )]. Lapse-value of VA policy: V lapse t (A t, G t, m t ) = Ṽ (t, [1 s(m t)]a t, [1 s(m t )]A t, 0), PH chooses to lapse and reenter if V lapse t { V t (A t, G t, m t ) = max V cont t > V cont t (A t, G t, m t ), V lapse t (A t, G t, m t ) Terminal condition: V T (A T, G T, m T ) = [1 s(m T )]A T Time-0 risk-neutral policy value: V 0 := Ṽ (0, A 0, A 0, 0) }.

26 Page 11 / 28 Financial Model Policyholder s Decision Making Continuation value of VA policy: V cont t (A t, G t, m t ) = Ṽ (t, A t, G t, m t ), With intermediary function Ṽ (t, At, G t+1, m t) = ] q x+t [A t e φm t + Put(A t, G t+1, φ mt ) + (1 q x+t ) e r E Q [V t+1 (A t+1, G t+1, 1 + m t )]. Lapse-value of VA policy: V lapse t (A t, G t, m t ) = Ṽ (t, [1 s(m t)]a t, [1 s(m t )]A t, 0), PH chooses to lapse and reenter if V lapse t { V t (A t, G t, m t ) = max V cont t > V cont t (A t, G t, m t ), V lapse t (A t, G t, m t ) Terminal condition: V T (A T, G T, m T ) = [1 s(m T )]A T Time-0 risk-neutral policy value: V 0 := Ṽ (0, A 0, A 0, 0) }.

27 Page 11 / 28 Financial Model Policyholder s Decision Making Continuation value of VA policy: V cont t (A t, G t, m t ) = Ṽ (t, A t, G t, m t ), With intermediary function Ṽ (t, At, G t+1, m t) = ] q x+t [A t e φm t + Put(A t, G t+1, φ mt ) + (1 q x+t ) e r E Q [V t+1 (A t+1, G t+1, 1 + m t )]. Lapse-value of VA policy: V lapse t (A t, G t, m t ) = Ṽ (t, [1 s(m t)]a t, [1 s(m t )]A t, 0), PH chooses to lapse and reenter if V lapse t { V t (A t, G t, m t ) = max V cont t > V cont t (A t, G t, m t ), V lapse t (A t, G t, m t ) Terminal condition: V T (A T, G T, m T ) = [1 s(m T )]A T Time-0 risk-neutral policy value: V 0 := Ṽ (0, A 0, A 0, 0) }.

28 Page 11 / 28 Financial Model Policyholder s Decision Making Continuation value of VA policy: V cont t (A t, G t, m t ) = Ṽ (t, A t, G t, m t ), With intermediary function Ṽ (t, At, G t+1, m t) = ] q x+t [A t e φm t + Put(A t, G t+1, φ mt ) + (1 q x+t ) e r E Q [V t+1 (A t+1, G t+1, 1 + m t )]. Lapse-value of VA policy: V lapse t (A t, G t, m t ) = Ṽ (t, [1 s(m t)]a t, [1 s(m t )]A t, 0), PH chooses to lapse and reenter if V lapse t { V t (A t, G t, m t ) = max V cont t > V cont t (A t, G t, m t ), V lapse t (A t, G t, m t ) Terminal condition: V T (A T, G T, m T ) = [1 s(m T )]A T Time-0 risk-neutral policy value: V 0 := Ṽ (0, A 0, A 0, 0) }.

29 Page 11 / 28 Financial Model Policyholder s Decision Making Continuation value of VA policy: V cont t (A t, G t, m t ) = Ṽ (t, A t, G t, m t ), With intermediary function Ṽ (t, At, G t+1, m t) = ] q x+t [A t e φm t + Put(A t, G t+1, φ mt ) + (1 q x+t ) e r E Q [V t+1 (A t+1, G t+1, 1 + m t )]. Lapse-value of VA policy: V lapse t (A t, G t, m t ) = Ṽ (t, [1 s(m t)]a t, [1 s(m t )]A t, 0), PH chooses to lapse and reenter if V lapse t { V t (A t, G t, m t ) = max V cont t > V cont t (A t, G t, m t ), V lapse t (A t, G t, m t ) Terminal condition: V T (A T, G T, m T ) = [1 s(m T )]A T Time-0 risk-neutral policy value: V 0 := Ṽ (0, A 0, A 0, 0) }.

30 Page 12 / 28 Financial Model Valuation to VA Provider PV of insurer s expenses, from time t forward: EPVE t (A t, G t, m t ) = ẼPVE (t, [1 s(m t)]a t, [1 s(m t)]a t, 0, ɛ ini + ɛ rec), if lapse ẼPVE (t, A t, G t, m t, ɛ rec), if cont. ẼPVE(t, At, G t+1, m t, ɛ) = ɛa t + (1 q x+t ) e r E Q [EPVE t+1 (A t+1, G t+1, 1 + m t )] Terminal condition: EPVE T (A T, G T, m T ) = 0 Time-0 present value of all expenses: EPVE 0 = ẼPVE (0, A 0, A 0, 0, ɛ ini + ɛ rec ) Time-0 NPV of VA policy to insurer: NPV 0 = NPV 0 (φ red,, φ ini ) = A 0 V 0 EPVE 0

31 Page 12 / 28 Financial Model Valuation to VA Provider PV of insurer s expenses, from time t forward: EPVE t (A t, G t, m t ) = ẼPVE (t, [1 s(m t)]a t, [1 s(m t)]a t, 0, ɛ ini + ɛ rec), if lapse ẼPVE (t, A t, G t, m t, ɛ rec), if cont. ẼPVE(t, At, G t+1, m t, ɛ) = ɛa t + (1 q x+t ) e r E Q [EPVE t+1 (A t+1, G t+1, 1 + m t )] Terminal condition: EPVE T (A T, G T, m T ) = 0 Time-0 present value of all expenses: EPVE 0 = ẼPVE (0, A 0, A 0, 0, ɛ ini + ɛ rec ) Time-0 NPV of VA policy to insurer: NPV 0 = NPV 0 (φ red,, φ ini ) = A 0 V 0 EPVE 0

32 Page 13 / 28 Financial Model Numerical Implementation Implement numerically via recursive dynamic programming = State space: A t, G t, m t Black-Scholes Economy Parameters (Moenig and Zhu, 2016): Description Parameter Values Age at inception (years) x 55 Time to maturity (years) T 25 Risk-free rate r 3% Volatility of investment σ 20% Policy acquisition expense ɛ ini 7% Recurring expense rate ɛ rec 0.4% Mortality: 2012 IAM basic male mortality table

33 Page 13 / 28 Financial Model Numerical Implementation Implement numerically via recursive dynamic programming = State space: A t, G t, m t Black-Scholes Economy Parameters (Moenig and Zhu, 2016): Description Parameter Values Age at inception (years) x 55 Time to maturity (years) T 25 Risk-free rate r 3% Volatility of investment σ 20% Policy acquisition expense ɛ ini 7% Recurring expense rate ɛ rec 0.4% Mortality: 2012 IAM basic male mortality table

34 Page 14 / 28 Results for Innovative VA Provider 1 Motivation 2 Financial Model 3 Results for Innovative VA Provider 4 Results for Competitive Market 5 Conclusion

35 Page 15 / 28 Results for Innovative VA Provider Fix φ ini = bps (level break-even fee) Insurer chooses and φ red to maximize NPV 0

36 Page 15 / 28 Results for Innovative VA Provider Fix φ ini = bps (level break-even fee) Insurer chooses and φ red to maximize NPV 0 NPV 0 ($) 6,000 4,000 2,000 0 n = 4 red = 7 = 10 = 14 = 18 = 21-2,000-4, φ red (bps)

37 Page 16 / 28 Results for Innovative VA Provider Lapse Rates L = 4 = 7 = 10 = 14 = 18 = φ (bps) red

38 Page 17 / 28 Results for Innovative VA Provider Select Valuation Statistics No Red. = 7 = 18 φ red (bps) NPV0 ($) 0 3,600 6,170 V 0 ($) 77,340 81,290 78,980 EPVE 0 ($) 22,660 15,110 14,850 L Fee reduction (almost) eliminates lapses Also: reduces fee income for insurer (= prefers to delay to = 18) Saved expenses distributed between insurer ($6,170) and PH ($1,640) = Innovative VA provider could benefit substantially

39 Page 17 / 28 Results for Innovative VA Provider Select Valuation Statistics No Red. = 7 = 18 φ red (bps) NPV0 ($) 0 3,600 6,170 V 0 ($) 77,340 81,290 78,980 EPVE 0 ($) 22,660 15,110 14,850 L Fee reduction (almost) eliminates lapses Also: reduces fee income for insurer (= prefers to delay to = 18) Saved expenses distributed between insurer ($6,170) and PH ($1,640) = Innovative VA provider could benefit substantially

40 Page 17 / 28 Results for Innovative VA Provider Select Valuation Statistics No Red. = 7 = 18 φ red (bps) NPV0 ($) 0 3,600 6,170 V 0 ($) 77,340 81,290 78,980 EPVE 0 ($) 22,660 15,110 14,850 L Fee reduction (almost) eliminates lapses Also: reduces fee income for insurer (= prefers to delay to = 18) Saved expenses distributed between insurer ($6,170) and PH ($1,640) = Innovative VA provider could benefit substantially

41 Page 18 / 28 Results for Competitive Market 1 Motivation 2 Financial Model 3 Results for Innovative VA Provider 4 Results for Competitive Market 5 Conclusion

42 Page 19 / 28 Results for Competitive Market Optimization Problem Choose φ ini, φ red, and to maximize V 0 s.t. NPV 0 = 0 Constraint (NPV 0 = 0) implies a unique φ ini for any given φ red :

43 Page 19 / 28 Results for Competitive Market Optimization Problem Choose φ ini, φ red, and to maximize V 0 s.t. NPV 0 = 0 Constraint (NPV 0 = 0) implies a unique φ ini for any given φ red : 2,000 1,500 φ ini (bps) 1,000 n = 1 red = 4 = 7 = 10 = 14 = φ (bps) red

44 Page 20 / 28 Results for Competitive Market Same graph, with truncated y-axis: φ ini (bps) = 1 = 4 n = 7 red = 10 = 14 = φ red (bps) (If 7:) Reducing φ red allows provider to reduce φ ini as well Reduced expenses outweigh loss in fee income... until lapse rate = 0; then provider needs to increase φ ini

45 Page 21 / 28 Results for Competitive Market Lapse Rates L = 1 = 4 = 7 = 10 = 14 = φ (bps) red

46 Page 22 / 28 Results for Competitive Market Maximized Policy Value 86,000 = 1 = 4 84,000 = 7 = 10 = 14 V 0 ($) 82,000 = 18 80,000 78, φ red (bps) Reducing φ red to policyholder s benefit Initially: big impact due to reduced policy acquisition expenses Minor impact as φ red gets smaller (due to lower recurring expenses)

47 Page 23 / 28 Results for Competitive Market Maximized Policy Value Same graph, with truncated x-axis & y-axis: V 0 ($) 85,500 85,250 = 1 = 4 n = 7 red n = 10 red = 14 = 18 85,000 84, φ red (bps) Mathematical optimum: front-load all fees ( = 1, φ red = 0) But: moderate front-loading captures vast majority of benefits

48 Page 24 / 28 Results for Competitive Market Maximized Policy Value When φ red is small, reducing it further increases V 0 a little. Why? Making φ red even smaller leads to increase in φ ini (see prior slides) Larger φ ini means that A t is reduced faster at the beginning And more slowly later on b/c of lower φred We assumed that insurer s recurring expenses are in proportion to A t Lower A t = fewer expenses = larger V 0 In practice, part of insurer s expenses may be fixed = (Minor) impact of fee reduction (below threshold) overstated Focus on big impact of reduced fee policy: fewer lapses & acquisition expenses

49 Page 24 / 28 Results for Competitive Market Maximized Policy Value When φ red is small, reducing it further increases V 0 a little. Why? Making φ red even smaller leads to increase in φ ini (see prior slides) Larger φ ini means that A t is reduced faster at the beginning And more slowly later on b/c of lower φred We assumed that insurer s recurring expenses are in proportion to A t Lower A t = fewer expenses = larger V 0 In practice, part of insurer s expenses may be fixed = (Minor) impact of fee reduction (below threshold) overstated Focus on big impact of reduced fee policy: fewer lapses & acquisition expenses

50 Page 25 / 28 Results for Competitive Market Select Valuation Statistics No Red. max. V 0 max. φ red s.t. L 0 < (years) φ ini (bps) , φ red (bps) V 0 ($) 77,340 85,470 84,870 84,890 84,910 EPVE 0 ($) 22,660 14,530 15,130 15,110 15,090 L Policy value (V 0 ) increased by 10% over current status-quo B/c of up to $8,130 iuced expenses Can capture most of benefits with moderate front-loading of fees

51 Page 26 / 28 Conclusion 1 Motivation 2 Financial Model 3 Results for Innovative VA Provider 4 Results for Competitive Market 5 Conclusion

52 Page 27 / 28 Conclusion Assess impact of partial frontloading of VA fees on PH behavior Simple & financially impactful Makes PH share cost of lapse decision Under level fee: cost of lapsing is fully socialized Benefits both PH and insurer (by reducing expenses & fee rates) Can be implemented on new and existing policies Directly addresses concerns about VAs being too expensive Without compromising VA s attractive features Fewer lapses allows VA provider to increase investment horizon Invest in illiquid, long-term assets Benefits investors and economy overall (Gollier, 2015)

53 Page 27 / 28 Conclusion Assess impact of partial frontloading of VA fees on PH behavior Simple & financially impactful Makes PH share cost of lapse decision Under level fee: cost of lapsing is fully socialized Benefits both PH and insurer (by reducing expenses & fee rates) Can be implemented on new and existing policies Directly addresses concerns about VAs being too expensive Without compromising VA s attractive features Fewer lapses allows VA provider to increase investment horizon Invest in illiquid, long-term assets Benefits investors and economy overall (Gollier, 2015)

54 Page 27 / 28 Conclusion Assess impact of partial frontloading of VA fees on PH behavior Simple & financially impactful Makes PH share cost of lapse decision Under level fee: cost of lapsing is fully socialized Benefits both PH and insurer (by reducing expenses & fee rates) Can be implemented on new and existing policies Directly addresses concerns about VAs being too expensive Without compromising VA s attractive features Fewer lapses allows VA provider to increase investment horizon Invest in illiquid, long-term assets Benefits investors and economy overall (Gollier, 2015)

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56 Page 28 / 28 Questions & Comments

57 Where Less is More: Reducing Variable Annuity Fees to Benefit Policyholder and Insurer* Temple University 2017 ASTIN/AFIR Colloquia, Panama City * Research supported by Fundación MAPFRE

58 Page 28 / 28 Additional Graphs Empirical observation of VA policy lapses (Paris, 2017) Surrender Rate