Equity-Based Insurance Guarantees Conference Nov. 6-7, 2017 Baltimore, MD Behavioral Analytics for Annuities Timothy Paris Sponsored by
2017 Equity-Based Insurance Guarantees Conference Session 2B Behavioral Analytics for Annuities November 6, 2017 1:30-3:00pm Timothy Paris, FSA, MAAA Ruark Consulting LLC
Disclosures This material is not intended for general circulation or publication, nor is it to be reproduced, quoted or distributed for any purpose without the prior written permission of Ruark. Ruark does not accept any liability to any third party. Information furnished by others, upon which all or portions of this material are based, is believed to be reliable but has not been independently verified, unless otherwise expressly indicated. Public information and industry and statistical data are from sources we deem to be reliable; however, we make no representation as to the accuracy or completeness of such information. The findings contained in this material may contain models, assumptions, or predictions based on current data and historical trends. Any such predictions are subject to inherent risks and uncertainties, as future experience may vary from historical experience. The reader should consider the applicability of these models, assumptions, and predictions for the future, and whether additional margins for conservatism should be included. Ruark accepts no responsibility for actual results or future events. The opinions expressed in this material are valid only for the purpose stated herein and as of the date indicated. No obligation is assumed to revise this material to reflect changes, events or conditions, which occur subsequent to the date hereof. All decisions in connection with the implementation or use of advice or recommendations contained in this material are the sole responsibility of the reader. This material does not represent investment advice nor does it provide an opinion regarding the fairness of any transaction to any and all parties. 2
Source: LIMRA Variable Annuities Fixed Indexed Annuities Gross Sales (p.a.) ~$150 billion ~$100 billion Net Sales (p.a.) ~$0 billion? % Qualified 65% 55% % Guaranteed Living Benefit 3 77% 68%
Overview of VA Industry Experience
VA Industry Data 22 participating companies 2008 to present 68 million contract years of exposure +22% from last year 5
Surrenders vary by living benefit type Surrender Rate 30% GMWB None GLWB GMIB 6 0% 7 or 6 5 4 3 2 1 0-1 -2-3 or more more Years Remaining in Surrender Charge Period
Experience varies by company, but why? GLWB, Normalized by Years Remaining in Surrender Charge Period 150% 100% Average 50% 7
Surrenders have decreased since the crisis Surrender Rate 30% Spike 3 Years After Spike 3 Years Before Spike 0% Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013 Q1 2014 Q1 2015 Q1 2016 8
Surrender Rate However, a different trend for GLWB spike Nominal basis 45% ATM ITM 5-25% ITM 25-50% ITM 50+% 0% 3Q 09 3Q 10 3Q 11 3Q 12 3Q 13 3Q 14 3Q 15 9
Most GLWBs are actuarially out-of-the-money 89% OTM 54% 36% 7% 3% Nominal 7% 4% 0% Actuarial ATM ITM 5-50% ITM 50+% 10
GLWB moneyness basis matters Surrender Rate 25% Spike - nominal Spike - actuarial 0% OTM 25%+ OTM 5-25% ATM ITM 5-25% ITM 25-50% ITM 50-100% ITM 100%+ 11
GLWB moneyness basis matters Surrender Rate 25% Ultimate - nominal Ultimate - actuarial 0% OTM 25%+ OTM 5-25% ATM ITM 5-25% ITM 25-50% ITM 50-100% ITM 100%+ 12
Surrender Rate GLWB income utilization affects surrenders 25% Excess None Full or Less Than 0% 7 or 6 5 4 3 2 1 0-1 -2-3 or more more Years Remaining in Surrender Charge Period 13
Income utilization varies by age and tax status GLWB Partial Withdrawal Frequency 100% Qualified Nonqualified 0% <50 50-59 60-64 65-69 70-79 80+ Attained Age 14
Income utilization efficiency has increased GLWB Partial Withdrawal Frequency and Amounts 30% Excess Full 0% Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013 Q1 2014 Q1 2015 Less Than Full 15
Income commencement is the key question GLWB Partial Withdrawal Frequency 100% Qualified Continuation Nonqualified Qualified Commencement Nonqualified 0% 50-59 60-64 65-69 70-79 80+ Attained Age 16
GMIB annuitizations are low Actuarial basis 20% 60-64 65-69 70-79 80+ 0% 17 ITM 100+% ITM 50-100% ITM 25-50% ITM 5-25% ATM OTM 5-25% OTM 25+%
Guarantees can affect mortality too 150% % of Ruark Mortality Table GMDB only GLWB 0% 18 1 2 3 4 5 6 7 8 9 10 Duration
Mortality effects are amplified by policy size 150% % of Ruark Mortality Table GLWB GMDB only 0% 19 <$50k $50-100k $100-250k $250-500k $500k-1mil $1mil+ Account Value
Overview of FIA Industry Experience
FIA Industry Data 12 participating companies 2007 to present 13 million contract years of exposure +30% from last year 21
VA and FIA surrenders are lower with GLWB Surrender Rate 30% VA FIA FIA with GWLB VA with GLWB 0% 7 or 6 5 4 3 2 1 0-1 -2-3 or more more Years Remaining in Surrender Charge Period 22
FIA surrenders vary based on interest credited Surrender Rate 35% 0-2% All others 23 0% 10 or more 9 8 7 6 5 4 3 2 1 0-1 -2-3 or more Years Remaining in Surrender Charge Period
Behavioral Analytics Framework
Industry Data Traditional Analysis Statistical Techniques Expert Judgment 25 25
Model Development Start with maximum data set (industry) Extract relevant subset for a company Develop a model on this basis Do likewise using only company s data Customize model to reflect both, so that most important factors are included, with stable coefficients, balancing goodness-of-fit and predictive power You can go far with Generalized Linear Models (GLM) 26
Logistic Regression Model ln μμ 1 μμ = ββ 0 + ββ ii xx ii Log of odds is a linear function of key factors Binary values, such as surrenders or deaths 27
Goodness of Fit Predictive Power 28 28
Bayesian Information Criterion Rewards goodness-of-fit to historical data, but penalizes for additional factors used in your model One of many metrics to help guide your model selection process 29
Actual-to-Expected Ratios Predictive Power in the new vernacular Develop E using train data, compare to A from test data Out-of-sample, out-of-time, and k-fold cross-validations Examine in aggregate, by cohorts, and over time Look at range of outcomes and tails 30
Expert Judgment is Vital Business context, sensibility, materiality, parsimony Let the data speak More data usually beats more complex models Build simple models for complex data, and complex models for simple data 31
Sample Models
VA Surrenders Yrs Remaining in Surr Chg Period LB Type and PW History Moneyness Contract Size Interactions 33 33
Using industry data For each factor coefficient, standard error terms typically very small ~ 1/300 to 1/100. σσ μμ are Then testing predictive power using 5-fold cross-validation, average A/E errors are also very small ~ 1/700. 34
Using company-only data In some cases, company-only data is insufficient to even identify the key factors observed in the industry data, or it demonstrates factor coefficient estimates that are not sensible. Even if they do, the coefficient standard error terms be 20x larger. σσ μμ can Similarly, the average cross-validation A/E errors can be 10x larger. 35
Combining industry and company-only data A customized combination of industry and company-only data can produce a vastly superior model with much better fit and predictive power. Such a model should identify and quantify the effects of each additional factor in the presence of the others, and the interactions between them. Confidence increases with additional data. 36
Integration Across Behaviors Very important to model behavior on integrated basis 37
VA GLWB / GMIB Income Utilization Attained Age Tax Status Historical Income Utilization Contract Size Interactions 38
The power of more data As above, but for GWLB / GMIB income utilization, need to address complexities of frequency and severity relative to guarantee amounts. Customized model using industry data can reduce error by half where it matters most, for Full income utilization. 39
Discussion