Reinsurers Say Not Me To Annuity Guarantees Tab
If annuity guarantees result in a hefty tab, reinsurers say they wont be the ones picking up the bill.
Sensing the potential for sizeable losses, reinsurers say that a little over two years ago, they beat a hasty retreat from reinsuring guarantees such as guaranteed minimum death benefits and guaranteed minimum income benefits.
The stock market plunges in July and early August singed some variable annuity writers (see NU, Aug. 5).
A number of direct writers “gave the guarantees away and expected us to take most of it [the risk],” says Scott Willkomm, president, Scottish Annuity and Life Holdings, Ltd., Grand Cayman, Cayman Islands, BWI.
The reason, according to Willkomm, is that “a lot of carriers let the marketing department determine the risk parameters of how the product is constructed.”
Just how risky is annuity guarantee risk? Says Wilkomm: “It is toxic.”
GMIBs, for instance, are “incredibly risky” because they are “difficult to price” and “you are taking a bet on longevity,” says Chris Stroup, CEO of Swiss Res North American Life & Health operations in Armonk, N.Y.
The features potential pitfalls include “significant improvement in mortality” as well as low interest rates, he says. Consequently, the potential for “pretty significant adverse risks” might suggest a need to reevaluate these features, and in some cases, to stop offering them, Stroup says.
He says Swiss Re stopped writing these risks at the end of 1998 and, consequently, the exposure on the companys books is not material. A decision was made that “the risk profile was not appropriate for the company.”
Munich American Reinsurance Corp. exited the GMDB business in third quarter 2001, says Jim Sweeney, executive vice president, in Atlanta.
The business consisted of a couple of million dollars in premium, but the reserving is what increases the cost of the business when contracts are in the money, or paying on those guarantees, he explains.
So, on a block of business that was acquired from CNA Reinsurance in January 2000, the statutory reserves were $6 million to $10 million at the time of the acquisition, but when the guarantees went in the money the reserves jumped to $55 million, Sweeney adds.
Munich American Re opened the business up for a short time and then decided that fluctuations in statutory reserving could cause too much volatility, he continues.
“Quite frankly there was a significant retreat when market problems started occuring,” says Ron Colligan, a principal with Guy Carpenter, Norwalk, Conn.
Currently, his company is working on an alternative structure for GMDBs that could, if successful, be expanded to GMIBs, he says.
Carpenter has two clients right now for this “reinsurance type solution,” he adds.
The current scarcity of available reinsurance for annuity guarantees is a far cry from the availability five to six years ago, says Joseph F. Kolodney, managing director of the life reinsurance practice group, AON Re Inc., Stamford, Conn.
There can only be so many M&E charges built into a variable product to cover the costs of guarantees, he notes. And, mortality improvements have made it harder to make assumptions about mortality, he continues.
Mortality assumptions made on blocks of business that are 10-20 years old were correctly made then but may not reflect todays mortality improvements, he explains.
Making mortality assumptions becomes more of an art, a combination of “intelligence guided by experience,” Kolodney says.
And that experience continues to require careful analysis, says Arnold Dicke, senior vice president and chief actuary with ING Re, Denver.
“The mortality of the country has been improving for a long, long period of time,” he says, but adds that many of the benefits in underwriting preferred classes have already been realized.
However, Dicke notes, mortality is just one of a number of factors in determining annuity guarantees.
In the future, ING Re expects to customize tables for each company based on the companys underwriting assumptions, Dicke says.
Reproduced from National Underwriter Life & Health/Financial Services Edition, August 26, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.