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.