VA Guarantees Feel Reinsurance Squeeze
An optimist might say theres both good news and bad news for variable annuity writers who want reinsurance for some of the guarantees in their products.
The good news is that insurers who sell VAs with guarantees–including income, living and death benefits–will still be able to get reinsurance to support those features.
But the bad news is that its going to cost plenty, and there will only be a limited amount of it available.
“There is always someone [to provide reinsurance] but at a price,” David Greenfield, a partner with KPMG LLP, New York, says of the reinsurance market for variable products with guarantees.
Bermuda is a relatively small market but one with a fair amount of capital, Greenfield says. However, he notes, the challenge that direct writers have is to create a product reinsurers feel more comfortable with.
Ace Tempest Life Reinsurance LTD is one of the reinsurers that continues to reinsure guarantees on VAs, says Ari Lindner, senior vice president and chief life officer with the company based in Hamilton, Bermuda.
But reinsuring those risks “is complicated. There are a lot of different moving parts,” Lindner adds.
A lot of assumptions are made before these contracts are reinsured, he continues. Some of these assumptions include mortality and lapse rates, demographics and the average size of a policy.
Lindner has been working with VA guarantees since 1996 and has seen the demand for reinsurance come full cycle.
In the mid- to late-1990s, prices were low because it was easier to figure out what the risk was worth, he says.
Many direct writers decided in 1999-2000 that the risk was low enough to stop using reinsurance and even to begin recapturing business they had already reinsured, Lindner recounts. They felt, he says, they were paying for protection they would not need.
But the stock market peaked in March 2000 and by early to mid-2002, many companies were once again looking for reinsurance, Lindner says.
However, what they found, depending on the benefit they were offering, were prices that in some cases had doubled, he says. In fact, Lindner continues, in some cases prices had a lot more than doubled, with increases approaching 10 times what rates were a few years before.
There is no specific rule of thumb on the pricing of these benefits, he says, although, in general, the cost depends on the structure of the reinsurance agreement and the benefit offered. Generally speaking, living benefits do cost more, but, again, it depends on how the benefit is structured, Lindner says. There are times when guaranteed living benefits can cost less to reinsure than death benefits, he adds.
So, the direct writers profitability on the guarantee may depend on how much margin is built into the base mortality and expense charges in the product, he explains.
Or, a direct writer may need to consider a deductible before the reinsurance agreement becomes effective, Lindner adds.
Because of the changes in the availability and cost of reinsurance, guarantees are changing, he says. Companies are spending more time and resources to analyze the risk and thus, the real worth in guarantees, according to Lindner. A lot of these guarantees are like options and in a volatile equity market, they can be hard to price, he continues.
Some products and guarantees have been poorly designed in the past, but big VA carriers cannot afford to have a poorly designed product and will spend more to examine product design and cost, Lindner says.
In some cases, these benefits may be treated as optional rather than base benefits in an annuity contract, he adds. In other cases, rollup rates may be reduced to 5% from 6%, Lindner continues.
Direct writers may also raise the retail cost of the product, Lindner says.
Right now, he says the landscape is just beginning to shift, and it will probably take another year before this becomes more evident.