VA Guarantees May Be Hot, But For Reinsurers, Not
The word invariably used to describe guarantees in variable annuities is “hot,” as in very popular. But for reinsurers, the features are still, for the most part, a case of too hot to handle.
Reinsurers continue to look at potential business but are very cautious about taking on new business, interviews suggest.
Even with the stock market teasing investors with the promise of a rebound, for the moment the word on reinsuring VAs with guarantees continues to be “handle with care.”
With demand so high and supply so tight, in the long run, there probably will be new providers of reinsurance for these products, according to Ari Lindner, senior vice president and chief life officer with Ace Tempest Life Reinsurance LTD, Hamilton, Bermuda.
In fact, an unconfirmed report suggests that a startup reinsurance company will be offering reinsurance on VA guarantees.
Lindner says there are rumors of new entrants but offers a word of advice: “You cant do it halfway. Any company that did five or six deals in the late 1990s is not in a good place right now.” There has to be a strong understanding of the business, he continues.
The reason, he explains, is that with the proliferation of new benefit features, full attention needs to be given to the risks a reinsurer will be assuming.
For instance, Lindner says that while the VA with a guaranteed minimum withdrawal benefit is the “hot product” in the market, it is also one he believes “is not priced or structured appropriately.”
This is because there needs to be strong performance in the first couple of years of the contract, he explains. If the market performs poorly in the first couple of years of the contract, it doesnt matter if performance improves later in the contract because money that should have been accruing will not be there to support the benefit.
Lindner explains that for reinsurers, the return on capital is too low. Direct writers can make money on other components of the product such as the mortality and expense component of the contract.
But for the reinsurer, “we only make money on the rider and a 5% return on capital is not going to cut it,” he adds.
Ace Tempest is looking at GMWBs, according to Lindner, but “at this point, we are so far apart on price and structure that I dont think there is a good chance [the company would reinsure that risk].”
Additionally, there is a tension between pricing properly and competing effectively. For instance, he said, a company could not charge 1.25% for a GMWB feature when everyone else is charging .35%.
Most of the guarantee benefits his company is looking at are guaranteed minimum death benefits, earnings enhancement benefits and guaranteed minimum income benefits, he says.
“We are very picky” in reinsuring guaranteed minimum accumulation benefits, Lindner adds. “We want to see a fairly significant asset allocation restriction.”
Additionally, there needs to be a fixed account requirement as opposed to fixed income funds, and 30%-50% of money should be in these fixed accounts, he continues.
The reason, according to Lindner, is that the earnings on the fixed account component of the contract offsets the point at which money would have to be put up if there is a drop on the other part of the contract.
And on the issue of offsetting benefits, if capital efficiency is created, then a price efficiency is created, he says.
Pricing and the structure of a product will be important going forward, says Jim McArdle, vice president of structured solutions with Transamerica Reinsurance, Charlotte, N.C.
Transamerica is not accepting GMDB or GMIB business, he says. The reason, McArdle explains is that when the product structures and fees were examined, it was determined that benefits were rich compared to the prices being charged to contract holders.
However, newer benefits such as accumulation and withdrawal benefits have a better risk profile, according to McArdle. For instance, withdrawals under WB contracts are taken over an extended period of time.
And while some companies are selling lower risk benefits, other companies are using hedging strategies.