Industry Needs New Ideas
For VAs, Says E&Y
The life insurance industry needs new ways to hedge variable annuity products, says Ernst & Young LLP in its quarterly outlook for the industry.
E&Y warns that VA guarantees may leave companies with significant exposure due to the earnings volatility of the stock market and the uncertain future of interest rates, along with regulatory pressure designed to reduce risk and eliminate abuses. Analysts also are pressing carriers to come up with better hedging for these risks, E&Y says.
“New legislation and guidelines are putting pressure on the insurance industry,” adds Ellen Cooper, a co-author of the report and an E&Y actuary. “This is an opportunity for variable annuity providers to develop approaches that can extend their risk and capital management alternatives.”
Other VA experts point out that carriers have limited hedging tactics available and often limited need for hedging, in part, because they have reinsurance on older policies and have raised fees on newer ones.
Rick Carey, managing director of research for Finetre Corp., Atlanta, says bonds will be of uncertain value for hedging in view of their recent decline. “Municipal bonds were down 30 basis points today [April 14],” he points out. “Now is not a good time to be buying bonds.”