Industry Needs New Ideas

For VAs, Says E&Y

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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.”

Carey says, too, that VA carriers already are focused on the concerns raised by the E&Y outlook. “It would be a total shock if theyre ignoring this.”

David Ingram, a consulting actuary in the New York office of Milliman USA, Seattle, also thinks the industry already has made risk adjustments.

“Carriers are trying to design products that have more manageable risk and have increased their charges for the guarantees they make,” Ingram says.

Frank Sabatini, another E&Y actuary, says the demand for hedging is mostly accounting driven, due to concern about earnings. A hedge program gives the carrier an offsetting asset that will move in same direction as VA liabilities, he notes.

Another reason for hedging is that carriers havent been able to get reinsurance for about 3 years, which increases their exposure, Sabatini points out.

At any rate, hedging may not be an issue with consumers as much as it is with industry analysts and regulators. As far as increasing VA sales is concerned, Millimans Ingram believes the industry must keep VA products simple.

“I think the variable annuity industry needs to emphasize the fundamental strengths of the product rather than introduce bells and whistles,” he says. “Its fundamental strength is as a retirement program in a box. Its one product that provides investment vehicles for retirement and an option to provide a life income model on annuitization. It can be a self-contained retirement program. It has no competition, really, because nothing else provides that package.”


Reproduced from National Underwriter Edition, April 16, 2004. Copyright 2004 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.