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More Life Insurers Want To Hedge VA Guarantees

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NU Online News Service, May 7, 2004, 5:18 p.m. EDT – More North American life insurers want to hedge their variable annuity product guarantees against investment risk.[@@]

About one-quarter of affected big and midsize North American life insurers already hedge exposure to VA guarantees that are linked to the performance of the stock market, and another 34% hope to do so in the next 12 months, according to a new survey report from Tillinghast-Towers Perrin, New York.

Researchers at the actuarial consulting firm have based the report on completed questionnaires from 36 life insurance company chief financial officers.

Business is better, and 40% of the CFOs say net income increased more than 10% between the first quarter of 2003 and the latest quarter.

But, after years of low stock prices, reinsurance problems and regulatory scrutiny, life insurance company CFOs continue to push for improvements in risk and capital management. Although 48% of the CFOs cite regulatory changes as an important factor driving reform and 55% cite financial reporting issues, 71% of the CFOs admit that heat from the rating agencies has caught their attention.

More than 40% of the CFOs surveyed work for life insurers that have sold variable products with guarantees, and those insurers face especially big changes.

Two-thirds of the insurers that have sold variable products with guarantees have completed or now are conducting scenario testing to prepare for the proposed C-3 Phase II regulation of investment guarantees, Tillinghast says.

The National Association of Insurance Commissioners, Kansas City, Mo., expects to approve the C-3 Phase II model later this year.

The C-3 Phase II regulation would set additional capital requirements for all companies selling variable annuities that come with guarantees.

The amount of capital required to support living benefits sold with variable products will increase up to 6 times current levels, if no risk-management actions are taken, Tillinghast predicts.

Using futures contracts, options, derivatives and other financial instruments to hedge portfolios can be complicated and expensive.

But, because VA living benefits are popular and VA guarantee reinsurance is scarce, “hedging the risk is becoming more attractive,” says Hubert Mueller, a Tillinghast principal.