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Managing Risk High On Insurers Minds

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New York

Managing the risk inherent in products with guarantees is high on the mind of insurers, discussions at a recent conference sponsored by Standard & Poors suggests.

The issue surfaced several times during the conference titled, “Insurance 2004: Structuring for Success.”

The potential for volatility will continue given the growth of living benefits, death benefits and no-lapse guarantees, and the fact that there is a limited track record of their use, said Kevin Ahern, an S&P director. “There is very little track record” of policyholder behavior concerning use and lapsation, he said.

For instance, Ahern added, the significant growth in universal life products is due, in part, to the secondary guarantees they offer.

Two to three years ago, variable annuity guarantees were being introduced by companies who had a “me-too attitude” but today companies are being more careful, according to Doug Knowling, a vice president and corporate actuary with RGA Reinsurance Co., Chesterfield, Mo. The reason, he explained, is that companies are realizing that some guarantees have the potential to bankrupt them.

One of the keys to good risk management of these products is sound product design, according to Helen Galt, vice president and company actuary with Prudential Financial, Newark, N.J.

She discussed being a “significant” but “intelligent” player in the VA business with guarantees. Being intelligent includes not only using stochastic modeling but also having an awareness of both policyholder behavior and the experience of other companies, Galt explained. Unfortunately, she continued, there is not yet a lot of data for exercise rates for VA products with guarantees.

Ed Zore, CEO of Northwestern Mutual Life Insurance Co., Milwaukee, said that, in general, products with secondary guarantees are sold to older people who are less likely to lapse a product. “If a product is assuming a higher lapse rate, you dont want to be in a position of hoping a contract will lapse,” he continued. “We are working hard to keep business on the books,” he continued. Consequently, a company needs to evaluate carefully whether or not to offer these products, he added.

Zore also touched on topics including an optional federal charter and growth by acquisition. He noted that each of the 50 state insurance departments have their own requirements and estimated that it costs $38 million more for his company to operate under state regulation than under a type of federal system. In one instance, he described a product approval process that took 6 months to get approved in one state and 3 years to get approved in another state. A federal regulator makes all the sense in the world, he added.

“It is important to have knowledgeable, experienced regulators,” said Dona Young, CEO, Phoenix Cos., Hartford, Conn. But the benefit of a federal optional charter really depends on the details, she added. The insurance industry is a more complicated industry than the banking industry [which currently has a federal regulator], Young said.

Young also offered input when the topic of acquisitions was broached. She said that Phoenix had made an effort to focus its efforts. “In the long term, you get rewarded for executing strategy,” and not just for size, she continued.

Northwestern Mutuals Zore noted that with the complexity of businesses and the need for scale, it makes it really important to do things well. “You cant afford to do all the things that you like to do anymore.”

With regards to Northwestern Mutual, he added, “I cant think of anything right now that I need. I dont see any attractive acquisition that will add value. Bigger does not necessarily add value.”

On the issue of being in diverse businesses, Rodney Clark, a director with Standard & Poors, New York, cited the entry of a number of insurers into the asset management business. Some companies purchased asset management businesses and of these companies, some are not at scale and have no reasonable expectation of getting there, he added.

Reproduced from National Underwriter Edition, July 1, 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.