Reinsurance Will Help Shape Income Planning Products
Going forward, cutting-edge income planning products will be available if direct writers are able to connect a series of product development dots including consumer need, company profitability and reinsurers capacity and expertise, say industry experts contacted by National Underwriter.
The advent of a huge pool of retirees is spawning the financial planning discipline of income planning, they say. “At this point, we are right around the corner,” Shane Chalke, founder and CEO of Finetre Corp., Herndon, Va., recently told attendees at the annual meeting of the National Association for Variable Annuities.
But Chalke said his concern is that the industry will miss an opportunity. “I dont believe that we are ahead of the curve on product design. I dont think that products are well designed in relation to needs.”
As direct writers continue to focus on product as a way to respond to need, life reinsurers, on the other hand, have evolved from reinsuring product to reinsuring risk, says Michael Barry, a managing director, with Fitch Ratings, New York.
There is a refocus on reinsuring mortality rather than the asset component of variable annuities, he explains. It is an unbundling, he continues, the result of a review by reinsurers of whether they “want to reinsure the product or the mortality portion.”
The turning point, Barry says, was “an overly aggressive product structure at the direct level.”
Reinsurers are not fighting for revenue in the way that direct writers are, in part, because they have benefited from a consolidation in the reinsurance market, he adds. The sense among reinsurers seems to be that they didnt buy into the stock market risk, Barry says.
What currently exists is a bundling of guarantees associated with fund management in a variable annuity, and this is changing, says Larry Rubin, a principal and actuary with PricewaterhouseCoopers, New York.
The real problem is the cost of offering guarantees such as guaranteed minimum income benefits that carry a high capital market cost to hedge risks, he continues.
The market for reinsuring guarantees remains tight, says Ari Lindner, senior vice president and chief life officer with Ace Tempest Life Reinsurance Ltd., Hamilton, Bermuda, which is offering reinsurance on some VA guarantees.
Ace Tempest Life Re is reinsuring GMIBs, says Lindner. “We are open for business.”
However, no one, including Ace, is reinsuring guaranteed minimum withdrawal benefits, he adds, and the reason is that the risk reinsurers would have to take for that guarantee would make it too expensive to reinsure.
Lindner says insurers are still trying to find the right mix of guarantees. The problem is that the GMIB does not offer a consumer sufficient access to money, and the GMWB does not protect a consumer from outliving assets, he says.
Several years ago, there was the debut of a variable immediate annuity with guaranteed floors, but the issue with that product is also access to money, according to Lindner.
There are other guarantee features being offered, including guaranteed minimum accumulation benefits, which he says have not sold well because there is not a perceived value in guaranteeing the same account value for a number of years. The real risk in reinsuring that guarantee, he continues, is earning between 2.5%-3% a year to keep the account at the same level and account for fees charged.
A successful product would incorporate participation in the market, access to funds and guarantees, according to Lindner. But the expense of a guarantee has to be considered along with product flexibility, he adds.
In addition to offering reinsurance for GMIBs, Lindner says direct writers also can receive help in areas such as product design. He says companies often seek out help on pricing.
If a direct writer needs help on product development, he says, it is better to bring in a reinsurer early in the process so the reinsurer can tell the company what the reinsurance cost component will be given the product structure and whether reinsurance will be available.