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.
Reinsurers can help direct writers in a number of ways, says Donna Claire of Claire Thinking, Fort Salonga, New York.
For instance, reinsurance can create balance in a direct writers product portfolio so that it has a reasonable balance of life insurance and annuity products, she says. The same can be true for reinsurers which might need to balance their portfolios, she adds.
Although there is currently a retrenchment in reinsurance of VA guarantees, Claire says once there is better pricing and a better understanding of what is being written, there will be more of a willingness to reinsure these guarantees again.
She adds that reinsurers will be even more interested in reinsuring long term care insurance once direct writers accurately price the product.
Reinsurers say the body of research they have gathered over time can help direct writers better price and develop new income planning products and features.
For instance, Munich American Reassurance Company, Atlanta, is doing research on longevity risk that could help develop new LTC products or to understand the potential cost of a product design, says Jim Sweeney, MARCs executive vice president and chief operating officer.
An important component in being able to understand LTCI, an income planning product, is to have accurate underwriting tools, he adds. But there is a degree of skepticism over whether the current tools provide an accurate assessment or if there is a need to find better tools, he says.
As for variable annuities, Sweeney says MARC participates on a limited basis, reinsuring the mortality component of a VA but not the account value component.
At RGA Financial Markets, St. Louis, clients are demanding more reinsurance for immediate annuities and equity-indexed annuities, says John Laughlin, an RGA executive vice president.
Laughlin says he believes immediate annuities will be a bigger part of a consumers retirement plan. Boomers face longer life spans and an increased likelihood that they will not have a defined benefit plan to rely on, he explains.
In addition to outliving income, Laughlin says health care costs and coverage are major concerns.
Both direct writers and reinsurers say that, given these concerns, another product that impacts income, critical illness insurance, is one that offers great potential.
The value that reinsurers can bring to the critical illness market is expertise in underwriting, pricing and analytics, according to Rohit Shenoy, business leader, U.S. critical illness & personal accident with the U.S. Accident and Health division of GE Insurance Solutions, Avon, Conn.
Critical illness products need to be sold simply at first, Shenoy says, and once they become more established, then additional features can be added to the product. For instance, Shenoy says that conceivably there could be a death benefit component to a critical illness product, although he notes that you would have to make sure that one component of the product is not subsidizing the other feature.
But the take-away is that the benefit to consumers can be tremendous given the savings rate and the consumer debt rate, he adds.
In 2003, the savings rate was approximately 1.4% according to the U.S. Bureau of Economic Analysis. The ratio of household debt to disposable income stood at 18.1% at the end of 2003, according to the Federal Reserve Board and Bureau of Economic Analysis.
Critical illness is also an area that UnumProvident, Portland, Maine, sees as a small but growing market, says Al Riggieri, vice president and corporate actuary. It is a product that fits in well with the voluntary worksite market, he continues.
If a reinsurer has worked outside the United States in a country such as South Africa and has a body of knowledge that can be used by a direct writer, that knowledge is of value, he adds.
And, since it is a new market in the U.S., there is more of a need to share risk through reinsurance, says Stephen Mitchell, UnumProvident vice president of group pricing.
Reproduced from National Underwriter Edition, October 21, 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.