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Rating Agency Wants More VA Risk Details

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Analysts at Moody’s Investors Service, New York, say they wish they knew more about the performance of variable annuities.[@@]

U.S. VA operating profits increased to almost $7 billion in 2003, up from a loss of $141 million in 2002, according to an annual U.S. life insurance industry outlook compiled by a team led by Laura Bazer.

Insurers also are giving a little more information about VA operations, Bazer’s team writes.

Nevertheless, “the transparency in financial reporting of VA profitability and risks (e.g., assumptions used by insurers to account for amortization of deferred acquisition costs) remains generally opaque,” the analysts write. “As a result, understanding an insurer’s true economic earnings and potential volatility of earnings going forward remains an arduous process.”

The improving stock market has improved VA unit performance, but it also has eased the pressure on insurers to provide more information, the analysts write.

The analysts note that some VA issuers are seeking help from outside advisors with setting up hedging programs in an effort to reduce the risk of offering death benefit guarantees, income guarantees and other guarantees.

The annual industry report is important because it reflects rating agency market assumptions that can affect individual insurers’ ratings. Ratings affect insurers’ capital costs and product prices.

In other sections of the industry report, Bazer’s team:

- Talks about the value of career agents. “Captive or exclusive agency distribution, with strong ties to both the company and the customer, promote better overall policy persistency, particularly in challenging operating environments,” the analysts write.

- Predicts higher health insurer stock prices will lead to health insurance company acquisitions.

- Suggests that consolidation could continue to lead to higher life reinsurance prices and opportunities for smaller, adequately capitalized life reinsurers.


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