The market for reinsuring variable annuity guarantees, shut tight for a number of years, opened a crack with the recent announcement that Lincoln National’s guaranteed minimum withdrawal benefit would be reinsured by Swiss Re.

The agreement is a 50% co-insurance arrangement associated with up to $4.5 billion in contracts sold in 2007 and 2008, according to Lincoln. The insurer, based in Philadelphia, will retain 100% of the base variable annuity contracts.

In a statement, the company detailed the popularity of the lifetime option feature. In the second quarter of 2007, elections of the Lincoln SmartSecurity Advantage rider with the lifetime option were 28% of new individual VA product deposits. As of June 30, 2007, 28% of Lincoln’s Individual Market’s VA product account balances of $58.6 billion had the Lincoln SmartSecurity Advantage rider, including 4% related to the lifetime withdrawal option.

The rider, in place since October 2006, has a 5% provision, says Brian Kroll, Lincoln’s vice president-variable annuity pricing, who explains that if a purchaser put $100,000 in contract at age 65, then the contract holder could withdraw up to $5,000 a year for life.

There has been difficulty until recently in getting VA riders reinsured, Kroll says, but currently interest is growing. Relationships are important in the reinsurance market, and in the case of Swiss Re and Lincoln National, there is a long relationship in reinsuring life insurance contracts, he adds.

Having expanded capacity strengthens the risk management of Lincoln’s product portfolio, he explains. In this particular agreement, it was “definitely a partnership where we could each step into each other’s shoes.”

Russell Hackmann, managing director with Swiss Re, New York, says that reinsuring VAs with guarantees required the coordinated effort of the reinsurer’s reinsurance and financial services business.

He says Swiss Re reinsures all guarantees: death benefits, accumulation benefits, income benefits, withdrawal benefits and withdrawal benefits for life.

The Lincoln agreement is not the first reinsurance deal Swiss Re has completed for variable annuity guarantees, he says.

Even so, in general, it has been “very, very difficult” to get this type of reinsurance in the marketplace, he notes, with the long-term nature of the guarantee being one of the reasons.

Part of the reason, Hackmann explains, is that two of the most prevalent VA guarantees in the U.S. are guaranteed minimum income benefits and guaranteed minimum withdrawal benefits that have “fairly significant behavioral and longevity risks.” These riders have to be examined deterministically and stochastically as well as behaviorally, he says.

Deterministic projections rely on a point estimate, while stochastic modeling offers a range of projections.

Since withdrawal benefits are relatively new features, they require even more scrutiny, he continues.

Minimum death benefit guarantees, he adds, are a little more straightforward since mortality risk is a little more predictable.

Proper analysis of these risks will involve capital markets and reinsurance, Hackmann states. In fact, he continues, “the growth of reinsurance really is where the capital markets and insurance intersect.” He says that catastrophe bonds as well as these VA guarantees are some examples that mark this intersection.