Finding ways to back variable annuity guarantees represents a promising but challenging opportunity for life reinsurers.
Insurance industry experts gave that assessment here during a panel discussion at a recent insurance conference organized by Standard & Poor’s, New York.
Many consumers and retirement advisors see VA contracts with guarantees as ideal retirement saving and income planning vehicles.
But the nature of the guarantees is such that, “when bad things happen, they happen really quickly,” said Paul Rutledge III, president of Transamerica Reinsurance, Charlotte, N.C.
Backing VA guarantees is a radical change from reinsuring traditional mortality coverage, said Michael Pado, president of XL Re Life America, Stamford, Conn.
When backing VA guarantees, reinsurers must forecast VA holder behavior as well as VA holder mortality, Pado said.
Accommodating that mix of investment risk with mortality risk will require the participation both of reinsurers and of the capital markets, Pado predicted.
One key is that the reinsurer and the direct writer need to act as partners, so that the reinsurer has more control over guarantee pricing, the panelists agreed.
The panelists noted that guarantee costs may not always reflect the true cost of offering some guarantees.
Swiss Re Life & Health America, Inc., Armonk, N.Y., is interested in reinsuring VA guarantee risk, but only if the direct writer client understands that the cost must be high enough to cover hedging expenses and other expenses, said Swiss Re Chief Executive Weldon Wilson.
At Transamerica, “we limit [guarantee reinsurance] to our best clients, and we do not hand it out like candy,” Rutledge said.
Panel speakers also talked about the effects of increasing longevity on the life insurance market and the nature of the policies sold to older insureds.
Death benefit amounts tend to be large, and the large policies purchased by older investors often have extremely high persistency rates, panelists said.
Because of factors such as the popularity of investor-owned life insurance, reinsurers need to pay attention to how contracts are shaped, Wilson said.
“I think we are comfortable in assuming [this business], but we really may have a different view on the pricing of older age mortality [than carriers do],” Wilson said.