Life insurers are being more careful about taking on variable annuity (VA) risk, but the generous guarantees they sold in the past remain a threat, a rating agency says.
Moody’s Investors Service Inc., New York, has taken a look at VA risk in an analysis of 2009 year-end financial information from the 20 largest VA writers.
The analysts who conducted the study tried to predict the impact of a 30% drop in stock prices on each insurer’s risk-based capital ratio.
The analysts also looked at the possible effects of stress scenarios on insurers’ capital financial resources and the insurers’ total exposure to VA risk.
Moody’s notes that its analysts create adjusted RBC ratio figures to gauge the possible effects of unusually harsh conditions on capital adequacy.
Adjusted RBC ratios increased at half of the insurers studied, but that result is misleading, the Moody’s analysts conclude.
Capital reserves at the insurers improved, but many insurers are using “captive” operating companies to manage VA risk, and most of those captives appear to have less than 100% of the capital they need to handle unusually severe conditions, the analysts say.
Moody’s is estimating the captives need about $10 billion to be fully capitalized.
“One of the key take-aways of the survey is that the onshore companies come out looking a lot better under the stress scenarios because they’ve shifted a lot of risk to the less regulated captive entities,” says Scott Robinson, a senior vice president at Moody’s. “By moving business offshore, they’re able to get around the U.S. regulatory capital requirements. The insurers are economically exposed, but the full extent of their exposure may not show up on the regulatory capital ratios.
Because of interest rate risk associated with VA guaranteed minimum income benefit and guaranteed minimum withdrawal benefit riders, VA writers likely will “implement large hedging transactions” to protect their reserves against scenarios involving low interest rates over prolonged periods, Moody’s analysts say.
“Most companies have not done such hedging to date, but you would hope they would hedge a certain portion of their risk,” Robinson says. “As the price becomes more attractive, I can see them hedging some of the risk on an opportunistic risk.”