Charges related to changes in policyholder assumptions on variable annuities with guaranteed benefits may emerge among life insurance companies in the U.S., putting a dent in earnings and capital, according to a new Moody’s report in the wake of ING’s announcement that it would take a 4th-quarter charge to earnings.
The Dutch ING Group just took a $1.1 billion charge for changes in policyholder “behavior” assumptions related to the closed block of VA policies in its U.S. operation. And these assumptions could hold sway at other insurers as well, according to the report by Laura Bazer of Moody’s.
She said that, while assumptions charges are common, the specific ING charge could be part of a trend, as policyholders are becoming more informed about their complex insurance policies, and are acting to gain the value of guaranteed insurance benefits when they are “in the money.”
In pricing and hedging the risks of their VA contracts, companies must also make assumptions about how many customers will hold on to their policies long enough to be eligible for benefit, how many of them will exercise guaranteed benefit options when they become available and how many more of them may exercise those options, the report explains.
If the company’s assumptions underestimate how aware customers are in timing and making these decisions, “there can be significant unexpected additional economic costs to the company,” Bazer stated.
With ING, VA policyholders were found to be holding on to their policies longer, and in greater numbers than ING originally assumed. ING had to increase its reserves to reflect the larger number of policyholders that may ultimately receive benefits over the life of their contracts.
Moody’s noted that the Netherlands-based ING is not alone in taking charges for policyholders behaving differently than the insurer expected. Moody’s adds that each country has its own rules about setting reserves.
Canadian companies accounting and reserving methodologies may require greater and earlier disclosure of these charges, Bazer says, pointing out that in the third-quarter 2011, Manulife Financial took an after-tax charge of CAD $309 million for changes to its assumptions for VA lapsation and other policyholder behavior, largely at its U.S. John Hancock operation.