What You Need to Know
- Regulator working group gave 23 variable annuity stress tests.
- Some companies predicted stress test conditions would improve their capital levels.
- The NAIC is working on an economic scenario generator that would include lower-for-longer interest rate scenarios.
Big U.S. variable annuity issuers look as if they can handle 10 or more years of very low interest rates, according tro results from a new National Association of Insurance Commissioners issuer stress test.
The variable annuity issuers that took the test might need about $8.1 billion in additional reserves, or 15% more, to handle one type of moderately bad interest rate environment, and $6.6 billion in additional reserves, or 12% more, to handle another type of bad environment, according to a results summary prepared by Mike Boerner, an actuary with the Texas Department of Insurance who serves as the working group chair.
“This compares to the entire life and annuity sector’s capital and surplus of $451 billion as of 12/31/20,” Boerner writes in the summary, which was addressed to Marlene Caride, the New Jersey insurance commissioner, who is chair of the NAIC’s Financial Stability Task Force.
The Financial Stability Task Force put Boerner’s summary in a materials packet for a recent online session the task force held in place of holding an in-person session at the NAIC’s upcoming fall meeting. The fall meeting is set to run from Dec. 11 through Dec. 16 in San Diego.
Interest Rates and Variable Annuities
Traditionally, U.S. life insurers have invested a high percentage of annuity premiums in high-quality corporate bonds and used interest earnings on the bonds to help pay benefits to the annuity holders. Today, typical interest rates on high-grade corporate bonds are lower than 4%, and less than half of what they were around 2000.
The NAIC’s Valuation Analysis Working Group gave a special stress test to 23 insurers that account for about 90% of U.S. in-force variable annuity business, in response to complaints that the NAIC’s main stress test process has not included enough scenarios involving very low or negative interest rates on bonds.
The variable annuity issuers that took the new special stress test now have about $56 billion in guaranteed benefit reserves and risk-based capital.
Bad Scenarios Could Be Good, for Some
Some insurers suggested that their performance could improve in the scenarios included in the stress tests.