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Variable Annuity Issuers Get a Low-Interest-Rate Checkup

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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.

More on this topic

Those insurers said they could flourish, in spite of low rates, because of factors such as benefits from hedging programs, improvements in asset and liability management strategies, and their companies’ use of reserving strategies that are based on tougher scenarios than the scenarios used in the special stress tests, Boerner reports.

Boerner notes that the NAIC is already updating its main economic scenario generator to include “lower for longer” interest rate scenarios.

Long-Term Strategies

The working group also asked stress participants about steps the companies might take if rates stay low for 15 to 20 years.

About 13% said their companies had already repriced or redesigned products in response to low rates, and 33% said their companies might do so in the future.

About 29% of the issuers had already discontinued products or adjusted the sales mix, and 25% could do that in the future.

Another 17% said their companies had taken “no additional actions, outside of usual activities” and would take no additional actions, outside of usual activities, in the future.

(Image: Diego M. Radzinschi/ALM)