Session 60 PD, Annuity Product Development Trends Moderator: Guillaume Briere-Giroux, FSA, MAAA

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Session 60 PD, Annuity Product Development Trends

Moderator:

Guillaume Briere-Giroux, FSA, MAAA

Presenters:

Guillaume Briere-Giroux, FSA, MAAA

Kendrick D. Lombardo FSA, MAAA

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© 2014 Oliver Wyman

Guillaume Briere-Giroux, FSA, MAAA, CFA

Annuity Product Development Trends

Market and Product Development Trends for Fixed Indexed Annuities

2014 SOA Annual Meeting & Exhibit

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© 2014 Oliver Wyman 11 © 2014 Oliver Wyman

Agenda

I.

FIA market update

II.

FIA product trends

III. Hybrid annuities

IV. Key takeaways

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© 2014 Oliver Wyman 22 © 2014 Oliver Wyman

Indexed annuity sales trends (2001-2014)

FIA sales are on pace to achieve a 10% cumulative annual growth rate

(CAGR) between 2007 and 2014

Source: Wink’s Sales & Market Report (2006 and prior) and LIMRA (2007 and later)

$ Billions 6.8 11.8 14.4 23.1 27.2 25.3 25.0 26.7 29.9 32.1 32.2 33.9 39.3 50.0 0 10 20 30 40 50 60 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 10.4% CAGR Industry forecast

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© 2014 Oliver Wyman 33 © 2014 Oliver Wyman

Top FIA writers in 2014 (1-10)

High Low Rank (2014 Q2 YTD) Company 2014 Q2 YTD Sales ($ Billions) 2013 Q2 YTD Sales ($ Billions) YoY Change (%) % Indexed (2013) % Variable (2013) % Fixed (2013) 1 Allianz Life 6.61 2.40 175% 2 Security Benefit 2.35 2.08 13% 3 American Equity 1.91 1.97 -3% 4 Great American 1.56 1.09 43% 5 Athene1 1.19 1.34 -12% 6 Midland National .90 .81 11% 7 Voya .85 .52 65% 8 EquiTrust .82 1.00 -18% 9 Symetra .74 .44 68%

10 Fidelity & Guaranty Life .70 .49 41%

Composition of sales

1 2013 sales figure combines Aviva and Athene

Source: Wink’s Sales & Market Report and LIMRA

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4 4 © 2014 Oliver Wyman Lincoln Symetra

Competitive landscape (2013)

Today’s FIA market has a broad range of players with increasing

representation outside of the independent channel

Source: Wink’s Sales & Market Report and Oliver Wyman Research

Phoenix

Banks and broker dealers Independent and banks Independent organizations Recent A c quirers US Stock Companies Foreign Subsidiaries Mutual Companies O w ne rs hip Structure

Lower Credit Rating Higher

A++ A A-B++ B+ B

Market share and dominant distribution channels by ownership structure and credit rating

Priv

ately

Held

Career

Size of bubbles represents 2013 market share

Primary distribution channels

A+ Allianz Life Sagicor Life Jackson National Security Benefit American Equity Great American EquiTrust Athene Fidelity & Guaranty Life North American Midland National

Lincoln Benefit Life VOYA Genworth AIG National Western Protective Life CNO Companies

Pacific Life Nationwide

OneAmerica Western & Southern All other companies Forethought

National Life Group

15.5 10.4 11.7 7.1 7.9 % % % % %

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© 2014 Oliver Wyman

AmerUS

(Aviva USA / Athene Block) ING (Now VOYA)

Competitive landscape (2005)

The FIA market was previously heavily concentrated in “niche players”

focusing on the independent channel

Source: Advantage Compendium and Oliver Wyman Research

Banks and broker dealers Independent and banks Independent organizations Recent A c quirers US Stock Companies Foreign Subsidiaries Mutual Companies O w ne rs hip Structure

Lower Credit Rating Higher

A++ A A-B++ B+ B

Market share and dominant distribution channels by ownership structure and credit rating

Priv

ately

Held

Career

Size of bubbles represents 2005 market share

Primary distribution channels

A+ Allianz Life

Jackson National

American Equity EquiTrust

Midland National Jefferson Pilot (Now Lincoln) Sun Life (Now Delaware Life) All other companies % % Old Mutual (Now Fidelity & Guaranty Life) 15.2 8.7 32.3  8.8 9.9 7.5 % % % % % %

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© 2014 Oliver Wyman 66 © 2014 Oliver Wyman

Economic conditions

The yield environment favors longer duration fixed annuities

Source: Federal Reserve of St Louis, Treasury data and BofA Merrill Lynch US Corporate Option-Adjusted Spreads

Select Bond Yields Credit and Maturity Spreads

FIA market update

Credit spreads returned to pre-crisis levels, but the yield curve is steeper. This environment favors longer duration products such as FIA with GLWBs.

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Base product design trends

FIA product trends

1

Volatility control indices

• Lower hedge cost allows uncapped upside

• Sellers include Security Benefit, Symetra, Allianz Life, Fidelity and Guaranty Life

2

Liquidity features

• Features that are not new but popular include • Return of premium

• Bailout provisions • Nursing home waivers

• Shorter surrender charge designs gained popularity

3

Other accumulation features

• “Buy up” the cap

• Rolling forward index credits

• Credits linked to change in interest rates • Guaranteed minimum values

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© 2014 Oliver Wyman 8

Benefit rider trends

1

Indexed-linked income growth

• “Stacked” rollups (e.g. 4% + account value performance) • “Turbocharged” account value driving income

• Income increases after income start

2

Other variations in lifetime income structures

• Rollups are compound / simple / or absent (e.g., vary income rates by age / duration) • Limiting rollups / limiting younger issue ages common (AG 33)

• Less breakpoints in income bands

• More income options (flat, guaranteed increase or index-linked increases)

3

Nursing home

income riders

• Offered for free or additional charge (e.g. 10 bps)

• Typically doubles the income for up to 5 years if cannot perform 2 of 6 ADLs • Becoming increasingly common

• Complex to price

4

Enhanced death

benefits

• Offered with or without GLWB (sometimes for an additional charge) • Wait periods

• Maximum payout

• Payout periods / reduced lump sum

Benefit riders are the most important driver of sales for many carriers, but less so for carriers focusing on distribution through banks. The next slide shows the relationship with between rider richness and market share for top FIA carriers offering benefit riders.

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© 2014 Oliver Wyman 99 © 2014 Oliver Wyman

Rider competiveness

The richness of GLWB riders and “extras” such as nursing home “doublers” and

GMDBs correlates fairly well with market share changes

Decreasing market share Increasing market share Stable market share

Rider

Composite Richness

Index*

Lower Credit Rating Higher

A++ A A-B++ B+ B

Market share and market share changes by credit rating and rider richness

Size of bubbles represents 2013 market share

Market share changes

A+ Company E Company G Company D Company B Company A Company C Company F

Source: Sales from Wink’s Sales & Market Report

Rating / rider richness “equivalent” line

*Rider composite richness index includes allowance for GLWB payouts, rider charges, presence of nursing home benefits and GMDBs.

This analysis does not factor commissions, distribution allowances or base credited rates.

Lower

Higher

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Hybrid annuities

“Hybrid” or “structured” annuities fill the spectrum between FIAs and variable

annuities and had sales of more of $4 billion since their introduction in 2010

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Hybrid annuity crediting structures compared to FIAs and VAs

Note: For illustrative purposes, assumes no fees and no dividends

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© 2014 Oliver Wyman 1212 © 2014 Oliver Wyman

Key takeaways

1

FIA market continues to expand quickly

2

Target volatility indices continue to gain traction

3

Increased differentiation of benefit riders

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Annuity market update

Variable annuities

Vikas Sharan, FSA, MAAA

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Page 2 Annuity market update – Variable annuities

History

Sales trends

Product development activity

Inforce management

Key takeaways

Agenda

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Page 3 Annuity market update – Variable annuities

Journey so far

1990s Free GMDBs VA sales $100B 2002 GMWB/GMAB introduced 2006 GLWB features war 2008 Great Recession Pullback and exits 2010 2012 Rationality/ consolidation 1999 2005 Index annuity sales $25B 2004 1996 GMIB introduced GLWB introduced

Source: IRI Fact Book

1982

Tax-deferred status

confirmed

?

► VA started as a product used for saving/accumulation and transitioned into a product

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Page 4 Annuity market update – Variable annuities

Consumers don’t understand complex index

annuities.

Irrational pricing still exists.

There must be a better way to get guaranteed income.

Advisors want simpler products.

A psychological barrier to deferred income annuities still exists. Net sales for variable

annuities will increase by over 50% in the next five

years.

It’s back to the old days, focusing on tax deferral and

capital growth.

The froth in the index annuity market feels like the early days of the

variable annuity market.

Private equity firms may not focus on customer priorities

first. Insurers are innovating to

impress analysts and shareholders.

Insurers do not fully appreciate the gravity of their actions over the last

several years.

The next wave of innovation is on the horizon. Insurers have lower credibility in our system due to

recent actions.

Sales per advisor were twice as high in 1995. New annuity

business is down in 2013, but exchanges and transfers

are up 50%.

The annuity industry loves to compete on features, while the mutual fund

and security industries compete on performance, customer service, reputation

and consistency.

Annuity market survey

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Page 5 Annuity market update – Variable annuities

Predominant forces

Intense competition among carriers remains planted in features,

complexity and price

Rivalry based competition increases the attractiveness of

substitute offerings to both distribution and customers

Once lured away, distributors and customers become increasingly

difficult to lure back.

Differentiating strategies

Acknowledge the need to rebuild trust with advisors

Continue to simplify and rationalize products

Focus on service and experience – and de-emphasize price

Rethink innovation

Annuity market survey

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Page 6 Annuity market update – Variable annuities

VA sales have leveled off in recent years per LIMRA*, influenced by

A general pull-back from market leaders, coupled with general de-risking

Withdrawal income benefit has competition from FIAs

Competition from non-insurance solutions, e.g., mutual funds

Annuity market sales trends

VA sales levels off, increased competition from FIAs

Source: LIMRA Data Bank

* 2014 sales calculated as annualized sales based on YTD 2014 Q2 sales.

0 50 100 150 200 2014 2013 2012 2011 2010 2009 Sales ($B)

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Page 7 Annuity market update – Variable annuities

Variable annuity sales for writers in the top 5 for the last six years

shown below

Variable annuity sales

Market leader pullback and de-risking shifts the sales leader board

Pullback:MetLife and

Prudential open about pull-back efforts in 2012, de-risk products and bring sales levels closer to the pack

Consistent mix:The top 5

list consists of the same companies. AIG replaced MetLife last year in the Top 5 list. $0.0 $5.0 $10.0 $15.0 $20.0 $25.0 $30.0 2009 2010 2011 2012 2013 2014 VA Sales ($B)

VA Sales by Calendar Year

Top 5 Companies in Sales

Jackson National Life Lincoln Financial Group TIAA-CREF AIG Prudential MetLife AXA

Source: LIMRA Data Bank

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Page 8 Annuity market update – Variable annuities

Distribution of GLBs by sales type and GLB election rate trends are

shown below*

Lifetime withdrawal benefit designs continue to increase their presence in

the market relative to other benefit types.

GLB election rates have fallen over the last several quarters.

Variable annuity GLB election rates

Increased lifetime withdrawal concentration, reduced election rates

13% 12% 12% 12% 11% 11% 10% 10% 31% 31% 30% 31% 30% 30% 29% 29% 56% 57% 58% 57% 59% 60% 61% 62% Q4 2011 Q2 2012 Q4 2012 Q2 2013 % Tota l A s se ts

GMAB, GMWB & Hybrid GMIB GLWB

75% 80% 85% 90% 95% 100% Q4 2009 Q3 2010 Q2 2011 Q1 2012 Q4 2012 Q3 2013 % A n y GL B elected

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Page 9 Annuity market update – Variable annuities

► VA products continue to utilize features that help manage risk

► Target volatility funds now ubiquitous ► Derivative within the fund

► Feature Indexing – linking contract features to a market index

► Several companies filing new products that allow flexibility to change roll-up rates and withdrawal percentages

to be reactive to market conditions

► Newer annuity product designs emerging

► Deferred income annuities

► Some liquidity constraints, but starting to generate new sales

► New York Life has sold over $1 billion; at least nine other providers have product on market

► Structured hybrid annuities

► Index-linked annuities with downside protection provided in exchange for upside ► No living benefits offered on some of the early designs

► Growth oriented VAs

► Introduced to attract investors interested in return and low fees more than guaranteed benefits ► Jackson National achieved $1 billion sales in the first quarter of 2014

Product development

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Page 10 Annuity market update – Variable annuities

Contingent deferred annuity (CDA)

Insurance companies are partnering with asset managers to offer a

guaranteed income rider on a mutual fund or a managed account

investments

Concept similar to VA with guaranteed withdrawal riders

► Offer downside protection in form of lifetime income ► Offer upside potential with step-ups

Restriction on underlying MF/ETFs that can be included in the CDA by

using an ‘approved fund’ filter

Proportion of CDA fee might vary by investment choice (e.g., higher fees

for actively managed funds compared to index tracking funds)

No death benefit

Regulations still evolving

► NAIC working group:

http://www.naic.org/committees_a_contingent_deferred_annuity_wg.htm

Product development

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Page 11 Annuity market update – Variable annuities

Annuity income comparison

0% 5% 10% 15% 20% 25% 30%

VA-10 FIA-10 VA-20 FIA-20

Guaranteed w ithdra w als/pa y out as a percent of initial premium

Payout as a % of initial premium DIA 10 female DIA 10 male DIA 20 female DIA 20 male

Ignoring the impact of market returns, FIA products with GLWB riders provide higher guaranteed withdrawals than VA products with GLWB riders. More surprising is that some FIAs provide more guaranteed income than DIAs.

Source: EY’s Retirement Income Knowledge Bank®, EY desk research

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Page 12 Annuity market update – Variable annuities

► Number of mergers and acquisitions (M&A) transactions in recent years

► Variable annuity block toxicity reduced somewhat from favorable equity markets and

rising interest rates

► Industry still looking to reduce risk exposures ► Approaches:

► Buy-outs

► Hartford, Transamerica and AXA have experimented with GMXB buyout clauses ► AXA recently announced a second wave of offers on legacy policies sold 2004–2009 ► Unclear how successful these program have been thus far

► Reinsurance options

► Straight ‘all-in’ coinsurance deals still not widely available ► Longevity reinsurance transactions starting to emerge

► Divestiture

► Greater supply of buyers driven by private equity interest, as discussed

► Limits on distribution

► Restrictions on future contributions

In-force block management

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Page 13 Annuity market update – Variable annuities

Equity markets have stabilized and interest rates have risen, but challenges

still remain for hedging programs:

► Difficulty of having a single hedging strategic objective effectively address multiple

accounting and regulatory frameworks

► Measurement of program objectives under multiple lenses, including statutory,

US GAAP and economic

► Accounting mismatch issues on SOP 03-1-based benefits

Industry trends in the hedging space include:

► Increased adoption of macro hedging strategies by variable annuity writers to

complement core dynamic hedging strategies to manage tail risk and capital

► Increased sophistication of interest rate, equity and volatility models within

valuation systems to produce more granular valuations

► Increased industry interest and adoption in GPU-based technology to accelerate

processing times, increasing capacity and/or frequency of trade grid refresh

► Additional assistance from product design, with the emergence of target volatility

funds and other features that help manage product risk

Risk management and hedging

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Page 14 Annuity market update – Variable annuities

Variations of product designs evolving in the market

Continued evolution of risk management

Carriers continue to de-risk VA offerings

Further integration of risk management and hedge activity with

product development to create sustainable offerings

Products available in the market which seem more

attractive than VA

FIA sales will probably surpass VA sales in five years

VA focus will increase on being a tax-deferred saving vehicle

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