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Session 25 PD, Annuity Product Update - Fixed & Variable. Moderator: Kendrick D. Lombardo, FSA, MAAA


Academic year: 2021

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Session 25 PD, Annuity Product Update - Fixed & Variable Moderator:

Kendrick D. Lombardo, FSA, MAAA


Steven Roy Cramer, FSA, MAAA Casey Edward Malone, FSA, CERA Michael P. Sparrow, FSA, CERA, MAAA


Income Annuity Update

Presented by

Casey Malone, FSA, MAAA, CERA

Consulting Actuary

May 19, 2014



Income Annuity Sales

May 29, 2014



SPIA Sales

 Sales were up 8% from 2012 to 2013 after being down 5% from 2011 to 2012.  Sales were down in the first half of the year, but rebounded late -> up 30%

from Q4 2012 to Q4 2013.*

 Could it be the rates? Pretty good bet.

May 29, 2014



Deferred Income Annuities (“DIA”)

 SPIA with a deferred income date, e.g. purchased at age 50 for

income to begin at age 70.

 Sales growth of 113% from 2012 to 2013* Rates can’t be the

whole story.

 Offered by about 12 companies (up from 6 in 2012):

May 29, 2014

• Lincoln

• Met Life

• Prudential

• American General

• Symetra


• New York Life

• Northwestern Mutual

• Mass Mutual

• Guardian

• The Principal

• CUNA Mutual

*Limra SRI



Sales Decomposition

May 29, 2014


2013 230.1  84.8  10.5  8.3  2.2 

2012 219.7  72.3  8.7  7.7  1.0 

Change 4.7% 17.3% 20.7% 7.8% 120.0%

Possible Driver Fixed Sales Rates Rates Rates Innovation


Q4 2013 61.9  25.6  3.3  2.6  0.7 

Q4 2012 52.7  17.7  2.4  2.0  0.4 

% Change 17.5% 44.6% 38.5% 30.0% 82.1%

Possible Driver Fixed Sales Rates Rates Rates Innovation


Q1‐Q3 2013 168.2  59.2  7.2  5.7  1.5 

Q1‐Q3 2012 167.0  54.6  6.3  5.7  0.6 

% Change 0.7% 8.4% 13.9% 0.0% 144.3%

Possible Driver Flat VA De‐risk? DIA Flat Innovation

YE 2012 Q1 2013 Q2 2013 Q3 2013 YE 2013

10 yr UST 1.78% 1.87% 2.52% 2.64% 3.04%



Appeal of DIAs

 Deferral period allows consumer to isolate longevity risk.

 Deferral period means less assets need to be allocated to

longevity piece.

Less of a drop in liquid assets to the consumer

Less of a drop in AUM for producer

Allows greater equity/bond market participation

 Flexible premium approach would allow for future interest rate

participation or inflation protection during the deferral period.

 Much wider consumer base:

Appeals to income someday customers, not just income today


 BYOP – Build your own pension



DIA – GMWB Tradeoffs

 Male, issue age 55, income age 65, $100,000 premium, death at age 90

 DIA: 10 yr certain after 10 years, ROP DB for 10 years, $9,480 annual income  GMWB: 6% simple rollup for 10 years, 4% w/d rate at age 65, 3.5% total AV

drag (M&E, rider, inv. mgmt.), $6,400 annual income



DIA Innovation – New York Life

 New York Life’s GFIA (guaranteed future income annuity)

Flexible premium DIA

Income is purchased at the current rates at the time of premium


 GFIB (guaranteed future income benefit) rider on Income Plus


VA rider with guaranteed income set at issue (like GMxB)

Money is transferred at NYL’s discretion from the VA account value

to fund the DIA income

Depending on market performance and interest rates, the

policyholder may have money in their VA account value at the

income start date.



DIA Innovation - Guardian

 Guardian attached a DIA rider to an IOVA chassis

 Transfers from VA account value purchase DIA income at

current rates

 Long deferral periods -> earlier of 40 years and age 85 (70 ½ for

qual) -> isolates longevity when you need it

 Optional return of transferred amount death benefit

 No guarantee like NYL GFIB, but policyholder retains complete

control of assets.



DIA Innovation – Northwestern Mutual

 Participating DIA

 Single premium locks in guaranteed income amount after the

deferral period.

 The income amount could increase through dividends.

 The dividends can be taken in cash or rolled into increased

future income.



2012 IAR Table

 SPIA/DIA issued in 2014 will be reserved under this new table.

 All else equal, it should have pricing implications.



2012 IAR Table

 Reserves will increase at most ages and durations.

 Largest increases are seen for the DIAs.




 Rates are going to be the major driver of fixed sales fluctuations

over short periods.

 Demographics are slow to take hold as a major driver, but

should drive long term trends.

 Innovation can possibly drive a shift into income annuities.

In SPIA, innovation is stifled by the limitation of taking income within

1 year.

The deferral period in DIA frees us up to innovate designs and

hybrid products that more closely match many consumers’ life cycle



Variable Annuity

Product Development


Michael Sparrow, VP & CFO Annuity Products SOA Life & Annuity Symposium

May 19, 2014


VA Product Development Update May 2014

Nationwide Financial

Market for VAs is going sideways

• VA sales down in consecutive years, despite great markets

• Living benefit value prop is diminished, less attractive to advisors • Current sales are being “replaced” by alternative vehicles

State of Variable Annuity Sales


VA Industry Sales

* Source: LIMRA


VA Product Development Update May 2014

Nationwide Financial

Few of industry leaders is showing an appetite for LB growth

• AIG, Transamerica, Lincoln showed significant growth

• Jackson shifted mix to IOVA, halted sales to manage capacity • Former leaders ceded significant market share to peers

What happened to the arms race?

State of Variable Annuity Sales

15 -40% -30% -20% -10% 0% 10% 20% 30% Transamerica Lincoln SunAmerica Pac Life AXA Jackson TAIA-CREF Ameriprise Nationwide Pru Met Life * Source: LIMRA


VA Product Development Update May 2014

Nationwide Financial


• Continued low rate environment

• Desire to take profit following weaker periods • Saturation of LB risk

Environmental / Other

• Fed oversight

• Accounting changes

• Strain of current statutory reserve rules • Discipline???

Has the industry gotten smarter or is this just a phase?

What are the possible drivers?


VA Product Development Update May 2014

Nationwide Financial

Key product trends to discuss

• Updates to LB portfolios

• Continued focus on risk management in design • Rate sheeting

• Investment only VAs (IOVAs) • Alternative benefit structures

• Non-equity VAGLBs

• Fixed Indexed annuities and Structured VAs

What has this meant to product developers?


VA Product Development Update May 2014

Nationwide Financial

Product update season revealed surprisingly little change to

core VAs of the market leaders

Spring product update highlights:

• A few withdrawal benefit increases – Pru HD and Transamerica • Modest fee changes – Pac Life and Ohio National

• Jackson suspends rollup GMDB

• Are rollup death benefits going to become extinct?

• New investment only VAs from Pru and AXA, others pending • Usual addition / closure / renaming of funds

Recent VA Product Updates


VA Product Development Update May 2014

Nationwide Financial

Basic lever is risky asset weighting, but approaches vary

• Target fund’s volatility to a prescribed level • Set an absolute limit on fund’s volatility • Protect against principal loss

Risk managed investments – Vol Control Funds

19 Target Volatility Capped Volatility Principal Protection

 Focus on tail protection  Realized vol driven

 Never increases core risk exposure

 Less severe drops  Lower E(return)

 Easier to explain results  Modest resv benefit

 Both tail & upside effects  Realized vol driven

 Overweight equity in low vol environment

 Less severe drops

 Can outperform static fund  Harder to explain

 Better resv benefit

Characteristics Outcomes

 Both tail & upside effects  Considers both vol and

gain/loss experience  Put-like hedge strategies

 Can maximize loss protection & resv benefits  Very complex strategy  Difficult to explain results


VA Product Development Update May 2014

Nationwide Financial


• Returns across different scenarios and time horizons • Cost of fund mgmt

Insurance Company

• Risk and volatility • Profitability

Firms and Advisors

• Continuity of carrier and products

• Transparency

Risk managed investments – Design Choice



Company Policyholder

Firms and Advisors

Decision process can be hard. What is most important to your

company … risk reduction, pricing benefits, fund return


VA Product Development Update May 2014

Nationwide Financial

Companies have begun adopting rate sheeting as a

tool for more active management of GLWB

profitability and competitiveness


• Respond to competitive trends faster • Less volatile sales

• Manage profits better

Rate sheeting

21 Effective May 1, 2014 50-64 4.00% 65-74 5.00% 75-79 5.50% 80+ 6.00%


• Operationalizing in systems, marketing, and communications • Regulatory filings still required


VA Product Development Update May 2014

Nationwide Financial

Key features of IOVAs

• Capitalizes on trend toward higher tax rates • Extensive array of investments (100+)

• Tendency towards lower M&E fees

• No guaranteed benefits or only basic GMDB

Key product activity

• Jackson’s Elite Access is the benchmark

• Who is next behind Jackson to have success? • AXA Investment Edge (new)

• PRU Premier Investment (new) • Nationwide Market Flex

Can tax deferral return to prominence as a primary engine of VA


Investment Only VAs


VA Product Development Update May 2014

Nationwide Financial

Different forms of guarantees are eating away at traditional VA

investor base

• Bond only WBs

• Structured note like designs • Fixed indexed annuities

Bond Only

• Prudential Defined Income growing since 2013 debut • Like a WB on a fixed annuity, but…

• May be a more capital and risk efficient way to deliver it

Contingent Deferred Annuities (CDAs)

• Interest and momentum appears to have dissipated

• Similar attempts to target fee-based advisors with VAs have had limited success

Alternative Structures


VA Product Development Update May 2014

Nationwide Financial

The VA world has changed, perhaps for a long time to come

• Back to the future for tax deferral

• Long term future of VA guarantees is uncertain • Alternative designs are on the rise

• Volatility control funds have a future beyond just VA market




Index Linked Variable Annuities

Update & Developments

Steve Cramer, FSA, MAAA

VP, Product Development






What are they?


Where do they fit?


How do they work?


What has happened lately?


What are they?


Unit Linked VA’s

No guaranteed accumulation

Full upside potential

Full downside risk

Unitized fund performance

Index Linked VA’s

No guaranteed accumulation

More upside potential

Limited downside risk

Performance tied to an index

FIA’s: Fixed Indexed

Guaranteed accumulation

Limited upside potential

No downside risk




Where do they fit?





How do they work?

29 -50% -25% 0% 25% 50% Consumer Returns Traditional VA -10% 0% +5% +10% +15%


How do they work?

30 -50% -25% 0% 25% 50% Consumer Returns Traditional VA FIA -10% 0% +5% +10% +15%


How do they work?

31 -50% -25% 0% 25% 50% Consumer Returns

Traditional VA FIA ILVA (Buffer) -10% 0% +5% +10% +15%


How do they work?

8 -50% -25% 0% 25% 50% Consumer Returns

Traditional VA FIA ILVA (Buffer) ILVA (Floor)


What has happened lately?


10/2010 5/2013 9/2013 8/2013


What has happened lately?



Multiple carriers have entered market


LATF Subgroup


Model 250 (VA) or 255 (MGA)?


Consumer issues?


Illinois proposed regulation


Classified as Variable


Other questions?



Who will enter this space?


What volume can we achieve?


Other resources?



Article in The Actuary

Structured-Note Annuity: A Niche Industry is Born with Endless Possibilities

By Joe Halpern and Greg Henke



LATF Subgroup



Illinois Proposed Regulation


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