Oliver Wyman Modeling Managing and Pricing of Living Benefit Risks May 2014

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2014 Life and Annuity Symposium Session 83 / Virtual Broadcast: This presentation provides an industry overview of practices related to the modeling, pricing and risk management of living benefit …

2014 Life and Annuity Symposium Session 83 / Virtual Broadcast: This presentation provides an industry overview of practices related to the modeling, pricing and risk management of living benefit risks and qualitatively positions FIA GLWBs (covered by co-speakers in more detail via a case study) relative to other living benefits.

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  • 1. © 2014 Oliver Wyman Guillaume Briere-Giroux, FSA, MAAA, CFA Modeling, Managing and Pricing Living Benefit Risks Overview of Industry Approaches 2014 Life and Annuity Symposium Atlanta – May 20, 2014
  • 2. © 2014 Oliver Wyman 11© 2014 Oliver Wyman Overview of industry approaches I. What living benefits? II. What risks? III. What scenarios and what value lenses? IV. Industry modeling practices After this overview, co-speakers will expand on select modeling, pricing and risk management issues with a case study focused on a fixed indexed annuity (“FIA”) with guaranteed living withdrawal benefit (“GLWB”)
  • 3. © 2014 Oliver Wyman 22© 2014 Oliver Wyman What living benefits? Sales data from LIMRA LowerHigherMarketRisk Mostly elective Both elective and non-elective Non-elective Insurance risk type Elective Size of bubbles represents order of scale for recent new business volumes (LTC converted to single premium equivalent) Lower HigherInsurance Risk
  • 4. © 2014 Oliver Wyman 33© 2014 Oliver Wyman What insurance risks? High Low Product Longevity Base lapse Dynamic lapse Withdrawals or annuitization Morbidity VA GMAB VA GLWB VA GMIB FIA GLWB* SPIA DIA LTC *With nursing home benefit Risk level
  • 5. © 2014 Oliver Wyman 44© 2014 Oliver Wyman What market risks? Product Credit Interest rates Equity Volatility Fund correlation / basis risk VA GMAB VA GLWB VA GMIB FIA GLWB* SPIA DIA LTC *With nursing home benefit High Low Risk level
  • 6. © 2014 Oliver Wyman 55© 2014 Oliver Wyman What scenarios and what value lenses? Real World Risk NeutralValue lenses SimpleComplex Dynamic policyholder behavior Static behavior scenarios None Behavior “scenarios” Size of bubbles represents order of scale for recent new business volumes (LTC converted to single premium equivalent) Sales data from LIMRA Deterministic+ sensitivities Stochastic Nested stochasticDeterministic Integrated dynamic behavior scenarios Economicscenarios
  • 7. © 2014 Oliver Wyman 66© 2014 Oliver Wyman Industry modeling practices Product Stochastic equity returns (RW) Stochastic interest rates (RW) RN cost of guarantees Behavioral cohorts Dynamic behavior VA GMAB  ?   VA GLWB      VA GMIB    ?  FIA GLWB*     SPIA ? DIA ? LTC ? ?
  • 8. © 2014 Oliver Wyman 77© 2014 Oliver Wyman Key points 1 Market risks impact pricing approaches 2 Accounting and risk management practices drive “scenario layers” 3 Behavior risk drives modeling granularity and complexity 4 Assumption modeling is becoming increasingly sophisticated