Society of Actuaries FIA pricing webcast focusing on comparing FIA GLWB vs. VA GLWB pricing.

1. © 2017 Oliver Wyman
Guillaume Briere-Giroux, FSA, MAAA, CFA
Indexed Annuity Pricing Considerations Webcast
May 24, 2017

2. 1© 2017 Oliver Wyman 1
Agenda
I. FIA GLWB vs. VA GLWB
II. FIA GLWB hedging
III. Session Q&A

3. 2© 2017 Oliver Wyman 2
Pricing practices
FIA GLWB pricing shares many practices used for VA GLWBs; one
exception is the less prevalent use of risk neutral valuations for FIAs
Product
Stochastic
equity returns
(RW)
Stochastic
interest rates
(RW)
RN cost of
guarantees
Behavioral
cohorts
Dynamic
behavior
FIA GLWB
  ?  
VA GLWB
    
Why is the use of risk neutral valuation not widespread for FIA GLWBs?

4. 3© 2017 Oliver Wyman 3
FIA GLWB vs. VA GLWB fundamentals
The structure of the lifetime income stream provided to the consumer is
similar but achieved differently
FIA GLWB VA GLWB
Guarantee
structure
Guaranteed payout rates
Guaranteed rollups / durational increases
• Benefit base “indexing” • Ratchets
Assets
• General account
• ~98% fixed income
• ~2% index options (annual reset)
• Fixed income mostly “buy and hold”
• Separate account including equities and
fixed income (marked to market)
• Dynamic hedging program (marked to
market)
• Fixed income assets supporting
guarantees (mostly buy and hold)
Rider fees
• Reduction in account value notional;
usually reduces future surrender and
death benefits only
• Reserving impact
• Rider charge is a general account cash
inflow; the deduction from separate
account increases the likelihood and
magnitude of GLWB claims
• Reserving impact

5. 4© 2017 Oliver Wyman 4
Thought experiment (1 of 2): FIA GLWB with fixed account vs. fully
hedged VA with GLWB
FIA GLWB (fixed account only) VA GLWB (hypothetical 100% hedge)
Asset
strategy
• Corporate bonds, buy and hold
(important caveat)
• Cost of GLWB is based on required
assets to match expected outflows,
which are reasonably certain
• Assume that all base fees and the GLWB are
hedged
• Under that assumption, separate account is
100% immunized by a dynamic hedge overlay
and earns the risk free rate (forward curve)
• Cost of guarantees after hedging is based on
risk free rates, interest rate volatilities and
implied volatilities
Expected
asset
outcome
• Return “engine” net of fees = 3.2%
(next slide)
• Return “engine” net of fees = 1.5% (next
slide)
Using risk neutral valuation for the FIA GLWB fixed account would wipe out the
credit risk premium and have a profound impact on the example above. Does
adding indexed crediting optionality support making the valuation risk neutral?

6. 5© 2017 Oliver Wyman 5
Thought experiment (2 of 2)
Pricing practices explain why general account products usually provide
higher guaranteed payouts than VA GLWBs
1.50%
2.00% 2.00%
3.20%
1.50%
-0.50%
-0.30%
0.0%
1.0%
2.0%
3.0%
4.0%
Swap Rate Credit
Spread
Default
Losses and
Investment
Expenses
FA "Engine" VA "Engine" Non-
Revenue
Sharing
Fees
Swap Rate
FA with GLWB Hedged VA
1.7% of additional “return” to
pass through to policyholder

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FIA GLWB vs. VA GLWB reserving considerations
FIA GLWB VA GLWB
Statutory
reserves
• General account reserve stable
and predictable, and supported by
initial premium and underlying
earned rate; reserve is present
value of all cash flows
• General account reserve for
guarantees factors in future general
account inflows and outflows using a
conditional tail expectation and
standard scenario
• Several complexities
US GAAP • Stable (SOP 03-1 for GLWB) • Most VA GLWB marked to market;
some bifurcate lifetime component
under SOP 03-1
FIA GLWB framework is significantly more stable, which can be good… or bad

8. 7© 2017 Oliver Wyman 7
FIA GLWB hedging
As with VAs the “cost” of hedging the GLWB can impact pricing results
Item Description Considerations
1 Death and
surrender
benefits
• These two benefit streams depend on
account value performance
• Coordinates well with base contract hedging
2 Lifetime
withdrawals
• Split between partial withdrawals and
claims depends on account value
performance, but the total size of the
lifetime income stream is not
• Does not coordinate well with base contract
hedging as the total lifetime income stream is
not directly dependent on index credits
• Mismatches can occur on a statutory basis
when AG33/35 reserves are dominated by the
GLWB benefit streams, or can occur with US
GAAP SOP03-1 liabilities
0
BenefitAmount
Year
40
0
Year
40
Death
Partial Withdrawals
Surrender
Claims
1
1
Illustrative policyholder benefits (0% index credit per year) Illustrative policyholder benefits (3% index credit per year)
22

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Takeaways
1 “Replication costs” matter
2 Approach for replication is influenced by accounting and liquidity constraints
3 Monitor the impact of your hedging method

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Session Q&A