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.

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

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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