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Similar to 2018 SOA LAS - The science behind a successful retirement (20)
2018 SOA LAS - The science behind a successful retirement
- 1. © Oliver Wyman
The Science Behind a Successful Retirement
Society of Actuaries – Life and Annuity Symposium
Baltimore – May 8, 2018
Nicholas Carbo, FSA, MAAA
- 3. 2© Oliver Wyman
Industry annuity sales 2008 - 2017
Pure income annuity sales remain low
Book value
SPIA
DIA
Marketriskforpolicyholder
Source: LIMRA. Variable sales shown are a total inclusive of registered indexed sales.
LowerHigher
201320122011201020092008 20172014 2015 2016
Variable
Registered indexed
MVA
Fixed indexed
- 4. 3© Oliver Wyman
$238 $220 $230 $237 $236 $222 $204
0%
10%
20%
30%
40%
50%
60%
70%
$0
$50
$100
$150
$200
$250
$300
2011 2012 2013 2014 2015 2016 2017
Incomeelection(%ofsales)
Sales($B)
Accumulation (FA/FIA/VA) VA GLWB FIA GLWB Income annuity % of income sales
Income vs. accumulation sales
Income sales are decreasing
VA GLWB sales declined sharply due to de-risking. Until 2016, this was partially compensated by rising
FIA GLWB sales. The recent FIA GLWB slowdown is caused by DOL/distribution changes.
Source: LIMRA
- 5. 4© Oliver Wyman
Income annuities FIA GLWB VA GLWB
Product features Income • Guaranteed income
• Various payout structures
available
• Gender specific rates
• Guaranteed income
• Single and joint life options
• Unisex rates
• Guaranteed income
• Single and joint life options
• Unisex rates
Cash value • Cash value options limited • GMSV (Guaranteed minimum
surrender value)
• Modest upside potential
• Full participation in market returns
less fees
• Subject to downside risk
Death benefits • Various death benefit options or no
death benefit
• Account value returned on death
• GMSV guaranteed upon death
• Account value returned on death
• Most VA GLWB have no
guaranteed death benefits
• GMDB typically available
Pricing regime Primary pricing
methodology
• Real world • Real world • Risk neutral
Customer options for guaranteed income
There are three major guaranteed income products in the market
1 2 3
- 8. 7© Oliver Wyman
Product features analysis
We will sequentially examine product features from a consumer view
Income guarantees
Cash value
Death benefits
1
2
3
- 9. 8© Oliver Wyman
300
400
500
600
700
800
900
1,000
0 1 2 3 4 5 6 7 8 9 10
VA GLWB Income annuity life only Income annuity cash refund FIA GLWB
Guaranteedmonthlyincome
Deferral period
Guaranteed income rates by product and deferral
1.Income illustrated for a single premium of $100k
2. Rates based on common products in the marketplace
60 year old male guaranteed monthly income by deferral period
FIA GLWB guaranteed
income exceeds
income annuity life only
FIA GLWB guaranteed income exceeds
income annuity cash refund
FIA GLWB income can exceed pure income annuities
- 10. 9© Oliver Wyman
10 years from issue
5 years from issueAt issue
Cash value (immediate income scenario)
FIA provide stronger cash value guarantees but with very limited upside relative to VA
$0
$50
$100
$150
$200
FIA GLWB VA GLWB Income annuity cash refund
$0
$50
$100
$150
$200
$250
FIA GLWB VA GLWB Income annuity cash
refund
$0
$25
$50
$75
$100
FIA GLWB VA GLWB Income annuity cash refund
Cashvalue($k)
Cashvaluerange($k)Cashvaluerange($k)
1.Income illustrated for a single premium of $100k
2.Range based on S&P returns from 1/1/87- 1/1/2017, using the best and worst results for the number of years of experience
Historical
experience
Historical
experience
60 year old male with income starting at issue
1FIA GLWB has paid out
$6k more than VA GLWB
1FIA GLWB has paid out
$12k more than VA GLWBProduct Cash value commentary
Income annuity
cash refund
No cash value offered, cash refund is only a death benefit
FIA GLWB Narrow range of possible cash values, with guarantee
VA GLWB Wide range of possible cash values
- 11. 10© Oliver Wyman
$0
$25
$50
$75
$100
FIA GLWB VA GLWB Income annuity cash refund
10 years from issue
5 years from issueAt issue
Deathbenefit($k)
Death benefit (immediate income scenario)
FIA offers strong guaranteed death benefit; assuming a GMDB is not present, VA
have significant downside risk
$0
$50
$100
$150
$200
FIA GLWB VA GLWB Income annuity cash refund
$0
$50
$100
$150
$200
$250
FIA GLWB VA GLWB Income annuity cash
refund
Deathbenefitrange($k)
1.Income illustrated for a single premium of $100k
2.Range based on S&P returns from 1/1/87- 1/1/2017, using the best and worst results for the number of years of experience
60 year old male with income starting at issue
Historical
experience
Historical
experience
Product Death benefits commentary
Income annuity
cash refund
Death benefit slightly higher than FIA guarantees
FIA GLWB Narrow range of possible death benefits, with guarantee
VA GLWB Wide range of possible death benefits
Deathbenefitrange($k)
- 12. 11© Oliver Wyman
Income annuities FIA GLWB VA GLWB
Income 1 • Life only income guarantees
are very strong 2 • The income guarantee is
very strong 3 • The income guarantee is
weakest of the three options
Cash value
(strong equity market) 3 • Limited or no cash value 2 • Modest upside potential 1 • The cash value is invested in
the market less fees
Cash value
(weak equity market) 3 • Limited or no cash value 1 • Minimum of GMSV 2 • The cash value is invested in
the market less fees
Death benefits 2 • Various death benefit
guarantees can be purchased 1 • GMSV paid on death
• Modest upside potential 3
• The death benefit value is
invested in the market less fees
(assuming no GMDB rider)
Rankings of the three benefits
FIA GLWB offers strong guaranteed income while preserving flexibility
Industry sales indicate that the flexibility of a GLWB is valued by consumers
1 2 3
- 15. 14© Oliver Wyman
60 year old male starting income at issue
1.0% 1.2%
3.7%
4.8%
9.7%
10.2%
1.0%
0%
2%
4%
6%
8%
10%
12%
Age 70 / Year 10 surrender Age 80 / Year 20 death Age 90 / Year 30 death Age 100 / Year 40 death
Client IRR Company IRR
Rateofreturn
Time of policyholder exit
Client and company IRR for an FIA with GLWB starting income immediately
Timing of surrender or death determines the rate of return achieved by the client and
the company
1.Client IRR represents pre-tax return on invested cash flow (premium)
2.Company IRR represents the internal rate of return on after-tax distributable earnings
- 16. 15© Oliver Wyman
Risks and profitability drivers for FIA GLWB
Policyholder behavior and interest rates are the two largest risks for FIA GLWB
Policyholder behavior
• GLWB utilization
• Lapses and dynamic lapses
Statutory reserves
• Correct calculation
• Hedging interaction
• Relief in select states
Interest rate risk
• Asset liability interactions
• Management actions
• Interest sensitive policyholder
behavior
“Index lift”
• Benefit / risk from over-hedging
• Volatility strike skew and equity
risk premium
Mortality
• Base mortality
• Mortality improvement
• Anti-selective lapses?
- 17. 16© Oliver Wyman
Risks and profitability drivers for income annuities
Mortality and investment income determine profitability for income annuities
Mortality
• Certain to take income for life
• Differences in insured mortality
improvement vs general population
Investment income
• Long term liabilities
• Reinvestment risk
Statutory reserves
• New discount rate
method
• Mortality table changes
- 18. 17© Oliver Wyman
VA GLWB rider richness
GLWB benefit richness has been decreasing since the crisis but has been
increasing slightly over the last year
0%
2%
4%
6%
8%
10%
12%
14%
Q22008
Q42008
Q22009
Q42009
Q22010
Q42010
Q22011
Q42011
Q22012
Q42012
Q22013
Q42013
Q22014
Q42014
Q22015
Q42015
Q22016
Q42016
Q22017
Q42017
Guaranteedincome(%ofinitialpremium)
Withdraw immediately Withdraw after 5 years
Withdraw after 10 years
Oliver Wyman VA GLWB guaranteed income index
Annual guaranteed income, as a % of initial premium
Q3 2008
Immediate 5.4%
5 years 7.4%
10 years 10.6%
Q4 2017
Immediate 4.4%
5 years 6.2%
10 years 8.5%
• Oliver Wyman has tracked the annual income
guaranteed by major variable annuity GLWB
products since 2008
• In 2008, the average policyholders can withdraw
over 10% of initial premiums each year after
deferring for 10 years
• By 2014, this amount had dropped to 8% as
legacy benefit parameters become
unsupportable given low interest rates
• Industry pricing practices have begun
converging in recent years towards using
market-consistent metrics
• Consequently, product changes have largely
been restricted to:
– Investment fund choices
– Market-linked features – e.g., VIX-indexed
fees – to reduce hedge cost
- 19. 18© Oliver Wyman
Key takeaways
1 FIA GLWBs offer strong income guarantees while preserving flexibility
2 There is correlation between sales and product de-risking
3 The decrease in income annuity sales remains at odds with demographic trends