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2019 LAS - Annuity update
- 1. © Oliver Wyman Annuityupdate SOA – 2019 Life and Annuity Symposium Tampa, FL – May 21, 2019 Nicholas Carbo, FSA, MAAA
- 2. 1© Oliver Wyman Agenda 1Sales update 2 Product innovation/rates and reinsurance 3 Regulations impacting annuities 4 Alliance for lifetime income
- 3. 2© Oliver Wyman Annuitysales 2008 – 2018 FIA and RFIA sales have been the main driver of increasing annuity sales over the last several years Book value SPIA DIA Marketriskforpolicyholder Source: LIMRA LowerHigher 201320122011201020092008 20172014 2015 2016 Variable Registered indexed MVA Fixed indexed 2018
- 4. 3© Oliver Wyman Top10 annuity writers in 2018 The top selling annuity writers in 2018 are diversified across a number of annuity types Rank Company 2018 Sales ($BN) % Indexed % Variable % Fixed 1 AIG companies 18.3 2 Jackson National Life 17.4 3 New York Life 14.1 4 Lincoln Financial Group 12.7 5 Allianz Life 11.5 6 AXA 10.7 7 TIAA CREF 10.3 8 Nationwide 10.3 9 Pacific Life 9.3 10 Prudential Annuities 9.2 Top 10 sales 124.0
- 5. 4© Oliver Wyman Recentannuity innovation Other than the advent of RFIAs, product innovation in retail annuities has been largely incremental and focused on de-risking Variable annuities Fixed index annuities RFIA development • GLWB rider inclusion • Buffer vs floor design • Volatility-control indices – Higher potential upside • Liquidity-focused features – Shorter surrender charge periods – Bailout provisions • Index-linked income – “Stacking” roll-ups – Growth potential in income even after policyholder begins withdrawals • Fee based offering? • Volatility-control funds – Required for most living benefits • UST-indexed features – Roll-up/payout rates linked to the UST • VIX-indexed features – Rider fees linked to the VIX • Tiered withdrawal rates – Payout rate declines after account value depletes
- 6. 5© Oliver Wyman Fee-basedFIA product launches Fee-based FIA products have made up 0.50% of the 2018 industry FIA sales September 2017 • American Equity – Eagle Advisory 8 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 December 2015 • Midland National – MNL Prosper 5 August 2016 • Great American – Index Protector 7 February 2017 • Allianz – Retirement Foundation ADV Annuity February 2017 • Lincoln – Lincoln Core Capital May 2017 • Pacific Life – Pacific Index Advisory July 2017 • Nationwide – Nationwide Summit July 2017 • Symetra – Advisory Edge – Income Advisory Edge Q1 2018 February 2017 • AIG – Power Index Advisory January 2018 • Prudential – PruSecure Advisor March 2018 • Jackson National – Marker Protector First product with no surrender charges! There have been no fee-based FIA launches since Q1 2018
- 7. 6© Oliver Wyman Registeredfixed index annuity product launches Increasing sales has attracted more participants into the registered fixed index annuity space 2010 2013 2014 2015 2016 2017 Oct 2010 • AXA introduces Structured Capital Strategies May 2013 • Metlife introduces Shield Level Selector August 2013 • CUNA introduces Member’s Zone Annuity September 2013 • Allianz Life introduces Index Advantage January 2015 • Voya introduces Potential Plus October 2015 • Voya closes Potential Plus August 2017 • Brighthouse introduces Shield Level Select Access (Fee Only) August 2016 • CUNA introduces Member’s Horizon Annuity Feb 2017 • AXA Structured Capital Strategies Plus filed 2018 Feb 2018 • Great West launches Capital Choice Nov 2018 • Symetra launches SymetraTrek May 2018 • Lincoln launches Level Advantage May 2018 • Great American launches Index Frontier
- 8. 7© Oliver Wyman M&Adeals ($BN) The competitive annuity landscape has been transformed by a number of acquisitions and IPOs over the last 10 years Alternative buyers Japanese insurers IPOs and spinoffs 2010 2011 2012 2013 2014 2015 2016 2017 2018
- 9. 8© Oliver Wyman VAGLWB income history Carriers began to re-risk late last year, likely pressured by declining VA sales in 2016-2017 VA GLWB income available after 10-year withdrawal delay Based on consistent set of major VA issuers in industry • Oliver Wyman has tracked the annual income guaranteed by major variable annuity GLWB products since 2009 • In 2009, the average policyholders can withdraw over 10% of initial premiums each year after deferring for 10 years • By 2014, this amount has dropped to 8% as legacy benefit parameters become unsupportable given low interest rates • Range of variation across major products has also shrunk in the same timeframe, as industry has consolidated and moved to similar pricing methods • In mid-2017, numerous carriers began re-risking – i.e., increasing benefit richness and removing investment restrictions – Changes “front ran” recent interest rate increase – Likely driven by rapidly-declining sales in 2016 and 2017, led partially by DOL threat • As a result, range of product variation has opened up once more, signaling heating competition 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 2009Q1 2009Q3 2010Q1 2010Q3 2011Q1 2011Q3 2012Q1 2012Q3 2013Q1 2013Q3 2014Q1 2014Q3 2015Q1 2015Q3 2016Q1 2016Q3 2017Q1 2017Q3 2018Q1 2018Q3 Incomeavailableafter10years(%ofpremium) Range of income available Median income available 10-year UST
- 10. 9© Oliver Wyman Fixedannuity rate offerings Fixed annuities have seen no margin improvement from the recent interest rate rise, as all yield enhancements were passed back to the consumer 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% Guaranteedcreditingrate Range of crediting rates Median crediting rate Reference portfolio gross yield Evolution of crediting rates for 5-year MYGAs Based on consistent set of MYGA issuers in industry Reference portfolio comprises 50/50 A/BBB public corporate bonds
- 11. 10© Oliver Wyman FIAGLWB AG 33 reserves exceed economic reserves Conservative prescribed assumptions lead US statutory reserves to be higher than “economic reserves” AG 33 RESERVES 1 Policyholder utilization • Based on company pricing assumptions • Experience is limited for GLWB benefits (can look to VAGLB) 2 Discount rates • Related to the portfolio earned and expected reinvestment rates • Responsive to current interest rate environment 3 Mortality assumption • Based on company experience • Typically higher mortality than the Annuity 2012 IAR ECONOMIC RESERVES VS 1 Policyholder utilization • Optimal policyholder utilization • Maximum present value of all benefit streams 2 Discount rates • Prescribed by regulation • No connection to the “actual” portfolio earned rate 3 Mortality assumption • Mortality assumption has lower mortality than typical company pricing assumptions
- 12. 11© Oliver Wyman FIAreserve financing Financial reinsurance allows direct writer to hold less redundant reserves, reducing rider driven strain $0 $20,000 $40,000 $60,000 $80,000 $100,000 $120,000 0 5 10 15 20 25 30 35 40 Duration Account value GLWB reserve CSV Economic reserves Illustrative account value and reserves Financial reinsurance considerations • Definition of economic reserves • Risk transfer • Recapture provisions • Risk chargeReinsuring redundant reserves results in an increased IRR Financial reinsurance is an opportunity to reduce strain and increase product profitability, but treaty and regulatory elements require careful consideration
- 13. 12© Oliver Wyman Initialview on principles-based CTE calculation for an FIA with GLWB Initial reserve for a representative model point* 0 95 100 105 Lapses Principles based CTEAG 33 W/d wait Expenses *Issue age 62 with a 8% simple rollup capped at 10 years and income rates varying by attained age Range will vary by product, company and final VM-22 methodologies VM-22 methodologies for a principle-based CTE calculation are not defined; the final manual will affect the principle-based reserve levels
- 14. 13© Oliver Wyman USstate and NAIC Best Interest rules History of the Fiduciary and industry annuity sales The DOL rule was struck down in June 2018, but there have been additional proposals that may result in potential headwinds for annuity sales 2015 2016 2017 2018 2019 DOL Fiduciary Rule Timeline Other Best interest rules April 6, 2016 DOL final ruling published Jun. 21, 2018 DOL rule died Early 2015 DOL proposes Fiduciary rule Annuity sales ($BN) April, 2018 SEC rule proposed 32 36 33 32 27 27 26 25 24 25 26 26 25 26 25 25 12 13 14 16 16 16 15 14 14 16 15 14 15 18 18 20 9 10 12 12 15 14 11 10 13 12 11 10 12 15 15 17 0 10 20 30 40 50 60 70 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 VA FIA FA Uncertain period It was uncertain if FIAs would be included in the DOL rule, some distributors started leaning toward FIAs instead of VAs Source: LIMRA ?
- 15. 14© Oliver Wyman Bestinterest rule status by state Seven states have proposed best interest regulation with three states adopting the proposals Implemented Proposed Died New York reg 187 is effective August 1, 2019 for annuities and February 1, 2020 for life insurance
- 16. 15© Oliver Wyman Standardscomparison The DOL rule, NAIC best interest rule and Reg. BI impact different segments due to jurisdictional differences NAIC best interestFINRA suitability Employer-sponsored plans DC & DB Individual accounts Mutual funds Annuities ERISAplans&IRAs Non-ERISAplans&non- qualifiedfunds ERISA fiduciary DOL fiduciary SEC best interest Broker-dealers and investment advisors Insurance only agents
- 17. 16© Oliver Wyman Non-guaranteedelement means any element within a policy provision other than an exempt policy provision that may be changed at the insurer’s discretion without the consent or request of the policy owner and that affects the policy charges or benefits. Non- guaranteed element includes indeterminate premium policy rates, expense and benefit charge rates, interest crediting rates, cost of insurance rates, and index account parameter, but shall not include elements that are not within the insurer’s discretion... – NEW YORK STATE DEPARTMENT OF FINANCIAL SERVICES 11 NYCRR 48 (INSURANCE REGULATION 210) New York Regulation 210
- 18. 17© Oliver Wyman NewYork Regulation 210 Mark your calendars May 1 “By May 1 of each year, the insurer shall file... a listing of any adverse change in the current scale of non-guaranteed elements of any existing policy that occurred in the prior calendar year.” 6 years “The insurer shall maintain in its records, for six years after the termination of the last policy subject to the board-approved criteria, the written documentation of the determination of non- guaranteed elements required by this Part.” 120 days “An insurer shall file any adverse change in the current scale of non- guaranteed elements…at least 120 days prior to implementation.” 60 days “An insurer shall provide a disclosure document to a policy owner…at least 60 days prior to any adverse change in the current scale of non-guaranteed elements.” 5 years “The board-approved criteria shall…include a statement of the maximum period, not to exceed five years, between reviews of anticipated experience factors and non-guaranteed elements for reasonableness.”
- 19. 18© Oliver Wyman Alliancefor Lifetime Income The Alliance for Lifetime Income has been rolling out various promotions to bring awareness to the benefits of guaranteed lifetime income Goals of the Alliance for Lifetime Income • Awareness of annuity products • Education on Lifetime income products • Benefits of your portfolio including lifetime income • Removing misconceptions about annuities Ways to get the word out • Various pop-up booths in 2018 • Sponsor 2019 Rolling Stones tour • Bringing excitement to Lifetime Income, through various ads
- 20. 19© Oliver Wyman Keytakeaways 1 Diversification outside of VAs will continue 2 Regulations will continue to impact the life and annuity business 3 The Alliance for Lifetime Income will increase awareness of annuities for those that need them most
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