There was a very interesting and very crowded session on variable annuities yesterday during the annual insurance conference offered by Standard & Poor’s Corp. The session started with a question from Robert Hafner, associate director with Standard & Poor’s Corp. on the state of the variable annuity market.
In the short term, VA carriers will be adjusting their products, offering lower interest rates and increasing fees as well as bolstering their hedging programs, according to Kenneth Mungan, principal and financial risk management practice leader with Milliman, Inc. In the long term, they will need to rethink their whole product.
While adjustments will be made, there will be “no sharp turns to the left or to the right,” according to Frederick Crawford, executive vice president & chief financial officer with Lincoln Financial Group. Lincoln will review product design, pricing, and its guarantees, he told attendees of a session on variable annuities.
Milliman’s Mungan pointed out that investors in VA writers do not have the appetite for leverage and unhedged product lines and insurers will need to offer guarantees on a sustainable basis, keeping this in mind. “As long as there is a sustainable model, there will be plenty of investors,” he said.
Mungan also cautioned that “the solution might be sewing the seeds of the next crisis.” If business sold now is later viewed as unattractive to the contract holder, then there may be disintermediation in the future, he explained.
Michael Wells, chief operating officer with Jackson National Life Ins. Co., says that his company has a different approach. A portion of Jackson National’s VA portfolio has subaccounts in passive index products that are easier to hedge and efforts are made to sell products that can be internally hedged. Additionally, products are sold that allow the company to adjust features and withdraw features which have unfavorable pricing. Wells also says that if a GMAB annuity is going to be sold, there needs to be more flexible pricing at the point of sale.
Milliman’s Mungan said that while any carrier can buy a derivative hedge, reinsurance may be even more valuable because it is a validation of the product. If a reinsurer feels confident enough to offer reinsurance on a particular product, “it is an external validation of that product.”