A team from the actuarial firm of Oliver Wyman presented a report titled “Observations on Emerging Variable Annuity Statutory Accounting Results” during the March 25 afternoon session of the Life & Health Actuarial Task Force. LHATF met during the spring meeting of the National Association of Insurance Commissioners in Denver.
The presentation is a prelude to a position paper Oliver Wyman will present next month. The firm’s team started the presentation by looking at issues including potential disincentives to hedge risks particularly interest rates and volatility as well as the standard scenario floor dominating more than might have originally been intended.
Among the results, according to the team, is the possible demand for greater hedging solutions and the need to explain why a company is deploying this program and why the actions are important.
The Wyman research looked at 12 of the largest 20 variable annuity writers, according to the team. It looked at the potential “unintuitive consequences” of hedging strategies, suggesting that further study is needed. For instance, the intuitive impact of the hedging, according to page 7 of the slide presentation, was decreased capital requirements and increased stability of capital requirements. But the unintuitive impact of hedging would be increased total asset requirements and greater instability of capital requirements.
Of 12 companies that were examined by Wyman, a third did not see a hedging benefit. Four of those companies experienced stagnant or increased TAR; two saw an increase in required capital; and six had no capital required. And the team referred to slide 12 of the presentation which indicated that if unhedged, under AG 43 12 of 14 companies would have been driven by the Standard Scenario.
The team told regulators that “one dirty secret [of hedging] is regulatory capital arbitrage,” which provides greater regulatory capital but not necessarily greater protection.
Following this presentation, LHATF held a debate of an interest rate generator developed by the American Academy of Actuaries, Washington, used to produce interest rate and Treasury rate scenarios led to a discussion on whether the generator should rely on more recent rates rather than on a 50-year historical Treasury rate.
New York regulator Fred Andersen argued that it is a big issue for products such as UL with secondary guarantees because even a 25 basis point difference in the interest rate can have a substantial impact on the product. So, if the rate used in stochastic modeling is 5.5% and the actual rate is lower, that can really affect the result.
But John Bruins, a life actuary with the American Council of Life Insurers, Washington, pointed out that the real risk is using a rate that will create volatility. Larry Bruning, Kansas chief actuary and LHATF chair, said that volatility in scenarios was the very thing that would help regulators understand the impact of different economic scenarios on a company.
Nancy Bennett, representing the Academy, was asked whether the generator was looked at for a “whole host of products.” She responded that the Academy wanted to have a method for predicting the future for any product, so avoided looking at specific products which could create “product bias.”
Tomas Serbinowski, a Utah regulator responded that the issue highlights the uncertainty about really relying on actuarial judgment but at the same time questioning the work of a professional actuarial body. But New York’s Andersen, disagreed, saying, “should we just let the academy ….what are we doing analyzing this stuff if not carefully analyzing what is put in front of us.”