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Session 12: Panel on Life AnnuitiesSession 12: Panel on Life Annuities
Jeffery YongIAIS Secretariat
Regional Training Seminar IAIS-ASSAL
San Salvador, 25 November 2010
Session 12: Panel on Life Annuities 225 Nov 2010San Salvador
Agenda
1. Overview – pension gap
2. Recent product developments
• Variable annuities
3. Risks
• Longevity risk
• Low interest rate environment
• Recent risk mitigation instruments
4. Regulatory developments
Session 12: Panel on Life Annuities 325 Nov 2010San Salvador
Mind the pension gap
Source: OECD Pension at a glance 2009
Session 12: Panel on Life Annuities 425 Nov 2010San Salvador
Agenda
1. Overview – pension gap
2. Recent product developments
• Variable annuities
3. Risks
• Longevity risk
• Low interest rate environment
• Recent risk mitigation instruments
4. Regulatory developments
Session 12: Panel on Life Annuities 525 Nov 2010San Salvador
Variable annuities - structure
• Unit-linked products offering access to investment funds
Guaranteed MinimumDeath Benefit
Guaranteed MinimumAccumulationBenefit
Guaranteed MinimumIncome Benefit
Guaranteed MinimumWithdrawal Benefit
• Guaranteed value on death
• Guarantee on fund value
• Guarantee income levels on minimum conversion rates when moving from accumulation to income phase.
• Guarantee regular income from the fund during defined period.
• E.g. 7% for first 15 years; 5% for life upon reaching age 65
Examples:• return of premium• premium rolled-up at pre-set interest rate• highest point the fund ever reached• average fund value over the last few policy years
Session 12: Panel on Life Annuities 625 Nov 2010San Salvador
An example of the guaranteesAn example of the guarantees
Source: AXA
Session 12: Panel on Life Annuities 725 Nov 2010San Salvador
Growing interest in variable annuities - Japan
Source: Watson Wyatt
Fund under management for variable annuities in Japan (in JPY)
Gross sales of variable annuities in the US
Session 12: Panel on Life Annuities 825 Nov 2010San Salvador
Why are variable annuities popular?
• Replace other savings-type of life products e.g. with-profits policies – opaqueness, discretion
• Offer attractive returns with guarantees• BUT there is no free lunch!
– Surrender charges– Insurance charges– Policy charges– Fund management charges– Guarantees charges
Session 12: Panel on Life Annuities 925 Nov 2010San Salvador
Risks associated with variable annuities
Credit risk
Operationalrisk
Longevityand mortality
risks
Market risk
VARisks
Session 12: Panel on Life Annuities 1025 Nov 2010San Salvador
Agenda
1. Overview – pension gap
2. Recent product developments
• Variable annuities
3. Risks
• Longevity risk
• Low interest rate environment
• Recent risk mitigation instruments
4. Regulatory developments
Session 12: Panel on Life Annuities 1125 Nov 2010San Salvador
Ageing population – a global phenomenon
Percentage of people aged 65 and over
Source: Swiss Re, OECD
Session 12: Panel on Life Annuities 1225 Nov 2010San Salvador
Time in retirement will be longer despite higher Time in retirement will be longer despite higher retirement ages due to increasing longevityretirement ages due to increasing longevity
Pension Ages in the OECD 1960-2050
Source: OECD
Expected time in retirement 1960-2050
Session 12: Panel on Life Annuities 1325 Nov 2010San Salvador
Longevity improvements are not uniform
Heat map of estimated annual rates of mortality improvements for England and Wales (LHS: Male; RHS: Female)
Source: Institute of Actuaries
Session 12: Panel on Life Annuities 1425 Nov 2010San Salvador
Falling interest rate putting pressure on guarantees
Source: Sun Life
Session 12: Panel on Life Annuities 1525 Nov 2010San Salvador
Annuity rates are falling with interest ratesAnnuity rates are falling with interest rates
Annuity rates and 10 year gilt yields
Note: Annuity rate is for a 65 year old male purchasing a single-life annuity non-guaranteed annuity for GBP10,000
Source: ABI
Session 12: Panel on Life Annuities 1625 Nov 2010San Salvador
Longevity bonds and swapsLongevity bonds and swaps
Unknownfuture annuity
payouts
Variablepayments matching
- longevity index- actual experience
exchanged
Insurer Counterparty
Insurer Counterparty
Issue price
Mortality dependent cash flow
Long
evity
S
wap
Long
evity
B
ond
Session 12: Panel on Life Annuities 1725 Nov 2010San Salvador
Agenda
1. Overview – pension gap
2. Recent product developments
• Variable annuities
3. Risks
• Longevity risk
• Low interest rate environment
• Recent risk mitigation instruments
4. Regulatory developments
Session 12: Panel on Life Annuities 1825 Nov 2010San Salvador
Regulatory developments in response to variable annuities
EU US Canada
•Draft report on VA just issued for consultation
o Technical/actuarial issues – hedging, technical provisions, capital adequacy
o Governance issues
o Group/colleges issues
o Systemic/ macroprudential issues
•New principles-based reserving requirements
•Enhancements to annuity disclosure to identify potential risk (e.g. interest rates movements)
•Enhancements to internal model calibration for segregated funds
Session 12: Panel on Life Annuities 1925 Nov 2010San Salvador
Thank you for your attention. Any questions/ comments?
