What’s Next for Fixed Indexed Annuities and their Income Riders?

Presented byNoel Abkemeier

Iowa Actuaries ClubMarch 12, 2013

2 March 12, 2013

Topics

Why focus on income riders today?

Issues on income riders– Design

– Pricing

– Reserving

– Capital requirements

– Hedging

Issues on underlying FIAs– Investment yield

– Crediting methods

Direction of income rider market

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Why focus on income riders today?

Retirement income solutions are increasing in importance– Baby Boomers are magnifying the need for longevity

protection

– Investment unpredictability creates need for stable solutions

Income riders play a significant role on FIAs– Approximately two-thirds of sales include an income rider

– Their experience can have a significant impact on profitability

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Many aspects of income riders deserve attention Design

Pricing

Reserving

Capital requirements

Hedging

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How Might Income Rider Design Change?

Can risk be narrowed?– Shape of roll-up

• Non-constant?

• Vary by attained age?

– Non-linearity of withdrawal percentages?

– Index-based roll-up could become standard• Narrow dispersion of risk

– Greater use of separate early and late utilization designs

Will rider bonuses become more detached from premium bonuses?

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How Might Income Rider Design Change? (cont’d) Will benefits expand?

– Will LTC “Doublers” become “Triplers”?

– Will death benefits based on remaining benefit bases thrive or contract?

Simplicity vs. multiple features– How much complexity is enough?

Vary cost by accumulation option?– “Overperformance” varies by design

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What might change pricing?

Design changes, particularly index-based roll-up– Lower risk creates lower costs

Rise in interest– Affordable rider roll-up tracks base annuity crediting

Data on utilization– Current data are sparse

– Variable annuity data not necessarily transferrable

Reserve changes

RBC changes

Income rider hedging

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How will reserving change?

Current status:– AG 33 sets severe standard

• Assumes worst case utilization and 100% persistency

• More severe impact if guaranteed alternative death benefit equals remaining benefit base

– Some state regulators allow use of AG 43 (variable annuity methodology)• Iowa, Kansas, and Connecticut (if in separate account)

9 March 12, 2013

How will reserving change? (cont’d)

Short term options on the table:– No change

– Modification in AG 33

– Use of AG 43

Current direction:– Ultimately, new methodology in VM-22 (2016?)

– NAIC waiting to see probable direction of VM-22

– Reasonable chance of interim solution in 2013• AG 33 with realistic utilization and persistency assumptions?

• “Standard Scenario” type of approach

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What next for RBC?

Currently RBC effectively is C-1 and C-3 on incremental reserves

Specific RBC requirements in C-3 Phase x– Stochastic?

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Is there income rider hedging in the future?

Hedging of income riders is uncommon to non-existent– Primary risk is reinvestment, but today that is a virtual non-risk

Hedging could be required in the future– Rating agency expectation when risk seems material?

– Enterprise risk management

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Underlying FIAs affect income rider pricing

Investment returns

Crediting strategies

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What can impact investment returns?

Rise in yields on fixed yield investments– Creates opportunity for stronger income rider roll-ups or

withdrawal allowance percentages

Entry of private equity investors– New investment approaches

– Specific set of investment expertise

– How will additional yields be utilized?

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Are there higher yielding crediting strategies? Actively-managed indices

Direct or indirect use of margin/spread fee– “Optimized Overperformance”

Volatility-controlled indices– Lower cost hedging, thus better formulae

15 March 12, 2013

Where is the income rider market heading?

Income riders will continue to meet a growing need for guaranteed lifetime income

Income approaches with access to assets should maintain an advantage

Rising interest rates will embellish the proposition

FIA with income riders, which are the lowest cost income riders, should maintain a strong position

16 March 12, 2013

Questions?