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Willis Group
Headquartered in London / NYC
Traded on NYSE (WSH)
CEO: Dominic Casserley
2013 commission and fees: $3.7B
Approximately 18,000 employees in
over 120 countries
2
Property, 49%
Casualty, 31%
Life, Accident & Health, 2%
Surety, 2%
3
Willis Re global outreach and experience
Made up of over 1,500 employees across 39 offices in Africa,
Australia, Asia, Europe, Middle East and North America
3rd largest and fastest growing global reinsurance broker with
2013 Revenue of $531M
Decades of combined experience in each office with specialists
in:
– Facultative and Treaty reinsurance
– Financial & Actuarial analytics
– Rating Agencies
– Alternative reinsurance solutions
Resources across the globe allow for business leverage
U.S. Life Executive Team
Michael Kaster, FSA, MAAA, MBA - Senior Vice President
– 30+ years of insurance/actuarial executive leadership experience,
both with direct writers and as a senior actuarial consultant.
– Deep industry knowledge and relationships, which facilitates client
development and solution implementation.
Amit Ayer, FSA, MAAA, FRM – Vice President
– Significant life insurance industry and consulting experience in
structuring, advising and managing life and annuity risks, domestic
and international.
– Leads our analytical approaches through use of technical tools and
industry leading modeling approaches.
4
Willis Re’s Life Solutions Group (LSG) brokerage business model mimics Willis Re’s Property & Casualty brokerage model
5
Dimension Traditional brokerage
model Willis Re LSG brokerage model
Willis Re LSG
brokerage
advantage
1 Broker
compensation Ceding company may pay
portion of broker fee Ceding company pays no fee
2 Products Diffuse understanding of
products
Exposures on balance sheet
Deep understanding and experience with life asset-
intensive and traditional life products, long term care,
SPIA, structured settlements and payout annuities
Exposures not taken on balance sheet
3 Analytical
solutions /
capabilities
Minimal investment in modeling
capabilities and infrastructure to
support brokerage process
Dedicated analytics team (AXIS and other platforms) to
model asset intensive life business
Analytics group led by experienced former consultant with
12+ years of advisory experience
4 Interaction
with ceding
company
Loosely affiliated relationship
Trusted advisor of ceding company (work hand in-hand)
Improve efficiency of transactions between markets and
ceding company through analytical rigor, alleviating conflict
management
5 Interaction
with market
markers
Minimal interaction with market
makers
Work hand-in-hand with reinsurers and other market makers
to ensure best price execution and optimal transactional
structure
6 Access to
markets Traditional reinsurance markets
Supplement to direct reinsurer relationship
Partner with non-traditional and alternative markets to
pursue specific market needs and solutions
Significant advantage for Willis LSG Model Significant advantage for traditional brokerage model
7
Examples of LSG Engagements
Offering Description Examples
1 Capital
management
solutions
Strong analytics and sophisticated structures to
optimize capital efficiency
Portfolio analysis and capital restructuring to
support new business strategies
Obtaining embedded value in closed blocks
Disposition or acquisition of specific risks
Optimizing capital efficiency with intra-group
transactions
Capital financing via reinsurance solutions
2 Risk Solutions
Structures to release capital and finance future
company growth
Targeting specific risks to enhance the company’s
risk-based capital (RBC) position through product
diversification
Understanding of risk appetite of ALL Reinsurance
markets.
Improve ROE by structuring solution for
older legacy business with low returns and
volatile earnings
3 Capital
Deployment
Solutions
Partnering with business development and
alternative market distribution to pursue specific
market niches
Access to “best in class” alliances with distribution
groups and select insurers and reinsurers
Products include Life Insurance, Annuities (Fixed,
Indexed and Variable), and Long Term Care
Roadmap to deploy capital into new
ventures, through partnerships and/or
reinsurance solutions
Propose multiple solutions for LTC business,
including a bifurcated structure, splitting the
investment risk from the morbidity risk, via
different solution providers
Life insurance products are exposed to credit, interest rate, equity, and underwriting risks
Risks
Product Description Sub-products
GAAP
standard Credit
Interest
rate Equity
Under-
writing
Individual
annuities
Fixed
Immediate
Earn a fixed rate for the life of
the contracts
Single-premium
immediate annuity
Structured settlement
FAS 60
Fixed
Deferred
Earn a fixed rate for a period followed by
a floating rate set by the insurer
FAS 97
Variable Premiums are invested in separate
account funds earning a floating rate
Living benefit VA
Death benefit VA
FAS 133/
SOP 03-1
Individual
life
Term Life Provide a death benefit over a specified
benefit period with no cash value
FAS 60
Permanent
Life
Provide life insurance with cash value
accumulation, not contingent on
specified benefit period
Whole life
Universal life
FAS 60
Long-term
Care (LTC)
Provide benefits based on need for long-
term care
FAS 60
Group Group
Benefits
Provide life insurance for groups Group life insurance FAS 60
Retirement
Retirement
Benefits-
GICS
Guarantee institutional clients principal
repayment and a fixed/floating rate
Defined contribution
Defined benefit
FAS 97
Defined
contribution
Provide benefits based on contributions
by institutions/employees plus invest-
ment earnings
FAS 97
Defined
benefit
Provide fixed benefit for employees over
specified period
FAS 60
Significant risk exposure Some risk exposure
Surrender Charge
The standard cash flows involved in a variable annuity contract are depicted below
Variable Annuity –
key cash flow diagram
9
Variable Annuity – key cash flow descriptions
Cashflow Description
Initial
Commission
Paid by insurer to adviser at policy issue
Typically ~ 5% of deposit
Trailer
Commission
Paid by insurer to adviser in Years 2+ while business is
inforce
Typically 0.5% – 1%. May be a function of deposit or AV
Investment
Management
Fee
Fee charged for the management of the funds
in policy
Typically 150 – 200 bps of AV
Investment manager shares IMF with insurer
Insurance
charge
Sometimes called M&E
Typically 10 – 20 bps of AV
Rider charge Fee to support rider
Ranges between 50 – 100 bps of GV
Admin charge Fee for contract admin; usually $30
Surrender
charge
Paid by policyholder to insurer in the event of lapse (to
compensate for commissions paid)
Typically 7 – 8%; declining by 1% pa
Separate
Account
Policyholder
Investment manager
Advisor
General
Account
Deposit
Commission
(Initial +
Trailer)
IMF = Investment
Management Fee
IMF
Insurance charge
Administrative Charges
Rider charge
Expenses
(e.g.,
Marketing,
Maintenance)
Revenue
sharing
Key principles underlying reinsurance of FIA with GLWBs
Principle Description Reinsurer Cedant
A Holistic view of
profitability of
transaction
• Reinsurer can typically earn higher spreads on assets compared to those of cedant
• Reinsurer needs to understand details underlying pricing of cedant’s retained business in
order to support cedant’s profit target and overall profit target of transaction
• Reinsurer helps cedant achieve profit target through in-force ceding allowance and / or
new business expense allowances
B Reinsurance
structures
• Coinsurance vs. coinsurance with funds withheld are primary reinsurance structures for
FIA with GLWB
C Allowances in
proportion to
product features
• Higher expense allowances do not necessarily make a reinsurance quote more
attractive, as allowances should be in proportion to level of supportable caps and option
budget
D Hedging of
guarantees
• Hedging of credited rates is typically 100% reinsured and should be performed by
reinsurer’s dedicated risk management function
• Valuation / financial reporting functions more common to be outsourced
E Investment
guidelines
• Level of collateralization of trust and stringency of investment guidelines in event of
default of reinsurer should be carefully evaluated
F Product
differentiation
• Reinsurers and cedants should take care to understand subtle differences across
product types and regimes
G Financing of reserve
redundancy
• Industry estimates are that AG33 redundancies range from 3-5%, creating drag on
capital
Significant impact to FIA with GLWB reinsurance Immaterial impact to FIA with GLWB reinsurance
Profit targets for both reinsurer and cedant must be considered in FIA with GLWB reinsurance
11
Reinsurers can typically earn higher
spread on assets (10% in example) than
cedant can
However, given higher spreads on assets,
reinsurer cannot propose high option
budget (5% in example) and supportable
caps (10% in example) to cedant, as
cedant will be unable to support profit
margin at proposed option budget and
cap
Reinsurer ensures profit margins for
cedant is met through ceding allowances
(e.g., % of reserves)
Reinsurer must have detailed
understanding of the profit objective of the
cedant (e.g., non-ceded FIA with GLWB
business) in order to quantify ceding
allowance
Derivation of option budget for FIA with GLWB - reinsurer
3.0%
10.0%
1.0%
0.8%
0.7%
2.5%
3.0%
5.0%
0%
2%
4%
6%
8%
10%
12%
14%
Risk free rate Spread onAssets
Defaults Acquisitioncosts
Maintenancecosts
Minimumcrediting rate
Cost ofcapital /
profit
Optionbudget
5% option budget would
support approximately a
10% cap
10% spread based on
investments in riskier
assets (illustrative)
Observations
Translates into
profitability of FIA with
GLWB (e.g., 12% IRR)
Initial 1 2 3 4 5 6 7 8 9 10
Initial 1 2 3 4 5 6 7 8 9 10
Initial 1 2 3 4 5 6 7 8 9 10
Interest rate guarantees and surrender options
Fixed annuities are essentially tax-advantaged certificates of deposit (CDs), however
– Insurers set the crediting rate annually, often subject to a minimum guarantee
– Policyholders have access to their funds prior to maturity subject to a surrender charge schedule during the initial
contract years
Insurers choose asset maturities based on expected, but uncertain, policyholder cash flows
The surrender timing is driven by the interest rate environment
– Effective liability maturity extends when rates drop and shortens when rates rise
Rates stay steady at 3%
Customer lapses after 7 years
121 121
0
100
200
1 2 3 4 5 6 7 8 9 10
115 111
0
100
200
1 2 3 4 5 6 7 8 9 10
5% Rates rise to 5%
Customer lapses after 5
years
Rates drop to 1%
Customer lapses after 10
yrs
Assets maturity matches FA
maturity – no loss
Assets sold 2 yrs prior to
maturity at reduced asset
market value – loss of $4
Assets mature, but 3-year
reinvestment returns 2%
less than crediting rate –
loss of $6
Cash Flow Assets Liabilities
125 119
0
100
200
1 2 3 4 5 6 7 8 9 10
3%
1%
5%
3%
1%
5%
3%
1%
Example: Fixed Annuity
Longer-dated liabilities can have structural duration mismatches with assets
SPIA cash flows Cash flow dynamics
Accounting standards
Assets have a maturity shorter than liabilities
Regulations penalize use of derivatives to
address duration mismatch
Upon asset maturity, insurer is exposed to
reinvestment risk
Longer-dated protection products generally
follow FAS 60 accounting standards
Reserves are based on discount rate locked in
at issue (not marked-to-market to reflect
changing market conditions)
Cas
h f
low
Time
Assets Liabilities
Maximum available
asset maturity
Asset duration: 15 yrs
Liabilities duration: 20 yrs
Duration mismatch: 5 yrs
Illustrative example
Example: Single premium immediate annuity (SPIA)
Liquidity / solvency of life insurance liabilities
Highly Liquid Semi-liquid Highly illiquid
• Callable debt and
investment contracts
• Callable but with incentives to
hold securities
– Tax-deferred savings
– High surrender charges
– Guarantees
• Defined liability pay-outs that
cannot be modified
• Pay-outs triggered by
occurrence of insured event
(death, disability)
• GIC
• Senior debt
• Commercial paper
• Fixed deferred annuity
• Variable annuity
• Group annuity
• Defined contribution
• Universal life
• SPIA
• Term life
• Long-term care/disability
• Whole life
Partial List of companies
We have a broker of record agreement with the following
companies:
16
CNO Financial
Universal Insurance
Vantis Life
Securian Financial
Arch Capital
Deutsche Bank
Humana
National Brokers
CUNA Mutual
Hartford Life
Amerilife
Baltimore Life
Investors Heritage Life
GBG Financial
Western & Southern
Michael Edwards Direct
Universal Life
17
Contact information
Mike Kaster, FSA, MAAA, MBA
Senior Vice President
Life Solutions Group
(E): [email protected]
(T): 212 915 8332
Amit Ayer, FSA, MAAA, FRM
Vice President – Senior Actuary
Life Solutions Group
(E): [email protected]
(T): 212 915 8310
Willis Re
Brookfield Place
200 Liberty Street
New York, NY 10281