In the third quarter of 2019, Milliman consultants and actuaries conducted a survey to establish market best practices in the application of VM-21: Requirements for Principle-Based Reserves for Variable Annuities. Written into the requirements are several decision points for the application of the standard which are at the discretion of the carrier. The survey summarizes responses from 25 variable annuity carriers regarding these decision points. The carriers surveyed are diverse in terms of total in-force account value and material account value exposure to living and death benefits.
Life insurers’ price-to-earnings (P/E) ratios have
historically been significantly lower than the average S&P P/E of 15.7. Variable
annuity (VA) writers, in particular, have experienced high betas and have typically
traded below their book values in recent years. The average beta and P/E ratio
of some of the largest VA writers is 1.5 and 8, respectively.
Variable annuity guarantees are generally perceived by market
participants (and rightly so) as extremely risky products with significant
market exposure. While companies have had tremendous success in managing this
risk primarily via hedging, market participants have not fully appreciated the
value of such risk management techniques. Decreased confidence in VA writers
leads to excessive trading and volatility, which translates into high betas and
low P/E ratios.
This article by Milliman’s Ken Mungan and Poojan Shah attempts to illustrate, through an example, that hedging VA guarantees can smooth company earnings. Even though the majority of VA writers have implemented hedge programs to manage the market risk, P/E ratios continue to be low.
The experience spanned 2007 to 2017 and studied patterns of lapse behavior relative to product structure, guarantee value, and past withdrawal behavior. This infographic illustrates policyholder behavior.
Milliman is carrying out a series of policyholder behaviour experience studies using predictive analytics. This blog post discusses the most recent US-based study looking at Guaranteed Lifetime Withdrawal Benefit (GLWB) utilisation, which, along with lapse, is a key driver of variable annuity (VA) business value.
The study was based on a data set containing around 2 million unique VA policies issued between 2003 and 2015 of seven large variable annuity writers based in the US. These policies represent roughly $220 billion of account value (based on initial purchase amounts) and cover a range of GLWB product designs as well as demographic attributes. This provides a rich data set with which to study policyholder behaviour.
A predictive model can be constructed with common variables such as age, tax-qualified status and single/joint status to allow easy implementation. The models constructed for our study use drivers that are readily available in a typical in-force data file, making them suitable for implementation in existing actuarial projection platforms. Including additional explanatory variables or interactions to the assumption formula is a natural step of predictive modelling because many variables can be captured in a single model without double-counting the individual variables’ effects. This framework allows iterative improvements to predictions and better differentiation of policyholder behaviour at a seriatim level.
The 2016 Milliman VALUES™ GLWB Utilisation study examined both when the policyholders chose to begin taking lifetime withdrawals, as well as how efficiently they continued to take them thereafter. We were able to confirm and, more importantly, quantify many intuitive assumptions about these behaviours and what drives them, and discovered new insights as well. For example, less than half of all policyholders currently taking GLWB withdrawals utilise their GLWB benefit with 100% efficiency (i.e., taking precisely the maximum allowed withdrawal amount). This is interesting as we believe many companies price on a basis of 100% efficiency.
Milliman’s Tigran Kalberer and Annuity Systems’ Kannoo Ravindran have edited a new book, Non-traditional Life Insurance Products with Guarantees. In the book, the best-selling editors have assembled a team of authors from the insurance industry to explore all investment products with guarantees, such as variable annuities, index-linked products, and constant proportion portfolio insurance-based (CPPI) products. The book explores many features of these investment and retirement products from an insurer’s and pension plan sponsor’s perspective.
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