Frings SOA Annuity Risk Strategies Using Reinsurance 2013 Oct 20
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Transcript of Frings SOA Annuity Risk Strategies Using Reinsurance 2013 Oct 20
2013 SOA Annual Meeting – San Diego
PD 60 - Annuity Risk Strategies
Annuity Reinsurance
Michael Frings, FSA, MAAA
Vice-President and Senior Actuary, Global Financial Solutions
RGA Reinsurance Company
2013 SOA Annual Meeting - PD 60 - Annuity Risk Strategies | October 20, 2013
Table of Contents
2
Motivations for Annuity Reinsurance
Opportunities for Annuity Reinsurance
Annuity Reinsurance Strategies
Longevity Swap Case Study
Summary
Motivations for Annuity Reinsurance
3
Premiums/Deposits Flexible Single
Crediting Approach Fixed
Declared Rate Indexed
Variable/Unit-linked
Payout Period Deferred Immediate
Extra Benefits GMDB, GMIB, GMAB, GLWB,
etc.
Features & Motivations
Key annuity features…
4
Key reinsurance motivations…
Support new business VIF monetization Release capital Reduce risk
Movement/Actions… in financial markets, in competitive landscape, by annuity owners, and/or by agents/representatives
Aided by… Product design weak points Ins co management decisions
Result in Missed Expectations of Ins Co Financial Performance Under Statutory, US GAAP, IFRS, Economic, Management reporting
Annuity Risks in General Terms
Manifest in a Cascading Effect of…
5
“Isn’t It Just an Annuity…How Risky Can Those Be?...”
Risks in Specific Terms
To Name a Few…
6
Interest Margin/Spread Asset Impairment/Default Equity Hedging Longevity Expense Mortality Taxation Accounting Volatility Valuable, throw-away options
such as additional deposits
Liquidity/’Run-on-bank’ Competition ‘Frenzy’
Social Media Awake the Sleeping Annuity Owner Sophisticated Buyers Reputation Re-pricing Limitations Administrative Systems Valuation Systems Projection/Pricing Systems Compliance/Fraud Insurance Company Management Regulatory Actions Rating Agency Actions
Magnified by mis-estimation, mis-prioritzation of risks
7
Opportunities for Annuity Reinsurance
8
Measuring Risks Differences in incidence/frequency. Differences in amounts Differences in length
Reporting Risks Financial Accounting: US GAAP, IFRS, Local Regulatory (e.g. US Stat) Management Accounting: Operating vs Non-operating earnings
Pricing Risks Metrics vary: MCEV, ROE, ROI, ROA, Cost of Funds, Surplus Contribution, etc.
Regulating Risks Local regulatory requirements vary across jurisdictions
Rating Risks Rating agency ratings are important to many—but not all Capital requirements diverge: S&P, Moody’s, Fitch, AM Best, etc.
Opportunities Abound!
Often found when a ‘difference in view’ appears in…
9
Annuity Reinsurance Strategies
Location, location, location… Onshore, offshore Captive Complex mix including SPVs, etc.
Traditional Forms Coinsurance—either with/without funds withheld Modified coinsurance Combination of above
Less-Traditional Forms Non-insurance, financial guarantees Swaps—either as insurance or derivatives
Annuity Reinsurance Strategies
10
Next, a case study in longevity swaps to manage annuity risks…
Client A large corporation in the US Generous defined benefit program upon retirement Plan closed: all participants in payout period
Risks Asset default/impairment Re-investment Longevity
Characteristics Mix 33%/67% M/F Ages 70/67 M/F $2,000 monthly annuity benefit 20,000 starting lives 1% annual benefit escalation
Longevity Swap Case Study
Assume the following…
11
2014
2020
2026
2032
2038
2044
2050
2056
2062
2068
$-
$5,000,000
$10,000,000
$15,000,000
$20,000,000
$25,000,000
$30,000,000
$35,000,000
$40,000,000
$45,000,000
Gross Benefit Payments: Expected
Expected Benefits
Years
Am
ou
nts
Pai
d (
in m
ilio
ns)
12
Coinsurance Cede all risks Pay upfront consideration Markets: Who offers, Who buys Characteristics Pros/Cons
Longevity Swap Case Study
Two key ways to manage the longevity risk… Longevity Swap
Cede longevity…keep investment risk No upfront payments—net settle Market: Who offers, Who buys Characteristics Pros/Cons
Assumptions:5% loading of expected benefits
Ceding co discount rate 8%Reinsurer discount rate 6%
2014
2027
2040
2053
2066
$-
$10,000,000
$20,000,000
$30,000,000
$40,000,000
$-
$500,000.0
$1,000,000.0
$1,500,000.0
$2,000,000.0
$2,500,000.0
Cash Flows: Expected
Expected Benefits (floating leg)
Reinsurance Premium (fixed leg)
Net Payments to Reinsurer
Years
Gro
ss
Am
ou
nts
(in
mili
on
s)
Ne
t A
mo
un
ts (
in m
illio
ns
)
$-
$50,000,000
$100,000,000
$150,000,000
$200,000,000
$250,000,000
$300,000,000
$350,000,000
$400,000,000
$450,000,000
$500,000,000
$367,591,695
$460,133,614
$92,541,919
Coinsurance: Initial Values
Series1
A sizeable
out of pocket
expense
Payment deferred—upside potential
13
Longevity Swap Case StudyApplication of a longevity swap…
2014
2018
2022
2026
2030
2034
2038
2042
2046
2050
2054
2058
2062
2066
$-
$5,000,000
$10,000,000
$15,000,000
$20,000,000
$25,000,000
$30,000,000
$35,000,000
$40,000,000
$45,000,000
Gross Longevity Swap Cash Flows: Stressed
Expected Benefits
Benefits at 90% qx
Benefits at 110% qx
Benefits at 1.5% improvement
Benefits at -1.5% improvement
Benefits at 90% qx, 1.5% improvement
Benefits at 110% qx, -1.5% improvement
Reinsurance Premium
Years
Am
ou
nts
Pai
d (
in m
ilio
ns)
Benefits typically settle monthly Benefits are especially sensitive to mortality
improvement assumption Collateral as a negotiated item
2014
2019
2024
2029
2034
2039
2044
2049
2054
2059
2064
$(8,000,000)
$(6,000,000)
$(4,000,000)
$(2,000,000)
$-
$2,000,000
$4,000,000
Net Longevity Swap Cash Flows: Se-lected Stressed
Expected
Benefits at 90% qx
Benefits at 110% qx
Benefits at 1.5% improvement
Benefits at 90% qx, 1.5% improvement
Years
Am
ou
nts
Pai
d (
in m
ilio
ns)
14
Longevity Swap Case StudyCase study present values…
#Ceding Company Present
Values @ 8%Before
ReinsuranceAfter Swap
Benefits at 90% qx
Benefits at 1.5%
improvement
Benefits at 90% qx, 1.5% improvement
1 PV(expected benefit payments) $368
2 PV(actual benefit payments) $368 $368 $376 $382 $391
3 PV(reinsurance premium) $386
4 PV(Net payments to reinsurer) $18 $10 $4 $(5)
5 Ratio of 3 to 2 5.00% 2.22% -0.24% -2.90%
Key pricing parameters: Base mortality table, future mortality improvement, premium loading,
collateral
Arriving at a ‘meeting of the minds’ on terms is not easy Longevity swaps a very good way to manage block longevity risk
Takeaways…
15
Summary
16
Motivation Many motivations
Opportunities May appear when there is a difference in view
Strategies Both traditional & non-traditional approaches abound Many variations not discussed here
Case Study: Longevity Longevity swaps offer an efficient way to mitigate future risks of annuitants living
beyond expectations A good fit for some opportunities
What We Covered
Annuity Reinsurance Applications…
Thank you for your attention.
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