Variable annuity• GLBs(guaranteed living benefits)

• GLWBs(guaranteed lifetime withdraw benefits)• GMWBs(guaranteed minimal withdraw benefits)• GMIBs(guaranteed minimal income benefits)

• GMABs(guaranteed minimal accumulation benefits)• 78% of all new VA in market• GLB=579billion= 38% of VA

What is GLWB?

• DEFINITION OF 'GUARANTEED LIFETIME WITHDRAWAL BENEFIT - GLWB'• A rider on a variable annuity that allows minimum withdrawals from

the invested amount without having to annuitize the investment. The amount that can be withdrawn is based on a percentage of the total amount invested in the annuity.

GLWB: who buys it?

Why most buyers are in that age?

• Most of they are baby boomers who are going to retire in near future. • Increasing life longevity, this type of insurance provides guaranteed

life time cash flow.• Finance crisis in 2008 changed people’s behavior: more precautious.

Source of Fund

• 68% from qualified money • 32% from non-qualified money

What are qualified & non- qualified

• Qualified money is “before tax” money. This means you did not pay taxes on this money when you invested it. While invested, this money will grow tax-deferred. No taxes will be owed on gains within the account each year and therefore you will not get a 1099 form each year.. Eg: 401k plan?• Non Qualified money is “after tax” money, the investment earnings

could be taxable each year.. For example, if you place your Non Qualified investment dollars into a CD at the bank, you will have to pay tax on the interest earnings every year. Each year, the bank will send you a 1099 tax form showing you the amount of interest earned.

Interpretation of the source of fund

• Research shows as company attracts more rollover dollars, they will likely experience higher withdraw rate from qualified fund.• Thus, company should have a different strategy managing this money

and have sufficient liquidity. • Transaction fee or( withdraw fee) also matters.

Risk for insurance company

• Underlying investment may underperform before or during the withdraw period and the account balance might be insufficient to cover the lifetime withdraw guarantee.• Longevity risk: recall what we learned in math 471 & 472. The longer

the policy holder lives, the more the present value of future payment. • Interest risk: different interest rate leads to different discount factor.• But all the risks are common risks in general insurance products. They

are manageable also.

Change in benefit bases( large volatility in market)

S&P 500 chart in 2011

Withdraw activity average=5600

It’s important to understand the withdraw behavior • Because insurance company can decide how much cash needed and

maximize its profit. • Source of fund and age of owners are the two major influences on

withdraw activity• Customers who withdraw for two consecutive years are likely to make

ongoing withdraws.

By source of fund and age

Other factors impact withdraws

• Size of contracts• Deferral incentives• Duration of contract• Channel through which the contracts were sold

Additional premium and net flows

• Many retail VAs allows owners to add premium after issue, though in practice most contracts don’t receive ongoing deposits. For most GLWBs, the calculation of the benefit base incorporates premium received within a certain period of time after contracts issue.

Additional premium and net flows

Surrender activity

• Like withdraw activity, surrender activity is also very important for insurance company for the similar reasons

Guaranteed Minimum Withdrawal Benefit - GMWB

• A type of option that annuitants can purchase for their retirement annuities. This specific option gives annuitants the ability to protect their retirement investments against downside market risk by allowing the annuitant the right to withdraw a maximum percentage of their entire investment each year until the initial investment amount has been recouped.• The best aspect of this guarantee is that it protects annuitants against

any investment losses that have been incurred without losing the benefit of upside gain.

GMWB VS. GLWB

• No life time guarantee• But guarantee for a certain period• The maximal annual withdraw amount is generally higher than that of

GLWB.

Benefit base

W withdraw VS. WT withdraw

Withdraw activity

• Same reason for all Vas riders to analyze the withdraw activity

Withdraw activity

Additional premium and net flows

• Many retail VAs allows owners to add premium after issue, though in practice most contracts don’t receive ongoing deposits. For some GMWBs, the calculation of the benefit base incorporates premium received within a certain period of time after contracts issue.

Not as many as GLWB

GMWB surrender rate in 2011 is 7.9%

GMIBs(guaranteed minimal income benefits)

• A guaranteed minimum income benefit (GMIB) rider is designed to provide the investor with a base amount of lifetime income when they retire regardless of how the investments have performed. It guarantees that if the owner decides to annuitize the contract (for life, life plus a certain period, or the lives of two people), payments are based on the amount invested, credited with an interest rate--typically 4-5%. An investor must annuitize to receive this benefit and there is typically a seven-ten year holding period (in a few instances, a seven-year holding period) before it can be exercised. Age limits may also apply.

GMIBs(guaranteed minimal income benefits)• Receiving a guaranteed minimum income benefit ensures that an

annuitant will receive a payment regardless of market conditions. This minimum payment amount is predetermined by assessing the future value of the initial investment. This option is only beneficial to annuitants who plan to annuitize their annuity.• It’s also 2nd most popular type of GLB in VA market. Sales are up to 25

billion. 26% of VA sales.

Owners’ profile

• Almost 2/3 of GMIB contracts were funded from qualified sources of money, part of a trend towards a greater share of annuity contracts being funded from qualified sources or rollover assets rather than nonqualified source. • Funding a qualified source of money is more common among younger

buyers, especially those under 70 ( can’t believe how they define “young”)• Owners under 60 count up to 1/3 of all owners.

Source of fund and ownership of GMIB

ownership of GMIB

Benefit base

• We use data of early 2011. 4 out 5 were “in the money” because of the market loss in financial crisis.

Before financial crisis

So…..

• The ratio of contract value to benefit base is very bad in this case, comparing to previous types of VA. Why?• Maybe more portion of the money was invested in the equity market

rather than bond market.• Could we interpret this type of VA has less volatility? And thus further

predict it has less surrender (withdraw) rate?

S&P 500 chart in 2011

Smaller change in percent of benefit base • Also lets compare the change in percent of benefit base. For GLWB,

the change is about 9% but for GMIB which is just about 7%. Further consider the behavior of market in 2011. • Stays the same. GLWB is more vulnerable to the volatility of market.

Withdraw activity

Surrender rate

Surrender rate

Not likely

• Can’t simply make conclusion by few criteria. As actuaries, we need to take thorough consideration and use scientifically and analytical methods to make judgment rather than just simply use our intuition.

Guaranteed Minimum Accumulation BenefitsGMAB riders in variable annuities guarantee that the contract owner will receive a minimum amount after a set period of time or waiting period – either the amount initially invested or the account value with a locked-in guaranteed rate, or market gains locked in during the waiting period. The rider guarantees protection of the investment’s value from a down market.

Sale of GMAB contracts

• Continued to decline• Down 25 percent from $3.7 billion in 2010 to $3.2 billion in 2011 to

$2.4 billion in 2010.

Owner Profile

• GMAB buyers are typically younger than any other GLB buyers. In 2012, the average age of GMAB buyers was 53.2 years. Almost a third of buyers (34 percent) in 2012 were under age 50• Percent of GMAB buyers under age 50 increased from 30 percent in

2007/2008. to 45 percent in 2009 and 2010 before falling to 31 percent in 2011• The average premium received for GMAB contracts in 2012 was $

89800 –lower than other GLB contracts, reflecting the lower investable assets of the younger customer base

Ownership of Qualified and Nonqualified GMAB Annuities• For GMAB issued in 2012, 74 percent were qualified, compared with

68 percent of qualified contracts issued before 2012• This aligns with a broader industry shift that LIMRA has tracked in the

total VA market, where annuities are increasingly being funded with tax-qualified money, the bulk of which likely come from rollovers by younger individuals• Three fourths of the GMAB contracts issued in 2012 were qualified,

while two thirds of contracts issued before 2012 were qualified

Benefit Maturity

• GMAB benefit utilization simply requires the owner to keep the contract in force until the day of benefit maturity• At that point, if the accumulation benefit is in-the-money, then the

contract value is automatically set to the guaranteed benefit base• Most GMAB benefits mature 7 to 10 years after they are elected

Withdraw Activity

• GMAB contracts are not designed for owners to take withdrawals, but customers may take withdrawals for emergencies, or satisfy RMDs• 17% of GMAB owners took withdrawals in 2012• Around 80% of older customers took withdrawals from annuities

purchased with qualified money• After age 70, the need for RMDs from qualified annuities forces

owners to take withdrawals (systematic withdrawals)

Surrender Activity

• GMAB have the highest overall surrender rates compared with other GLBs, and the highest surrender rates among VA contracts issued since 2004• 9.9% in 2012• Higher GMAB surrender rates are associated with younger owners,

particularly those under age 60 who took withdrawals before or in 2012• There is little difference between persistency in contracts funded by

nonqualified and qualified money• There is even less difference based on gender, or the size of contracts

Product and Benefit Characteristics

• GMABs are the least expensive GLB, especially for contracts issued before 2010• Most cost around 0.4 to 0.8 percent of contract value – either

including or excluding any fixed account balance• A ten year waiting period is the most common guarantee period• Annual step-up options have become more common, and caps on

benefits have become more prevalent