CONTACTS:
FOR IMMEDIATE RELEASE
OLDWICK, N.J. - JANUARY 23, 2006 12:00 AM (EST)
Life insurers' array of individual annuity product offerings is expanding rapidly as the industry develops solutions for the baby boom generation, which is about to reach retirement age. A plethora of sophisticated guaranteed benefit riders has hit the variable annuity market in recent years, developed to satisfy the boomers' complex array of emerging needs:
- To live off the assets they have accumulated
- While also participating in continued asset accumulation
- With protection from downside risk.
The rapid growth of the variable annuity market and the introduction of increasingly complex secondary guarantees-designed to provide this combination of income replacement, asset accumulation and downside protection-forever have changed the risk dynamics of the life insurance industry, according to a special report issued by A.M. Best Co.
This report explores trends in product development and risk management, as well as the potential impact of impending changes in statutory reserving and risk-based capital requirements. In addition, this report presents a summary of observations based on results of A.M. Best's Variable Annuity Survey of top writers in the marketplace today.
The major themes of the report are summarized below.
Real Risk Exposure-Based on the survey data available, it is evident that the various benefit types and guarantee designs perform differently in the real world, and that market conditions are a major driver of the relative value of guarantees from a policyholder's perspective. For example, at year-end 2004 for variable annuities with a guaranteed minimum death benefit, almost one-third of the aggregate account value was in a contract considered to be "under water," i.e., the minimum guaranteed amount exceeded the account value.
Risk Management-The industry has developed, and continues to improve, sophisticated risk-management tools and processes to mitigate the potential financial exposure created by the secondary guarantee offerings, but the level of due diligence can vary significantly by company.
Impact of C-3 Phase II-A.M. Best believes that as C-3 Phase II becomes fully implemented in the NAIC risk-based capital model, it will introduce greater volatility into the balance sheets of insurers writing a substantial amount of variable annuities with secondary guarantees. As equity markets improve, capital requirements will decline while profitability increases. As equity markets decline, capital requirements will increase while profitability declines.
BestWeek subscribers can download a PDF copy of all full special reports at no additional cost or a combination of the PDF copies plus all related spreadsheet files of the report data at no additional cost from our Web site at www.bestweek.com.
Nonsubscribers can download a PDF copy of the full special report (12 pages) for $55 or a combination of the PDF copy plus the spreadsheet file of the report data for $140 from our Web site at www.bestweek.com.
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A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source.