Transcript IAIS Insurance Core Principles and Effective Supervision

Session 12: Panel on Life Annuities
Jeffery Yong
IAIS Secretariat
Regional Training Seminar IAIS-ASSAL
San Salvador, 25 November 2010
Agenda
1. Overview – pension gap
2. Recent product developments
•
Variable annuities
3. Risks
•
Longevity risk
•
Low interest rate environment
•
Recent risk mitigation instruments
4. Regulatory developments
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Mind the pension gap
Source: OECD Pension at a glance 2009
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Agenda
1. Overview – pension gap
2. Recent product developments
•
Variable annuities
3. Risks
•
Longevity risk
•
Low interest rate environment
•
Recent risk mitigation instruments
4. Regulatory developments
25 Nov 2010
San Salvador
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Variable annuities - structure
•
Unit-linked products offering access to investment funds
Guaranteed Minimum
Death Benefit
• Guaranteed value on death
Examples:
• return of premium
• premium rolled-up at pre-set interest rate
• highest point the fund ever reached
• average fund value over the last few policy years
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Guaranteed Minimum
Accumulation
Benefit
• Guarantee on fund value
Guaranteed Minimum
Income Benefit
• Guarantee income levels on minimum conversion rates
when moving from accumulation to income phase.
Guaranteed Minimum
Withdrawal Benefit
• Guarantee regular income from the fund during defined
period.
• E.g. 7% for first 15 years; 5% for life upon reaching
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age 65
An example of the guarantees
Source: AXA
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Growing interest in variable annuities Japan
Gross sales of variable annuities in the US
Fund under management for variable annuities in
Japan (in JPY)
Source: Watson Wyatt
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Why are variable annuities popular?
• Replace other savings-type of life
products e.g. with-profits policies –
opaqueness, discretion
• Offer attractive returns with guarantees
• BUT there is no free lunch!
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Surrender charges
Insurance charges
Policy charges
Fund management charges
Guarantees charges
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Risks associated with variable annuities
Market risk
Credit risk
VA
Risks
Longevity
and mortality
risks
Operational
risk
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Agenda
1. Overview – pension gap
2. Recent product developments
•
Variable annuities
3. Risks
•
Longevity risk
•
Low interest rate environment
•
Recent risk mitigation instruments
4. Regulatory developments
25 Nov 2010
San Salvador
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Ageing population – a global phenomenon
Percentage of people aged 65 and over
Source: Swiss Re, OECD
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Time in retirement will be longer despite higher
retirement ages due to increasing longevity
Pension Ages in the OECD 1960-2050
Expected time in retirement 1960-2050
Source: OECD
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Longevity improvements are not uniform
Heat map of estimated annual rates of mortality improvements
for England and Wales (LHS: Male; RHS: Female)
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Source: Institute of Actuaries
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Falling interest rate putting pressure on
guarantees
Source: Sun Life
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Annuity rates are falling with interest rates
Annuity rates and 10 year gilt yields
Note: Annuity rate is for a 65 year old male purchasing a single-life annuity nonguaranteed annuity for GBP10,000
Source: ABI
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Longevity bonds and swaps
Longevity
Bond
Longevity
Swap
Insurer
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Unknown
future annuity
payouts
Counterparty
exchanged
Variable
payments matching
- longevity index
- actual experience
Issue price
Insurer
Counterparty
Mortality dependent
cash flow
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Agenda
1. Overview – pension gap
2. Recent product developments
•
Variable annuities
3. Risks
•
Longevity risk
•
Low interest rate environment
•
Recent risk mitigation instruments
4. Regulatory developments
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San Salvador
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Regulatory developments in response to
variable annuities
EU
• Draft report on VA just
issued for consultation
o Technical/actuarial
issues – hedging,
technical provisions,
capital adequacy
US
• New principles-based
reserving requirements
• Enhancements to annuity
disclosure to identify
potential risk (e.g. interest
rates movements)
Canada
• Enhancements to internal
model calibration for
segregated funds
o Governance issues
o Group/colleges issues
o Systemic/
macroprudential
issues
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Thank you for your attention.
Any questions/ comments?
[email protected]
www.iaisweb.org
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