2018 SOA Webcast - The science behind a successful retirement
- 1. © Oliver Wyman The Science Behind a Successful Retirement Society of Actuaries - Webcast September 13, 2018 Nicholas Carbo, FSA, MAAA
- 2. 1© Oliver Wyman Agenda 1 Annuity market and income trends 2 Income guarantee products 3 Product risks
- 3. 2© Oliver Wyman Industry annuity sales 2008 - 2017 Pure income annuity sales remain low Book value SPIA DIA Marketriskforpolicyholder Source: LIMRA. Variable sales shown are a total inclusive of registered indexed sales. LowerHigher 201320122011201020092008 20172014 2015 2016 Variable Registered indexed MVA Fixed indexed
- 4. 3© Oliver Wyman $238 $220 $230 $237 $236 $222 $204 0% 10% 20% 30% 40% 50% 60% 70% $0 $50 $100 $150 $200 $250 $300 2011 2012 2013 2014 2015 2016 2017 Incomeelection(%ofsales) Sales($B) Accumulation (FA/FIA/VA) VA GLWB FIA GLWB Income annuity % of income sales Income vs. accumulation sales Income sales are decreasing VA GLWB sales declined sharply due to de-risking. Until 2016, this was partially compensated by rising FIA GLWB sales. The recent FIA GLWB slowdown is caused by DOL/distribution changes. Source: LIMRA
- 5. 4© Oliver Wyman Income annuities FIA GLWB VA GLWB Product features Income • Guaranteed income • Various payout structures available • Gender specific rates • Guaranteed income • Single and joint life options • Unisex rates • Guaranteed income • Single and joint life options • Unisex rates Cash value • Cash value options limited • GMSV (Guaranteed minimum surrender value) • Modest upside potential • Full participation in market returns less fees • Subject to downside risk Death benefits • Various death benefit options or no death benefit • Account value returned on death • GMSV guaranteed upon death • Account value returned on death • Most VA GLWB have no guaranteed death benefits • GMDB typically available Pricing regime Primary pricing methodology • Real world • Real world • Risk neutral Customer options for guaranteed income There are three major guaranteed income products in the market 1 2 3
- 6. 5© Oliver Wyman Product features analysis We will sequentially examine product features from a consumer view Income guarantees Cash value Death benefits 1 2 3
- 7. 6© Oliver Wyman 300 400 500 600 700 800 900 1,000 0 1 2 3 4 5 6 7 8 9 10 VA GLWB Income annuity life only Income annuity cash refund FIA GLWB Guaranteedmonthlyincome Deferral period Guaranteed income rates by product and deferral 1.Income illustrated for a single premium of $100k 2. Rates based on common products in the marketplace 60 year old male guaranteed monthly income by deferral period FIA GLWB guaranteed income exceeds income annuity life only FIA GLWB guaranteed income exceeds income annuity cash refund FIA GLWB income can exceed pure income annuities
- 8. 7© Oliver Wyman 10 years from issue 5 years from issueAt issue Cash value (immediate income scenario) FIA provide stronger cash value guarantees but with very limited upside relative to VA $0 $50 $100 $150 $200 FIA GLWB VA GLWB Income annuity cash refund $0 $50 $100 $150 $200 $250 FIA GLWB VA GLWB Income annuity cash refund $0 $25 $50 $75 $100 FIA GLWB VA GLWB Income annuity cash refund Cashvalue($k) Cashvaluerange($k)Cashvaluerange($k) 1.Income illustrated for a single premium of $100k 2.Range based on S&P returns from 1/1/87- 1/1/2017, using the best and worst results for the number of years of experience Historical experience Historical experience 60 year old male with income starting at issue 1FIA GLWB has paid out $6k more than VA GLWB 1FIA GLWB has paid out $12k more than VA GLWBProduct Cash value commentary Income annuity cash refund No cash value offered, cash refund is only a death benefit FIA GLWB Narrow range of possible cash values, with guarantee VA GLWB Wide range of possible cash values
- 9. 8© Oliver Wyman $0 $25 $50 $75 $100 FIA GLWB VA GLWB Income annuity cash refund 10 years from issue 5 years from issueAt issue Deathbenefit($k) Death benefit (immediate income scenario) FIA offers strong guaranteed death benefit; assuming a GMDB is not present, VA have significant downside risk $0 $50 $100 $150 $200 FIA GLWB VA GLWB Income annuity cash refund $0 $50 $100 $150 $200 $250 FIA GLWB VA GLWB Income annuity cash refund Deathbenefitrange($k) 1.Income illustrated for a single premium of $100k 2.Range based on S&P returns from 1/1/87- 1/1/2017, using the best and worst results for the number of years of experience 60 year old male with income starting at issue Historical experience Historical experience Product Death benefits commentary Income annuity cash refund Death benefit slightly higher than FIA guarantees FIA GLWB Narrow range of possible death benefits, with guarantee VA GLWB Wide range of possible death benefits Deathbenefitrange($k)
- 10. 9© Oliver Wyman Income annuities FIA GLWB VA GLWB Income 1 • Life only income guarantees are very strong 2 • The income guarantee is very strong 3 • The income guarantee is weakest of the three options Cash value (strong equity market) 3 • Limited or no cash value 2 • Modest upside potential 1 • The cash value is invested in the market less fees Cash value (weak equity market) 3 • Limited or no cash value 1 • Minimum of GMSV 2 • The cash value is invested in the market less fees Death benefits 2 • Various death benefit guarantees can be purchased 1 • GMSV paid on death • Modest upside potential 3 • The death benefit value is invested in the market less fees (assuming no GMDB rider) Rankings of the three benefits FIA GLWB offers strong guaranteed income while preserving flexibility Industry sales indicate that the flexibility of a GLWB is valued by consumers 1 2 3
- 11. 10© Oliver Wyman 60 year old male starting income at issue 1.0% 1.2% 3.7% 4.8% 9.7% 10.2% 1.0% 0% 2% 4% 6% 8% 10% 12% Age 70 / Year 10 surrender Age 80 / Year 20 death Age 90 / Year 30 death Age 100 / Year 40 death Client IRR Company IRR Rateofreturn Time of policyholder exit Client and company IRR for an FIA with GLWB starting income immediately Timing of surrender or death determines the rate of return achieved by the client and the company 1.Client IRR represents pre-tax return on invested cash flow (premium) 2.Company IRR represents the internal rate of return on after-tax distributable earnings
- 12. 11© Oliver Wyman Risks and profitability drivers for FIA GLWB Policyholder behavior and interest rates are the two largest risks for FIA GLWB Policyholder behavior • GLWB utilization • Lapses and dynamic lapses Statutory reserves • Correct calculation • Hedging interaction • Relief in select states Interest rate risk • Asset liability interactions • Management actions • Interest sensitive policyholder behavior “Index lift” • Benefit / risk from over-hedging • Volatility strike skew and equity risk premium Mortality • Base mortality • Mortality improvement • Anti-selective lapses?
- 13. 12© Oliver Wyman Risks and profitability drivers for income annuities Mortality and investment income determine profitability for income annuities Mortality • Certain to take income for life • Differences in insured mortality improvement vs general population Investment income • Long term liabilities • Reinvestment risk Statutory reserves • New discount rate method • Mortality table changes
- 14. 13© Oliver Wyman VA GLWB rider richness GLWB benefit richness has been decreasing since the crisis but has been increasing slightly over the last year 0% 2% 4% 6% 8% 10% 12% 14% Q22008 Q42008 Q22009 Q42009 Q22010 Q42010 Q22011 Q42011 Q22012 Q42012 Q22013 Q42013 Q22014 Q42014 Q22015 Q42015 Q22016 Q42016 Q22017 Q42017 Guaranteedincome(%ofinitialpremium) Withdraw immediately Withdraw after 5 years Withdraw after 10 years Oliver Wyman VA GLWB guaranteed income index Annual guaranteed income, as a % of initial premium Q3 2008 Immediate 5.4% 5 years 7.4% 10 years 10.6% Q4 2017 Immediate 4.4% 5 years 6.2% 10 years 8.5% • Oliver Wyman has tracked the annual income guaranteed by major variable annuity GLWB products since 2008 • In 2008, the average policyholders can withdraw over 10% of initial premiums each year after deferring for 10 years • By 2014, this amount had dropped to 8% as legacy benefit parameters become unsupportable given low interest rates • Industry pricing practices have begun converging in recent years towards using market-consistent metrics • Consequently, product changes have largely been restricted to: – Investment fund choices – Market-linked features – e.g., VIX-indexed fees – to reduce hedge cost
- 15. 14© Oliver Wyman Key takeaways 1 FIA GLWBs offer strong income guarantees while preserving flexibility 2 There is correlation between sales and product de-risking 3 The decrease in income annuity sales remains at odds with demographic trends