session 84 pd, management of actuarial risks for deferred...

Session 84 PD, Management of Actuarial Risks for

Deferred Annuities

Moderator: Kenneth Scott Birk, FSA, CERA, MAAA

Presenters:

Timothy S. Paris, FSA, MAAA Nathan Daniel Wilbanks, FSA, MAAA

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Management of Actuarial Risks forManagement of Actuarial Risks for Deferred Annuities

Management of Actuarial Risks for

Deferred Annuities

Nathan D. Wilbanks, FSA, MAAA

Brian Grinnell, FSA, MAAA, CQF

Session 84 - 2013 SOA Annual Meeting

October 12, 2013 2

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What is the return on your top selling product?

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Management of Actuarial Risks for Deferred Annuities Session 84

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3Image courtesy of Stuart Miles / FreeDigitalPhotos.net

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Distribution Matters

1.0%

μ=0

Standard Normall P

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uct

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0.4%

0.6%

0.8%


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0.0%

0.2%

(15.00) (10.00) (5.00) - 5.00 10.00 15.00

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Also Normal

1.0%

μ=0

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0.4%

0.6%

0.8%


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0.0%

0.2%

(15.00) (10.00) (5.00) - 5.00 10.00 15.00

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Exponential

1.0%

μ=0

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0.4%

0.6%

0.8%


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0.0%

0.2%

(15.00) (10.00) (5.00) - 5.00 10.00 15.00

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Barbell

1.0%

μ=0

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0.4%

0.6%

0.8%


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0.0%

0.2%

(15.00) (10.00) (5.00) - 5.00 10.00 15.00

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Uniform

1.0%

μ=0

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0.4%

0.6%

0.8%


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0.0%

0.2%

(15.00) (10.00) (5.00) - 5.00 10.00 15.00

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Weibull

45.0%

50.0%

μ=0

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15 0%

20.0%

25.0%

30.0%

35.0%

40.0%


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0.0%

5.0%

10.0%

15.0%

(15.00) (10.00) (5.00) - 5.00 10.00 15.00

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Lognormal

1.0%

μ=0

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0.4%

0.6%

0.8%


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0.0%

0.2%

(15.00) (10.00) (5.00) - 5.00 10.00 15.00

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Lognormal

1.0%

μ=0

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0.4%

0.6%

0.8%


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0.0%

0.2%

(15.00) (10.00) (5.00) - 5.00 10.00 15.00

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Cauchy

0.35%

0.40%

μ is undefined

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0 10%

0.15%

0.20%

0.25%

0.30%


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-0.05%

0.00%

0.05%

0.10%

(5.00) (4.00) (3.00) (2.00) (1.00) - 1.00 2.00 3.00 4.00 5.00

Fat tails (not a value judgment)

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Normal vs. Cauchy vs. Lognormal

0 60%

0.70%

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0.30%

0.40%

0.50%

0.60%


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0.00%

0.10%

0.20%

(5.00) (4.00) (3.00) (2.00) (1.00) - 1.00 2.00 3.00 4.00 5.00

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1-year Equity Returns from Nationwide’s Economic Scenario Generator (ESG)

200%

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0%

50%

100%

150%

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-100%

-50%

100% Equity

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1-year Equity Returns from Nationwide’s ESG – Emphasis on Tails

80

100

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0.1% 1.0% 5.0% 25.0% 75.0% 95.0% 99.0% 99.9%

-40

-20

0

20

40

60

An

nu

al r

etu

rn (

%)


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15

-100

-80

-60

%ile of distribution100% Equity

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Engineering a Better Distribution

Equity Indexed Annuity (EIA) Returns

80

100

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0.1% 1.0% 5.0% 25.0% 75.0% 95.0% 99.0% 99.9%

-40

-20

0

20

40

60

An

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%)


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-100

-80

-60

%ile of distribution100% Equity EIA

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Static 60% Equity Fund

80

100

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0.1% 1.0% 5.0% 25.0% 75.0% 95.0% 99.0% 99.9%

-40

-20

0

20

40

60

An

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rn (

%)


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-100

-80

-60

%ile of distribution100% Equity EIA Static 60% Equity

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Managed Volatility Fund up to 80% Equity

80

100

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0.1% 1.0% 5.0% 25.0% 75.0% 95.0% 99.0% 99.9%

-40

-20

0

20

40

60

An

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%)


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-100

-80

-60

%ile of distribution100% Equity EIA Static 60% Equity MVF80

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Aka Target Vol Fund, Volatility Controlled Fund, in some cases Tactical Asset Allocation Fund

May or may not include an element of principal protection

What is a Managed Volatility Fund?

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Seeks to modify equity exposure (through tactical allocations or the use of derivatives) in order to limit the volatility of the underlying

Can be used for both Variable Annuities and Fixed Indexed Annuities• Limits downside risk for Variable Annuities

Li it ti t l tilit f Fi d I d d A iti


Ind

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Cellular Results: Free Withdrawals

80%

90%

FIA Withdrawal Frequency by Age & Tax Statusl P

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So

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20%

30%

40%

50%

60%

70%

80%

Frequency


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20Source:

0%

10%

<50 50‐59 60‐64 65‐69 70‐79 80+Attained Age Group

Total Non‐Qualified Total Qualified

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Cellular Results: Arbitrage Opportunities

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20.0%

SPIA Returns by Age: Malesl P

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So

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-5.0%

0.0%

5.0%

10.0%

15.0%

50 55 60 65 70 75 80 85

RO

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-15.0%

-10.0%

Age at Income Start Date

SPIA Mortality Standard Mortality Super Preferred Mortality

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20.0%

SPIA Returns by Age: Females

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-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

50 55 60 65 70 75 80 85RO

TC


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-20.0%

-15.0%

Age at Income Start Date

SPIA Mortality Standard Mortality Super Preferred Mortality

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Cellular Results: Average Size

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Note that almost 20% of premium is right on the cusp of the band break

~11% of Premium is less than 25K. Premium less than 10Konly consists of 3% of production.

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Cellular Results: Average Size

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~46% of Policies are less than 25K in premium

~15% of Policies are greater than 105Kin premium

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How granular should results be?

What’s Next?

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Compare like competitor products

Arbitrage Avoidance


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Management of Actuarial Risks for Deferred AnnuitiesSession 84, October 22 2013, 8:30-9:45am

Timothy Paris, FSA, MAAARuark Insurance Advisors, Inc.

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17

Lower Surrender

Rates

Emerging GLWB Partial Withdrawals

GMIB Annuitizations

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Policyholder Behavior Rears Its Head

SurrendersUSD 1 1bUSD 1.1b

Mortality and surrendersEUR 0.6b

SurrendersUSD 0 3b SurrendersUSD 0.3b

Surrenders and other behaviorCAD 0.3b

The Challenge

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Guarantees Are Fragile

Active Risk Management

Interest Rates

Equity Indices

Currency Exchange Rates

Legal and Reputational Risks

Operational Risks

Policyholder Behavior Risks

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Is Behavior Reinsurable?

Errors and Omissions

Commercial Crime

Product Liability

Directors and Officers

Fiduciary Liability

Kidnap and Ransom

ReinsurableAutomobile Terrorism

Advantages

Ceding Company

Reinsurance Company

Manage from first principles

Avoid capital markets exposure

Growth market

Improve transparency

More predictable financials

Mitigate non-core risks

Diversified portfolio

principles

Competitive edge

transparency

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Bespoke

Hedging Attribution Report Gain/(Loss)

Hedged Market RisksDelta, Rho, Gamma, Vega, Theta

Unhedged Market RisksUnhedged Funds, Basis Risk

Program AdministrationModel Differences, Expenses

P li h ld B h iPolicyholder BehaviorMortality, Elective Behavior

Total

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Policyholder Behavior Reinsurance

Behavioral T tTargets

Reinsurance Structure

Practical Considerations

1200

1400

GMAB

1000

600

800

0 1 2 3 4 5 6 7 8 9 10

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Claims = Frequency X Severity

140%

160%

180%

Claims Premiums

80%

100%

120%

20%

40%

60%

Expected

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Practical Considerations

Premium Benchmark

Sweet Spot

Volume Adjustments

Experience Refund

Claim LimitsQuota Share

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Thank You!

Timothy Paris, FSA, MAAAy , ,

Chief Executive Officer

Ruark Insurance Advisors, Inc.

860.866.7786

[email protected]

linkedin.com/in/timothysparis

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