The high capital requirements of traditional fixed and fixed indexed annuities must be managed carefully. Reinsurance is a major management tool. Inforce blocks of business can be reinsured to manage current capital levels. Apply reinsurance to new business to manage to your desired capital levels on an ongoing basis. Instead of restraining sales to manage capital levels, reinsurance allows you to continue to support your distribution channels by allowing them to sell the volume of new business desired and providing them with the variety of products needed. The insurance company can diversify their accumulation business among traditional fixed, indexed, and variable annuities.
Methodology
For the Variable Annuity Benefit Utilization Study that we released in December 2009, RCL used the classical Limited Fluctuation (LF) credibility method. We believe that this method is reasonable for this purpose, as it reflects both withdrawal frequency and severity and is computationally straightforward. In this context, severity measures the amount of a withdrawal in relation to a guaranteed Benefit Base.
The LF method utilizes the Central Limit Theorem, and assumes that withdrawal frequency and severity are independent, and that withdrawals are mutually independent. RCL believes that these assumptions are reasonable for this study, and that investors’ regular review of their financial plans and product performance with their financial advisor tend to mitigate the potential dependency effects of systematic withdrawal programs from year to year.
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