Ruark Insurance Advisors, Inc. (RIA) provides full service reinsurance intermediary services, specializing in the annuity market. We represent the ceding insurance company. Products covered include variable annuities, indexed annuities, fixed annuities and payout annuities.
The process starts with our insurance company client, during which we:
- Evaluate needs
- Discuss alternative solutions
- Create reinsurance program structure
- Evaluate risk transfer requirements
- Recommend appropriate pricing levels
Once a reinsurance program is created that is likely to meet the needs of our client, we bring it to the reinsurance marketplace. We have excellent relationships with reinsurers in various jurisdictions, including the U.S. and Bermuda. RIA assists with development of the treaty document.
As is customary, our brokerage fees are paid by the reinsurer. We have always practiced full disclosure of our fees to our clients.
After reinsurance is placed, we maintain strong involvement on an ongoing basis, providing administrative relief to the ceding company and adding confidence to the accuracy and timeliness of data reporting. These complimentary administrative services include:
- Accuracy scrubbing of monthly data files
- Creation of premium and claim accounting reports
- Preparation of any needed treaty amendments
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.
There are many structural alternatives with fixed annuity reinsurance. Each targets a different issue or solution. The three main alternatives are:
· Traditional Quota Share
· Structured
· Redundant Statutory Reserves
Traditional Quota Share
This is equivalent to selling a share of business to the reinsurer. The reinsurer shares in all acquisition costs as well as all product risks and rewards. This is a permanent transaction, i.e., business stays with the reinsurer once it is ceded, and is not likely to be recaptured. This is the cleanest transaction for purposes of risk transfer and is readily recognized by regulators, rating agencies, statutory accounting and GAAP accounting. Asset management is a key issue. The parties must agree upon whether assets will stay at the ceding company or move to the reinsurer, and who will manage the assets. Reinsurers can be onshore or offshore.
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.
The LF method ascribes full credibility when the number of withdrawals is such that, with a high degree of probability, the actual total withdrawals should fall within a narrow confidence interval around the expected total withdrawals. The number of withdrawals is a natural choice for this purpose, as it implicitly reflects key factors that intuitively affect credibility – both credibility and the number of withdrawals tend to increase when exposure increases and when withdrawal frequency increases.
Credibility theory often utilizes the following basic formula to calculate a credibility-weighted estimate:
Estimate = Z * [Mean of current observation] + (1-Z) * [Prior mean],
where 0<=Z<=1.
Z is the credibility ascribed to the mean of the current observation. The prior mean may be based on prior observed data or some type of benchmark. The question is – how do we determine Z?
Three approaches are commonly used:
- Under the Limited Fluctuation (LF) approach, also referred to as classical credibility or American credibility, it is assumed that the current observation of data includes independent trials and that the Central Limit Theorem holds. In order to limit the effect that random fluctuations may have on the estimate, a confidence interval approach is used to determine how much data is required in the current observation in order to assign full credibility (i.e. Z=1), and how partial credibility (i.e. Z<1) should be calculated with smaller amounts of data.
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