“The reports of my death have been greatly exaggerated.” – Mark Twain
Reinsurance for variable annuity guarantees (VA GMxBs) has often been characterized as unavailable over the last few years. In fact, this is not the case. Reinsurance is available, but the terms required by reinsurers are often inconsistent with the pricing of direct writers. Success with VA reinsurance in 2010 requires an understanding of the critical reinsurance design points discussed below.
VA reinsurance design has historically been strongly influenced by the background of each specific reinsurer. Traditional life reinsurers were comfortable with policyholder behavior and mortality risk, but not capital markets risk. Reinsurers affiliated with investment banks had the opposite view – comfort with capital markets risk but not insurance risk. Time and experience have allowed these views to merge at some reinsurers. Programs with these reinsurers can now address both insurance and capital markets risks.
All reinsurers are currently employing some form of capital markets hedging strategy and evaluating assets and liabilities on a market consistent basis. This means that reinsurers will not speculate on how capital market conditions may change, funds must be highly correlated with “hedge-able” indices, and reinsurance pricing will be based on current market-implied conditions. Wide new business windows with uncertain volumes are incompatible with this risk management strategy. Instead, reinsurance can more readily be provided for inforce blocks or on a serial (e.g. monthly or quarterly) basis for new business.
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.
Ruark Insurance Advisors, Inc. (RIA) specializes in the design and risk management of ancillary product features such as Guaranteed Minimum Death Benefits, Earnings Enhancement Benefits, Guaranteed Minimum Income Benefits, Guaranteed Minimum Withdrawal Benefits, Guaranteed Minimum Account Value Benefits, and Guaranteed Payout Annuity Floors.
Many of our unique reinsurance programs are tailored specifically to the variable market. One example is the Deferred Stop Loss program (DSL) for which a patent is pending. This program recognizes the long-term nature of the guaranteed minimum death benefits, the inherent volatility of the equity markets, and the need for direct writers to avoid large fluctuations in earnings.
RIA has also designed programs that reinsure two different guaranteed benefits within one package. In these instances, the two benefits react differently to changes in stock market performance. This results in lower reinsurance premiums for the package than for the two products individually reinsured.
Fixed Annuities
Fixed annuities retain a significant market share, regardless of the external interest rate environment. Many companies maintain a position in this market but prefer to modify the risk profile. RIA has developed reinsurance strategies to implement risk sharing that provide capital relief either with or without sharing deferred acquisition costs.
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