fixed index and registered fixed index annuity product trends · fia glwb va glwb income annuity...

© Oliver Wyman

Fixed Index and Registered Fixed Index Annuity Product Trends

Actuaries’ Club of Hartford and Springfield – 2017 Fall Meeting

Hartford - November 14, 2017

Tom Buckingham, MBA, FSA, MAAA

Nicholas Carbo, FSA, MAAA

1 © Oliver Wyman

Agenda

1 Product comparison of FIAs, RFIAs and VAs

2 FIA and RFIA market dynamics

3 Accumulation market

4 Income guarantee market

2 © Oliver Wyman

Fixed Index Annuities

(FIAs)

Registered Fixed Index Annuities

(RFIAs)

Variable Annuities

(VAs)

Upside

participation

• Limited participation in

market returns

• Higher participation in

market returns than FIAs

• Full participation in market

return less fees

Downside

protection

• Down side protection • Subject to downside with

floor or buffer offered

• Full downside risk absent

of guarantees

Fees • No fees assessed • Some include M&E fees • M&E and fund fees

standard

Asset

allocation

• Many offer various index

accounts

• Restrictions on transfers

• Many offer various index

accounts

• Some offer VA flexibility

• Asset allocation varies by

product and customer risk

profile

Income

options

• GLWB offered

• Annuitization benefits

• Annuitization benefits only • GLWB offered

• Annuitization benefits

Product comparison of FIAs, RFIAs and VAs RFIAs are a new product segment bridging the differences of VAs and FIAs

Worse Better

FIAs are typically sold to risk-averse customer who still want a higher return than a fixed investment and

many times compete with certificates of deposit

3 © Oliver Wyman

6.5

11.7 12.7

22.4

26.5 25.3 25.2

26.8

30.1 32.3 32.4

34.1

38.7

46.9

53.1

58.2

55.1

0

10

20

30

40

50

60

70

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017Q2

Fixed indexed annuity sales trends (2001-2017) 2017 FIA sales are on track to drop 5% vs 2016 based on Q2 2017 sales

Source: Wink’s Sales & Market Report 1Q2 2017 sales were multiplied by two to get a 2017 annualized result

$ B

illi

on

s

YTD

Q2 20171

(Annualized)

15.7% CAGR (2001 -2016)

4 © Oliver Wyman

Recent acquisitions reshaped the FIA market Acquirer/Seller (date)

Transaction type: IPO Japanese insurers Alternative buyers

2010 2011 2012 2013 2014 2015 2016 2017

5 © Oliver Wyman

Crediting methods and indices Term end point and hybrid indices continue to be strong in the FIA market

Crediting methods (Q2 YTD 2017) Indices (Q2 YTD 2017)

Annual point-to-point crediting method and S&P 500 index are still the most common, but

“hybrid” and proprietary indices (e.g., target volatility and dynamic rebalancing indices) are

gaining significant traction Source: Wink’s Sales & Market Report

Term End Point (TEP),

14.3%

Annual Point-to-Point (A-

PTP), 49.2%

Daily / Monthly

Averaging (AVG), 6.5%

Monthly Point-to-Point

(M-PTP), 11.3%

Fixed, 14.4%

Other, 4.3%

S&P 500, 51.2%

NASDAQ-100, 1.5%

Russell 2000, 1.0%

Other public indices, 1.1%

Hybrid Indices, 28.6%

Rainbow / Multi-Index,

0.7%

Fixed, 14.4%

Other, 1.5%

6 © Oliver Wyman

Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017

December 2015

• Midland National

– MNL Prosper 5

Fee-based FIA product launches Half of FIA writers have or plan to introduce a fee-based FIA in 2017, according to LIMRA

August 2016

• Great American

– Index Protector 7

February 2017

• Allianz

– Retirement

Foundation ADV

Annuity

February 2017

• Lincoln

– Lincoln Core Capital

May 2017

• Pacific Life

– Pacific Index Advisory

September 2017

• American Equity

– Eagle Advisory 8

July 2017

• Nationwide

– Nationwide Summit

July 2017

• Symetra

– Advisory Edge

– Income Advisory Edge

7 © Oliver Wyman

• The customer will likely receive a higher cap rate

• The surrender charges will likely be lower or eliminated

• The company will not be paying an upfront commission,

resulting in less strain to the insurance company

• Agents that only sell fee-based may be willing to look at

FIA as a choice for their customers

• The uncertainty around the DOL fiduciary rule may

increase demand for these products

Higher customer value

Less strain to insurer

Market opportunity

Benefits of fee-based FIAs The removal of compensation from the product allows for benefits to the customer and insurance company

Questions remain as to how fee based FIAs will be made available to the middle market

8 © Oliver Wyman

Registered fixed index annuity product launches Product launches are accelerating recently with top competitors launching version 2.0 of their products

2010 2011 2012 2013 2014 2015 2016 2017

Oct 2010

• AXA introduces

Structured Capital

Strategies

May 2013

• Metlife introduces

Shield Level

Selector

August 2013

• CUNA introduces

Member’s Zone

Annuity

September 2013

• Allianz Life

introduces Index

Advantage

January 2015

• Voya introduces

Potential Plus

October 2015

• Voya closes

Potential Plus

August 2017

• Brighthouse

introduces Shield

Level Select

Access (Fee Only)

August 2016

• CUNA introduces

Member’s Horizon

Annuity

Feb 2017

• AXA Structured

Capital Strategies

Plus filed

In addition, Great West and Great

American have filed prospectuses for

RFIA products

9 © Oliver Wyman

Quarterly RFIA sales (2011Q3 – 2017Q1) Annualized RFIA sales are approaching $8BN

1.0

2.0

0.0

1.5

0.5

Qu

art

erl

y P

rem

ium

($ B

N)

+68%

2017

projected

2016 2015 2014 2013 2012 2011

AXA Allianz Brighthouse

Source: LIMRA

Source: Morningstar

10 © Oliver Wyman

Motivations for introducing RFIAs

Capital

requirements • Diversification with VA

• Principles-based

Market demand • Growing sales

• Accumulation story

Innovation • Higher cap rates

• New product segment

Risk

management • Diversification with VA

• Low interest rates D

11 © Oliver Wyman

Crediting rate spread risk

• Risk that pricing spread is not achieved

• Lower reinvestment yields / inforce management / guarantees 1

Policyholder behavior

• Risk of higher / lower lapses when option budget is

uncompetitive / competitive 3

Disintermediation

• Risk of ALM mismatches in rising rate environment, magnified by

dynamic lapses 2

Equity risk

• Most carriers effectively over-hedge and benefit from option

payoffs in excess of the option budget 4

Risks and profitability drivers for RFIAs and base FIAs The interest rate market is the main driver of risk and profitability for RFIAs and base FIAs

Accounting mismatches

• Disconnects between AG33/FAS 133 and asset accounting 5

i

12 © Oliver Wyman

Income annuities FIA GLWB VA GLWB

Product

characteristics

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

Typical

pricing

regime

Methodology • Real world pricing • Real world pricing • Risk neutral pricing

Customer options for guaranteed income Three major types of products exist in the market to guarantee income for life

13 © Oliver Wyman

Benefits for the three types of products The benefits offered by the three products significantly differ

Income guarantees

Cash value

Death benefits

1

2

3

14 © 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

Gu

ara

nte

ed

mo

nth

ly i

nco

me

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

The longer the deferral period, the more competitive the FIA GLWB guaranteed income becomes

15 © Oliver Wyman

10 years from issue

5 years from issue At issue

Cash value by product for income starting immediately FIA products currently offer higher guaranteed cash value than comparable alternatives

$0

$50

$100

$150

$200

FIA GLWB VA GLWB Income annuity cash refund

$0

$50

$100

$150

$200

$250


$0

$25

$50

$75

$100


Cash

valu

e r

an

ge

($k)

Cash

valu

e r

an

ge

($k)

Cash

valu

e r

an

ge

($k)


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

His

torical

experience

His

torical

experience

60 year old male with income starting at issue

FIA GLWB has paid out

$6k more than VA GLWB

FIA GLWB has paid out

$12k more than VA GLWB Product 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

16 © Oliver Wyman

10 years from issue

5 years from issue At issue

Death

be

nefi

t r

an

ge

($k)

Death benefit by product for income starting immediately FIA products currently offer strong guaranteed death benefit, with modest upside potential

$0

$50

$100

$150

$200


$0

$50

$100

$150

$200

$250


$0

$25

$50

$75

$100


Death

be

nefi

t r

an

ge

($k)


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

His

torical

experience

His

torical

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

Death

be

nefi

t r

an

ge

($k)

17 © 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 the highest income in many cases with strong policyholder optionality when compared to income annuities and VA GLWB

Individual purchase decisions are based on each client’s circumstances

18 © 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?

19 © Oliver Wyman

60 year old male starting income at issue

0.9%

3.6%

4.6%

9.5% 9.7%

-2%

0%

2%

4%

6%

8%

10%

Age 70 / Year 10 withdrawal Age 80 / Year 20 death Age 90 / Year 30 death Age 100/ Year 40 death

Client IRR Company IRR

Rate

of

retu

rn

Time of policyholder exit

Client and company IRR for an FIA with GLWB starting income immediately The rate of return achieved by the client and the company is dependent upon the timing of withdrawal or death

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

20 © Oliver Wyman

Key takeaways

1 FIAs have become more mainstream

2 RFIAs are less mature but growing rapidly

3 FIA GLWBs offer strong income guarantees while preserving liquidity

4 Carrier returns will be influenced by policyholder behavior and economic

markets

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