Category Archives: Annuities

UK reforms opens a secondhand annuity market

Individuals in the United Kingdom will be allowed to sell their annuities starting in April 2017. A few important questions arise in light of this development: Is a secondhand annuity market sustainable? Who needs to participate in the market to sustain it? Is such a market appealing to consumers? A recent FT Adviser article written by Milliman consultants Colette Dunn and Chris Lewis explores these issue.

Here is an excerpt:

As the Chancellor stated “For the vast majority of people, continuing with their existing annuity will be the right choice.” This is a view that has been strongly reiterated by the Economic Secretary to the Treasury, Harriett Baldwin, and by Minister of State for Pensions, Baroness Altmann.

However, without doubt there will be demand from some consumers. Some will simply be tempted by the short term cash over an income for life. Others may have bought an annuity when they were required to have a £20k income per year to enter flexible drawdown (a rule which no longer applies) and now wish to sell it.

Anyone who plans to sell their annuity, should consider more than just the price. They need to think about the tax implications, the potential loss of means tested benefits and whether it will result in them paying more towards any care costs.

The price is important too! Although we cannot know how the market pricing will develop, we have calculated illustrative cash-in values based on current interest rates, an assumption of current good health and possible transaction charges.

Market dynamics for annuities are shifting

The demand for fixed-income annuities has increased as the volume of variable annuity purchases has decreased. However, in a recent Bloomberg BNA article, Milliman’s Noel Abkemeier discusses the negative affects the recession has left on variable annuity products.

Here is an excerpt:

“During the Great Recession, the cost of hedging the living benefits became very expensive,” which forced the insurance industry to deploy various de-risking measures to try to stabilize the variable annuity business, said Noel Abkemeier, a consulting actuary and principal at Milliman in Chicago.

Insurance companies instituted a number of investment changes and other measures “to control the cost of the living benefit to the customer and, secondly, to limit their own risk,” Abkemeier said during a session on trends in annuity products at the Insured Retirement Institute’s Government, Legal and Regulatory Conference.

Unlike variable annuity sales, purchases of indexed annuities increased slowly but steadily during the same 2007-2012 period, Abkemeier said. “They were maybe the product for the time,” because they were less vulnerable to the fluctuation in interest rates that hurt fixed-income and variable-rate annuities, he said.

For more Milliman perspective on variable annuities, click here.

Are stripped-down variable annuities gaining traction?

Low-cost variable annuities with broader investment options have become appealing to some individuals. These scaled-back annuities are also less expensive to insurers because they eliminate the costs of hedging linked to income guarantees.

Milliman was cited in this Barron’s article (subscription required) discussing hedging costs. The article highlights the “50 most competitive contracts in popular annuity categories.”

Here is an excerpt:

These low-cost annuities don’t offer the same array of a la carte features, but they do come with some unexpected benefits. For instance, by not offering income guarantees, these annuities can include a wider range of investment options. Alternative investments can be very volatile, and therefore very costly to hedge. “Removing the benefit rider means we don’t have to hedge, which gives the insurer the ability to offer greater investment options,” says Doug Dubitsky, vice president of retirement solutions for Guardian Life, which has designed a simple variable annuity that is under review with the Securities and Exchange Commission.

… Insurers have lowered payouts under considerable pressure from a prolonged period of low interest rates, which make both new and existing contracts more expensive to manage. Insurers hedge the risk of their guarantees using interest-rate swaps, but this gets more expensive when interest rates are low. Since 2008, hedging costs have more than doubled, according to [Milliman], a Seattle-based firm that performs risk analyses. And many insurers are still burdened by the rich lifetime-income guarantees they sold prior to 2008.

For more Milliman perspective on variable annuities, click here.

Milliman does not sell variable annuities.

Variable annuities see a resurgence in popularity

This article in The Wall Street Journal (subscription required) takes a look at how life insurers have restructured variable annuities in recent years. Here is an excerpt from the story:

In a trend gathering momentum, the life insurers that sell these tax-advantaged vehicles for investing in funds are competing on the basis of investment choices. That’s what they did in the 1980s and 1990s, before launching an arms race of escalating promises of guaranteed-minimum lifetime income, even if underlying funds tanked.

That competition cost the industry dearly when markets slid in 2008 and early 2009, leading to price increases and less-generous features as insurers sought to repair their balance sheets. With the new offerings, insurers are drawing on the past but adding a twist: They are pitching variable annuities as a smart way to load up on alternative investments.

While many insurers did see losses in 2008 and 2009, those with sufficient hedging in place fared better. Milliman research indicates that hedging strategies saved insurers $40 billion in September and October of 2008.

The Milliman Managed Risk Strategy offers similar risk management techniques to pensions through hedging strategies that seek to maximize clients’ asset growth in bull markets while defending against losses in down markets.

For Milliman’s insight into the variable annuity industry, click here.

Annuity alchemy

A new article in LifeHealthPro looks at the hybridization trend as it applies to retirement. Here’s an excerpt:

It’s crept onto your restaurant menu, into your pocket and your retirement portfolio, too. It’s called hybridization—taking distinct elements of one item and combining them with distinct elements of another to yield another distinct multifaceted product. Use that recipe in the culinary world and you get fusion food. Use it in the high-tech arena and the result is an all-in-one device called a smartphone. Apply it to financial and insurance instruments, and to annuities in particular, and the possibilities are seemingly endless.

The drive to innovate and deliver versatile solutions that address multiple client needs has put annuity providers in full hybridization mode. From the structure of the contract chassis itself, on down to other, more granular aspects of their products, insurers are borrowing and blending elements of various insurance and financial instruments to put a unique spin on their annuity offerings.

“Really what they’re doing,” explains Tim Hill, FSA, MAAA, principal and consulting actuary in the Chicago offices of Milliman, an actuarial consulting firm that provides insurance companies with product development guidance, “is mining these features from other things and using them with annuities. That approach seems to rule the annuity marketplace today.”

The result is an influx of specialized, sometimes complex products with hybrid structures, hybrid compensation models, hybrid benefits, even hybrid hedging strategies.

For advisors, this proliferation of hybrid annuity products and features means having a wider range of potential solutions to offer clients. But it also means more product education, observes Hill’s colleague Carl Friedrich, FSA, MAAA, also a principal and consulting actuary at Milliman. “There’s a real learning curve [annuity producers] need to climb when they’re working with some of these [hybrid] products.”

The full article is available here.

Annuities and interest rates

We’ve talked before about how interest rates affect pension funded status. There are also implications for annuities. Investment News picks up on the potential for interest rates to affect the demand for indexed annuities; here is an excerpt.

Last year was a mixed blessing for carriers that sell the products, which offer a guaranteed minimum return, as well as a return based on the performance of a stock market index. Customers flocked to indexed annuities, at least in part because of new living-benefit features, generating some $32.1 billion in sales, up 7% from 2009, according to LIMRA. But low interest rates made the business less profitable for carriers.

The low-rate environment forced the largest indexed-annuity sellers — Allianz, American Equity Investment Life Holding Co. and Aviva USA — to begin trimming features last fall.

“Now, yields have come back to where they were at the start of 2010, and we’re having conversations again with carriers about enhanced features,” said Tim Hill, a consulting actuary and principal at Milliman Inc.

Carriers had loaded their investment portfolios with cash following the financial crisis and then gradually shifted funds to highly rated corporate bonds in search of yield. At the beginning of 2010, a seasoned corporate bond rated Aaa by Moody’s Investors Service was yielding 5.34%. But yields on top corporates dropped over the summer, falling to as low as 4.31%. (They rose to 5.26% by mid-month.)

That decline sparked a number of product cutbacks, as low yields constrict what carriers can afford to offer in the way of benefits, Mr. Hill said.