Annuity-Based Solutions: Securing the 'Golden Years' Seminar · Annuities include all fixed and...

The Product Development Section Presents

Annuity‐Based Solutions: Securing the “Golden Years” Seminar

May 9, 2018 | Baltimore Marriott Waterfront | Baltimore, MD

Presenters: Christopher Allen Bartak, FSA, MAAA

Nicholas E. Carbo, FSA, MAAA Jennifer L. Healy, FSA, MAAA

Justin Kahn Miranda McCarthy

Douglas L. Robbins, FSA, MAAA Peter Tian

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© Oliver Wyman

Fixed Annuity and Fixed Indexed Annuity Market and Product Trends Annuity-Based Solutions: Securing the “Golden Years” Seminar Baltimore, May 9, 2018

Nicholas Carbo, FSA, MAAA

1 © Oliver Wyman

Agenda

1 Backdrop for this seminar

2 Market and product perspectives

2 © Oliver Wyman

US population by age (MM of people) 2015 and 2030E

Backdrop for this seminar Need for guaranteed retirement income has never been greater and will continue to grow

50

10

0

20

40

30

80+

42 34

12

50 – 59 70 – 79 30 – 39

44 40 35

60 – 69

46 41

20

40 – 49

40

+14% 49

+64%

+72% -9%

20

+16% +13%

2030E 2015

Source: US Census Data

In-Retirement Average issue age of Fixed Annuities: 72

Pre-Retirement Average age: 30s to 40s Products offered: Group Retirement Plans, mutual funds platform, financial advice

Near/At-Retirement Average issue age of Variable and Index Annuities: 64

• Baby boomers will continue to enter retirement through 2030

• Average US life expectancy at age 65 increased by 3 years between 1975 and 2010, and is projected to continue to grow

• Explosion in population of retirees in income drawdown

3 © Oliver Wyman

US Personal Financial Assets – Landscape Overview; amounts in $BN

20%

100%

10%

0%

30%

40%

90%

60%

70%

50%

80%

DB

457

401k

DC

403b

2,032

Annuities

52,313

TSP

Non-qualified

IRA

Other

Retail

6,965

Private DB

8,249

State and Local

DB

Federal DB

Market

US personal financial assets Annuities are a minor fraction of US personal financial assets

Corporate Source: Investment Company Institute, US Retirement Market Statistics, Q3, 2016; Federal Reserve Statistical Release Z.1 Financial Accounts of the United States, Third Quarter 2016 Annuities include all fixed and variable annuity reserves at life insurance companies less annuities held by IRAs, 403(b) plans, 457 plans, and private pension

4 © Oliver Wyman

Retail annuity sales 2008 - 2017 RFIAs and fixed indexed annuities are the bright spots in the retail annuity market

Book value

SPIA

DIA

Mar

ket r

isk

for p

olic

yhol

der

Source: LIMRA

Low

er

Hig

her

2013 2012 2011 2010 2009 2008 2017 2014 2015 2016

Variable

Registered indexed

MVA

Fixed indexed

5 © Oliver Wyman

$238 $220 $230 $237 $236 $222 $204

0%

10%

20%

30%

40%

50%

60%

70%

$0

$50

$100

$150

$200

$250

$300

2011 2012 2013 2014 2015 2016 2017

Inco

me

elec

tion

(% o

f sal

es)

Sale

s ($

B)

Accumulation (FA/FIA/VA) VA GLWB FIA GLWB Income annuity % of income sales

Income vs. accumulation sales Income sales are decreasing!

VA GLWB sales declined sharply due to de-risking. Until 2016, this was partially compensated by rising FIA GLWB sales. The recent FIA GLWB slowdown is caused by DOL/distribution changes.

Source: LIMRA

6 © Oliver Wyman

Why are income annuity sales decreasing

The $MM question…

7 © Oliver Wyman

… This remains a puzzle for the industry!

Questions we will attempt to answer: • Why are FIAs successful? • Why have RFIAs seen so much growth? • Why are income annuity sales stagnant? • Will fee-based annuities break through?

8 © Oliver Wyman

Why are FIAs successful

9 © Oliver Wyman

Expanding FIA market The FIA market benefited from new entrants and wider acceptance with distributors

Rank Company Sales ($B) 1 Allianz Life 6.3 2 Aviva USA 4.5 3 American Equity 4.4 4 Great American 1.8 5 North American 1.7 6 Lincoln National 1.6 7 Midland National 1.5 8 Jackson National 1.5 9 ING 1.4 10 Security Benefit Life 0.9

Source: Wink’s Sales & Market Report

2011 FIA Market : $32.2B 2017 FIA Market: $54.0B

Rank Company Sales ($B) 1 Allianz Life 7.5 2 Athene USA 5.0 3 Nationwide 4.6 4 American Equity 4.1 5 Great American 3.5 6 AIG 3.4 7 Midland National 2.1 8 Global Atlantic 2.1 9 Symetra 2.0 10 North American 1.8

Top 3 market share 47% Top 10 market share 78%

Top 3 market share 29% Top 10 market share 65%

10 © Oliver Wyman

Competitive landscape (2005) The FIA market was previously heavily concentrated in “niche players” focusing on the independent channel

Banks and broker dealers Independent and banks Independent organizations

Rec

ent

Acqu

irers

U

S St

ock

Com

pani

es

Fore

ign

Subs

idia

ries

Mut

ual

Com

pani

es

Ow

ners

hip

Stru

ctur

e

Market share and dominant distribution channels by ownership structure and credit rating

Priv

atel

y H

eld

Size of bubbles represents 2005 market share

Primary distribution channels

Lower Higher Credit Rating

A++ A A- B++ B+ B A+

Source: Advantage Compendium and Oliver Wyman Research

Allianz Life

AmerUs (Athene/Aviva block)

Old Mutual (now Fidelity& Guaranty)

Midland National

Equi Trust

Jackson National

32.3%

9.9%

All other companies

8.8%

15.2%

American Equity ING (now VOYA)

Jefferson Pilot (now Lincoln)

Sun Life (now Delaware Life)

8.7% 7.5%

11 © Oliver Wyman

Competitive landscape (2013) In 2013, the market was already significantly broadened


Rec

ent

Acqu

irers

U

S St

ock

Com

pani

es

Fore

ign

Subs

idia

ries

Mut

ual

Com

pani

es

Ow

ners

hip

Stru

ctur

e


Priv

atel

y H

eld




A++ A A- B++ B+ B A+

Source: Wink’s Sales & Market Report and Oliver Wyman Research

Allianz Life

15.5%

Career

National Life

10.4% American Equity

Sagicor Life

CNO companies Phoenix

Midland National

North American

Pacific Life

11.7%

7.1%

7.9%

Security Benefit

Fidelity & Guaranty

Equi Trust Athene Lincoln Benefit Life

All other companies

Forethought

Genworth

Nationwide Western & Southern

OneAmerica

Jackson National

Great American

Lincoln

Protective Voya AIG

National Western Symetra

12 © Oliver Wyman

Competitive landscape (2017) Today’s FIA market has a broad range of players with substantial representation outside of the independent channel


Rec

ent

Acqu

irers

U

S St

ock

Com

pani

es

Fore

ign

Subs

idia

ries

Mut

ual

Com

pani

es

Ow

ners

hip

Stru

ctur

e


Priv

atel

y H

eld

Career




A++ A A- B++ B+ B A+

Source: LIMRA and Oliver Wyman Research

All distribution channels Allianz Life

Athene USA

Nationwide

American Equity

Midland National

Fidelity & Guaranty

North American Security Benefit

Equi Trust

National Life

Jackson National

Americo

Phoenix

Voya Great American Symetra

Pacific Life

Protective

AIG

Global Atlantic

Lincoln

Mass Mutual

13.9%

9.0%

8.5%

7.6% 6.5%

Small mutual companies Reliance Standard

Delaware Life

American National

Western & Southern

Bankers Life & Casualty

Ohio National

All other companies

9.2%

13 © Oliver Wyman

FIA distribution changes FIA sales have grown significantly due to penetration in institutional channels

Q4 2011 Q4 2017

Source: Wink’s Sales & Market Report

Independent agents, 89.4%

Bank, 5.1%

B/D, 2.6% Career, 2.9%

Independent agents, 55.9%

Bank, 16.9%

B/D, 20.2%

Career, 7.0%

14 © Oliver Wyman

The FIA market has grown partly due to large M&A capital inflows Acquirer/Seller (date)

Transaction type: IPO Japanese insurers Alternative buyers

2010 2011 2012 2013 2014 2015 2016 2017

15 © Oliver Wyman

Why have RFIAs seen so much growth

16 © Oliver Wyman

Registered fixed index annuity product launches Product launches have been 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 based)

August 2016 • CUNA introduces

Member’s Horizon Annuity

Feb 2017 • AXA Structured

Capital Strategies Plus filed

In addition Lincoln plans to launch in May 2018

2018

February 2018 • Great West

introduces Capital Choice

March 2018 • Great American

introduces Index Frontier 7

17 © Oliver Wyman

Registered fixed index account options compared to VA and FIA RFIA products offer two types of index accounts which allow for a higher cap than an FIA capped account Variable annuity

AV

retu

rn

Index value Index value

Index value

• Provides direct exposure to equity markets – i.e., no capped upside or floored downside

• Effectively a long call spread on the index – i.e., − Long call to capture

upside − Short call to limit net

debit

• Effectively a long “seagull” option structure – i.e., − Call spread similar to FIA − Short put to finance a

more attractive call spread

AV

retu

rn

Fixed index annuity (cap design)

AV

retu

rn

Buffer design

Index value

• Effectively a ”collar” option structure – i.e., − Call spread similar to FIA − Short put spread to

finance a more attractive call spread

AV

retu

rn

Floor design

18 © 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

19 © Oliver Wyman

Why are income annuities sales stagnant

20 © Oliver Wyman

Income annuities FIA GLWB VA GLWB

Product features 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

Pricing regime Primary pricing methodology

• Real world • Real world • Risk neutral

Customer options for guaranteed income There are three major guaranteed income products in the market

1 2 3

21 © Oliver Wyman

Product features analysis We will sequentially examine product features from a consumer view

Income guarantees

Cash value

Death benefits

1 2 3

22 © 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

Gua

rant

eed

mon

thly

inco

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

FIA GLWB income can exceed pure income annuities

23 © Oliver Wyman

10 years from issue

5 years from issue At issue

Cash value (immediate income scenario) FIA provide stronger cash value guarantees but with very limited upside relative to VA

$0

$50

$100

$150

$200

FIA GLWB VA GLWB Income annuity cash refund

$0

$50

$100

$150

$200

$250

FIA GLWB VA GLWB Income annuity cashrefund

$0

$25

$50

$75

$100


Cas

h va

lue

($k)

Cas

h va

lue

rang

e ($

k)

Cas

h va

lue

rang

e ($

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

toric

al

expe

rienc

e H

isto

rical

ex

perie

nce

60 year old male with income starting at issue

1FIA GLWB has paid out $6k more than VA GLWB

1FIA 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

24 © Oliver Wyman

$0

$25

$50

$75

$100


10 years from issue

5 years from issue At issue

Dea

th b

enef

it ($

k)

Death benefit (immediate income scenario) FIA offers strong guaranteed death benefit; assuming a GMDB is not present, VA have significant downside risk

$0

$50

$100

$150

$200


$0

$50

$100

$150

$200

$250

FIA GLWB VA GLWB Income annuity cashrefund

Dea

th b

enef

it ra

nge

($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

toric

al

expe

rienc

e H

isto

rical

ex

perie

nce

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

Dea

th b

enef

it ra

nge

($k)

25 © 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 strong guaranteed income while preserving flexibility

Industry sales indicate that the flexibility of a GLWB is valued by consumers

1 2 3

26 © Oliver Wyman

60 year old male starting income at issue

1.0% 1.2%

3.7% 4.8%

9.7% 10.2%

1.0%

0%

2%

4%

6%

8%

10%

12%

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

Client IRR Company IRR

Rat

e of

retu

rn

Time of policyholder exit

Client and company IRR for an FIA with GLWB starting income immediately Timing of surrender or death determines the rate of return achieved by the client and the company

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

27 © Oliver Wyman

Will fee-based annuities finally break through

28 © Oliver Wyman

Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018

December 2015

• Midland National – MNL Prosper 5

Fee-based FIA product launches

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

July 2017

• Symetra – Advisory Edge – Income Advisory Edge

July 2017

• Nationwide – Nationwide Summit

March 2018

• Jackson National – Market protector advisory

29 © 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 Fee-based chassis allows for more competitive features

30 © Oliver Wyman

Key takeaways Broadening the reach of retail income annuities remains a difficult problem. The following successes give hints on what could turn income annuities around:

1 FIA sales expanded through broader consumer acceptance and distribution

2 FIA GLWB sale grew due to flexibility combined with strong guarantees (echoes earlier VA GLBs)

3 RFIA accumulation story appeal with distribution consumers

Potential success factors drawn from above: distribution capacity, consumer acceptance, flexibility and strong guarantees.

Session Q&A

© Oliver Wyman

DOL FIDUCIARY RULE IMPACTS

MAY 9, 2018

CONFIDENTIALITY Our clients’ industries are extremely competitive, and the maintenance of confidentiality with respect to our clients’ plans and data is critical. Oliver Wyman rigorously applies internal confidentiality practices to protect the confidentiality of all client information.

Similarly, our industry is very competitive. We view our approaches and insights as proprietary and therefore look to our clients to protect our interests in our proposals, presentations, methodologies and analytical techniques. Under no circumstances should this material be shared with any third party without the prior written consent of Oliver Wyman.

© Oliver Wyman

2© Oliver Wyman

• Motivation for regulatory change• Proposed changes under the DOL rule• DOL rule impacts• Summary of SEC Regulation Best Interest

Agenda

3© Oliver Wyman

DB

Non-qualified money

Qualified money Non-qualified money

IRAs

DC

Fiduciary standard currently applies

Institutional

Motivation for change Concern was that the advice standard for IRAs and non-qualified money was not high enough

Retail

No consistent standard

4© Oliver Wyman

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1974 1979 1984 1989 1994 1999 2004 2009 2014

% o

f ret

irem

ent a

sset

s

Year

IRAs

DC

Private DB

State & Local DB

Federal DB

Annuities

40-year 10-year

10% 4%

10% 5%

10% 4%

8% 4%

12% 7%

25% 8%

Motivation for changeIRAs have been the fastest-growing class of retirement assets with a majority of growth coming from rollovers

Annual growth rate

5© Oliver Wyman

DOL rule overviewThe DOL rule moved toward a fiduciary standard and the use of PTEs to continue receiving commission

A

B

Becoming an ERISA fiduciary would have required a “Best Interest” rather than a “Suitability” standard

Becoming a fiduciary would have prevented advisors from receiving payments from third parties unless they use a PTE

6© Oliver Wyman

2016 2017 2018

Apr May Jun Jul Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul

April 6, 2016DOL final ruling published

April 10, 2017Started implementing best interest standards

Jan. 1, 2018Original BICE implementation date

12-months for implementation

Transition period – BICE partially applies BICE would have fully applied

Fiduciary rule/best interest standard applies(including PTE 84-24)

DOL rule timelineThe rule had a staggered implementation, with the most significant provisions never being implemented

Nov 27, 2017DOL delays BICE requirement

Mar. 15, 2018DOL rule struck down by circuit court

7© Oliver Wyman

DOL rule impactsWe expected the rule to have broad impacts across the insurance industry, for both manufacturers and distributors

5. Product Impacts

Product and distribution

2. IMO 3. LevelizedComp1. Volumes 4. Robo-advisors

Compliance

6. Policyholder contact

7. Non commission compensation

8. Selling agreement

9. Orphans and grandfathering

8© Oliver Wyman

DOL rule impactsAlthough the DOL rule is not in effect, we have seen some industry impacts

2. Advice Model 3. Product Shelf 4. Compensation

5. Compliance & Controls

6. Technology & Operations

1. Business Model

More impact Less impact

9© Oliver Wyman

SEC rule elements

# Proposal Applicability Description

1 Proposed Rule Regulation Best Interest

Broker-dealers Best interests for recommendations of securities transaction or strategy involving securities for a retail customer

2 Proposed Form CRS Relationship Summary

Broker-dealers and IAs 1. For IAs, plain English disclosure to be included in ADV

2. New plain English disclosure requirement for BDs too, to be defined

3. Both would have to disclose registration status in certain customer communications

4. Broker-dealer registered representative cannot use the word adviser

3 Proposed Commission Guidance

IAs Clarifies fiduciary duty standards for IAs

10© Oliver Wyman

Insurance suitabilityFINRA suitability

Standards comparisonThe DOL rule and Reg. BI impact different segments due to jurisdictional differences

Employer-sponsored plans DC & DB

Individual accounts

Mutual funds Annuities

ERIS

A pl

ans

& IR

AsN

on-E

RIS

A pl

ans

&

non-

qual

ified

fund

s

ERISA fiduciary

DOL fiduciary

SEC best interest

Broker-dealers and investment advisors Insurance only agents

11© Oliver Wyman

Primary differences between DOL and SEC rule

3 No private right of action

4Appears to have limitedimpact on insurance-only agents

1 Best interest is not clearly defined

2Simplified disclosure requirements

12© Oliver Wyman

Closing remarks

• Future of the DOL rule

• Expectations for the SEC rule

• Industry and customer impacts

QUALIFICATIONS, ASSUMPTIONS AND

LIMITING CONDITIONS

This report is for the exclusive use of the Oliver Wyman client named herein. This report is not intended for general circulation or publication, nor is it to be reproduced, quoted or distributed for any purpose without the prior written permission of Oliver Wyman. There are no third party beneficiaries with respect to this report, and Oliver Wyman does not accept any liability to any third party.

Information furnished by others, upon which all or portions of this report are based, is believed to be reliable but has not been independently verified, unless otherwise expressly indicated. Public information and industry and statistical data are from sources we deem to be reliable; however, we make no representation as to the accuracy or completeness of such information. The findings contained in this report may contain predictions based on current data and historical trends. Any such predictions are subject to inherent risks and uncertainties. Oliver Wyman accepts no responsibility for actual results or future events.

The opinions expressed in this report are valid only for the purpose stated herein and as of the date of this report. No obligation is assumed to revise this report to reflect changes, events or conditions, which occur subsequent to the date hereof.

All decisions in connection with the implementation or use of advice or recommendations contained in this report are the soleresponsibility of the client. This report does not represent investment advice nor does it provide an opinion regarding the fairness of any transaction to any and all parties.

Income Annuity Trends

S O C I E T Y O F A C T U A R I E S

G O L D E N Y E A R S S E M I N A R

FOR FINANCIAL PROFESSIONAL USE ONLY. NOT FOR USE WITH THE PUBLIC.

CRN202004-229527

2FOR PRODUCER USE ONLY. NOT FOR USE WITH THE PUBLIC.

Today’s discussion

• The New Retirement: According to the Boomer

• Costs of Living in Retirement– expectations versus experience– The Wants– The Needs– The Surprises

• Sources of Retirement Income – The emergence of DIY

• Living Longer

• Optimizing portfolio with guaranteed income

3

Retirement Snapshot (1,2)

Nearly 50 million retirees in the US

(2015)

$24 TRILLION in net worth

1 LIMRA, Secure Retirement Institute, “Sources of Retirement Income, A Study of Retirees,” 2017 2 LIMRA Secure Retirement Institute, “2016 Fact Book on Retirement Income”

$1.3 Trillion in retirement income

(2014)

Coming from Social Security and Pensions


The Retiree Market

The retirement market will grow for decades

2015Americans

Turning 65 per day 10,000

2015Number of

Retirees 49.5 million

2014Retirement

Income Market $13 trillion*

202111,000/day

202566 million

2025$25 trillion

2035 78 million

205012,000/day

*The retirement income market size estimate reflects consumers aged 25 or over, and households with assets between $50k and $4.9 million.

LIMRA Secure Retirement Institute analysis of U.S. Census Bureau’s Current Population Survey, March 2015 Supplement, National Population Projection, 2015, and 2013 Survey of Consumer Finance, Federal Reserve Board, 2014. As cited in LIMRA Fact Book on Retirement Income, 2016, A Review of Trends and Activity in the Retirement Income Market


A New Brand of Retirement

Breaking all the Rules


Their plans for retiring

26%

66%54%

42%

28%38% 39%

Plan to stop workand retire at aspecific age orsavings amount

Plan to or alreadyare working pastage 65 or don't

plan to retire

Plan to keepworking after

retirement

Proactivelyupdating skills tokeep working if

needed

Have a backupplan for retirement

income if they can'twork

Expect SocialSecurity to be

primary source ofincome

Expect self-fundedaccounts such as401(k), IRAs and

other savings to beprimary source of

income

Transamerica Center for Retirement Studies, “Wishful Thinking or Within Reach? Three Generations Prepare for Retirement, 18th Annual Transamerica Retirement Survey of Workers,” December 2017.

“How do you envision retiring?”


A Boomer perspective on longevity

“What age do you expect to live to?”

45%

10%

21%

18%

5%

1%

0.50%

Not sure

100+

90-99

80-89

65-79

60-64

Less than 60AGES

Transamerica Center for Retirement Studies, “Wishful Thinking or Within Reach? Three Generations Prepare for Retirement, 18th Annual Transamerica Retirement Survey of Workers,” December 2017

Retirement ExpensesWants, Needs & Surprises


Costs of Living in Retirement

•The WantsDiscretionary Expenses (dining out, travel for pleasure and entertainment, charities, legacies)

•The NeedsHousing, food, utilities, clothing, health care and long term care

•The SurprisesRespondents saved 11% of the income for emergencies

LIMRA, Secure Retirement Institute, “Sources of Retirement Income, A Study of Retirees,” 2017

The Needs 65%

The Wants 24%

Surprises11%

Results are based on a sampling of 2.025 retirees ages 55-79 who have retired for at least a year and have $35,000 or more in household income.


What Do you Think is the Number One Cost in Retirement?

Placeholder for Audience Poll Slide


Housing costs

The biggest bite out of retiree budgets!

HOUSING

32.9%TRANSPORTATION

16.2%FOOD

12.3%HEALTHCARE

11.1%RECREATION

5.3%Ann C. Foster, “A closer look at spending patterns of older Americans ,” Beyond the Numbers: Prices & Spending, vol. 5, no. 4 (U.S. Bureau of Labor Statistics, March 2016), https://www.bls.gov/opub/btn/volume-5/spending-patterns-of-older-americans.htm


Surprise!

The potential costs of“aging in place”

SOURCE: MIT Age Lab; Issue Brief Number 2015-12, Going Home: Senior Housing Options in Retirement Joseph F. Coughlin, Ignacio Chaparro, Olivia DaDalt; (Bureau of Labor Statistics, 2012); Home Advisor

New roof $6,582

Gutter Repair$328

New Furnace $3,875

Termites!

Wider Doors/Ramps

$500 –$1,000

New Windows

$6,582


Surprises in Basic living expenses

6%

6%

15%

16%

26%

28%

50%

57%

73%

Other reasons

Financially supporting older family member

Family events (divorced, widowed, married)

Doing more activities than expected

Financially supporting younger family member

Income taxes higher than expected

Housing costs more than expected

Health care costs more than expected

Cost of goods/services generally more than expected

Why were expenses higher than expected?

Note: Based on 507 retirees aged 55 to 79 who have been retired for at least a year, have $35,000 or more in household income, and who experienced “somewhat” or “significantly” higher-than-expected basic living expenses. Multiple responses allowed.

LIMRA Secure Retirement Institute, Retirement Spending, Experience versus Expectations, a Study of Retirees, 2016

Sources of Retirement Income


Social Security42%

Pension/Retirement30%

Employment Earnings11%

Interest & Dividends11%

Other6%

Individual retirement income by source

Social Security and pensions remain the two largest sources of retiree income – and both guarantee income for life.

LIMRA Secure Retirement Institute Analysis of U.S. Census Bureau’s Current Population Survey, March 2015 Supplement. Analysis based on fully retired households. Household income represents total income received in 2014. As cited in LIMRA Fact Book on Retirement Income, 2016, A Review of Trends and Activity in the Retirement Income Market.


Pension plans are disappearing

55% 53%

40%

26%18%

12%

Age 75 andolder

65 to 74 55 to 64 45 to 64 35 to 44 Age 18 to 34

Percent of households with access to a defined benefit plan

LIMRA Secure Retirement Institute analysis of 2013 Survey of Consumer Finances, Federal Reserve Board, 2014. For married couples, age group assignment based on age of oldest spouse in 2013. Data represents only households with zero-plus financial assets.

Pensions as a source of income will plummet for future generations.


5%

11%

16%

4%

26%

26%

28%

29%

81%

80%

5%

11%

16%

25%

40%

45%

52%

89%

81%

95%

Income from business

Rental income

Part-time work

Roth IRAs

Annuity

Retirement savingsplans

IRAs or Rollover IRAs

Taxable assets

Pension benefits

Social Security

Income sources: available and used

(As a percentage of households)


Available income sourcesUsed for income


53%

33% 34%

76%84%

33%

19% 17%

46%

63%

28%

0% 0%

56%65%

All Under age 65 Ages 65-69 Ages 70-74 Ages 75-79

Income from IRAs

Percent of retirees receiving income from traditional IRAs

Taking systematic withdrawalsTaking withdrawals only to meet RMDs

Taking withdrawals



Annuity ownership

21%

51%

27%

53%

39%

30%

33%

28%

33%

8%7%

8%

9%8%

6%8%

5%7%

Don't work with a financialprofessional

Work with a financialprofessional

No formal plan

Have a formal plan

Ages 75-79

Ages 70-74

Ages 65-69

Under Age 60

All

Percent of retiree households owning an annuity

Income AnnuityDeferred Annuity


Income Annuity Trends in the Market“Longevity Insurance”


Retail annuity sales by investment objective

$119.0 $115.4 $114.5 $107.7

$21.7 $27.5 $29.3 $30.7$16.3 $19.6 $23.1 $26.7$25.9 $33.8 $39.8 $41.3

2012 2013 2014 2015

Guaranteed Income Principal Protection Protection & Market Growth Market Growth

$183.0

Guaranteed income is the largest component of annual annuity sales.

Totals are for retail sales only and exclude sales in employer plans and structured settlements. Guaranteed income bucket includes VA sales with GLWB/GMIB/GMWB rider elected, fixed indexed sales with GLWB rider elected, immediate income annuity and deferred income annuity.

$196.3 $206.7 $206.5

U.S. Individual Annuity Yearbook —2015 and VA GLBElection Tracking Survey, LIMRASecure Retirement Institute, 2016.


Average initial premium by annuity type

$69k

$95k $90k

$117k

$148k $146k $148k

Fixed Rate Indexed Variable Indexed withGLWB

VA with GLB DIA SPIA

Lifetime income annuities can attract big tickets

Deferred Annuity Lifetime Income

“U.S. Individual Annuity Yearbook — 2015; Profile of Individual Annuity Buyer Study and Income Annuity Buyer Study,” LIMRA Secure Retirement Institute, 2016.


Putting it all together

•Boomer Market unlike any other with more assets than any other generation

•Retirement (and when) has not been clearly defined, thus they want flexibility

•Bottom line- retirees need to have some form of guaranteed income. There is no one right answer, no one size fits all. Specific to individual. Some need more liquidity, some need accumulation prospects too, some need tax benefits etc.

•But all need flexibility and products that can change with them as their life changes during the Golden Years

•This has led to DIY Retirement, and a slowing of DIA sales

•Opportunity for manufacturers to define retirement and build products that suit the changing Boomer landscape


Disclosures

Annuity products are issued by Massachusetts Mutual Life Insurance Company (MassMutual) and C.M. Life Insurance Company. C.M. Life Insurance Company, Enfield, CT 06082, is non-admitted in New York and is a subsidiary of MassMutual, Springfield, MA 01111-0001.

Douglas L. Robbins

May 9, 2018

The Science Behind Securing the “Golden Years”

2

Topics

▪A Reasonably Hot Research Topic

▪What Might a Typical Retiree do Wrong, and Why?

▪Changing the Odds

▪Educating “The People”

3

Topics

▪A Reasonably Hot Research Topic

4

What does our Gut Say, as Insurers?

▪ Retirees’ biggest financial risk is probably running out of money before they die

▪ This could happen for any number of reasons, but regardless, our intuition here makes perfect sense

▪ How can we as insurers act most effectively to help them?

5

A Clear Topic for Research

▪ Session 46 L from the 2016 L&A Symposium started my thinking along these lines, so credit is due there

▪ The SOA has recently published the “Managing Retirement Decision Series”▪ The article most similar to my topic today is called

“Designing a Monthly Paycheck in Retirement”

▪ It is more anecdotal, and less “techy” than my presentation today, but well worth a look

6

A Key Point of the DIA Session (46 L)

▪ The timing of guaranteed DIA payouts can have a dramatic effect on the probability a retiree outlives their money

▪ Why is that?▪ Each guaranteed payment directly impacts the “fund”

a retiree would otherwise use

▪ The timing and amount of that effect is material

▪ This all led, along with some other concepts, to the path I’ve taken here

7

Topics

▪What Might a Typical Retiree do Wrong, and Why?

8

▪A huge chunk of our current or soon-to-be retirees can tell you 2 Key Things about Investing

What and Why?

9

▪A huge chunk of our current or soon-to-be retirees can tell you 2 Key Things about Investing

▪A little knowledge is a what?

What and Why?

10

Two patterns of Fund Unit Values

11


▪Which one is better? Why?

12

The answer is, it depends

▪ If I invest only upfront dollars, Fund1 is surely better

13


▪What if I invest $10k a year?

14


▪ I’d then end up with $233k from Fund1, and $258k from Fund2!!

15

“Dollar Cost Averaging”

▪ A standard investors’ goal should be: buy low, sell high

▪ Sounds good in theory

▪ Easier said than done

▪ “Market timing” can be treacherous

▪ But by investing equal amounts over time, you’ll tend to naturally get more units for which you’ve bought low and eventually sold high, than vice versa

16

“Diversification”

▪ Buy lots of arguably sound financial instruments!

▪ Target-age funds, though, can help foster a long-term relationship with a tangible goal in mind

▪ Here’s the basic idea . . . .

17


▪ An investor with 30 years to retirement might be shown this, regarding an Equity fund: *

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

1 2 3 4 5 6 7 8 9 101112131415161718192021222324252627282930

Retirement Fund Over 30 Years - $10k per Year

5th Median 95th

*Note: from here on, all examples assume 7% mu & 16% sigma for Equity. 4% each for Fixed.

18


▪ Demonstrates the power of periodic Equity investing in the long term

▪ The median return looks great (not to even mention the 95th %-ile)

▪ Even the 5th %-ile shows at least some positive growth

▪ With a 30-year horizon, plenty of time to re-think, if early returns disappoint

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

1 2 3 4 5 6 7 8 9 101112131415161718192021222324252627282930


5th Median 95th

19


▪ The situation is quite different in year 25, assuming median growth thus far

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

1 2 3 4 5 6 7 8 9 101112131415161718192021222324252627282930


5th Median 95th

20

“Diversification” – 50% Fixed

▪ For some, it might make great sense to narrow the ultimate outcome range

21

Lessons Learned . . . .

▪Planning for equal transactions over time = “Good”

22



▪Diversification into Fixed = “Safety”

23



▪Diversification into Fixed = “Safety”

▪What could possibly go wrong?

▪Which one is better? Why?

24


▪ What if I have $200k, and plan to w/d $18k/yr (total $252k) for 14 yrs?

25


▪ The blue fund (4%/yr) works perfectly; the red one (~6.5%/yr) runs out in yr 11

26


27

Retirement Disaster

▪ My accumulation-phase red line was quirky – possibly misleadingly so

▪ The payout-phase one was just an S&P500 starting point of Jan 1, 2003 (which is by NO MEANS worst case!)▪ Not too quirky at all, really

▪ In fact, it could be reasonably viewed as an average to good-ish real-world scenario

▪ Yet it led to retirement disaster

28

Retirement Disaster

▪ My accumulation-phase red line was quirky – possibly misleadingly so

▪ The payout-phase one was just an S&P500 starting point of Jan 1, 2003 (which is by NO MEANS worst case!)▪ Not too quirky at all, really

▪ In fact, it could be reasonably viewed as an average to good-ish real-world scenario

▪ Yet it led to retirement disaster . . . b/c of timing

29

Topics

▪Changing the Odds

30

What is going on?

▪ “Reverse Dollar Cost Averaging”

▪ In a spiky market, if you are in the payout phase, taking annual income:

▪ You likely intend to withdraw equal amounts periodically – a standard retirement goal

▪ You may find it tough to adjust your income down by 40% if the market drops that much

▪ This will tend to cause you to sell the most units in market downturns, depleting your account rapidly in the worst possible scenarios

31

What can we do about it?

▪ Option 1: Meet our entire income need using a DIA/SPIA or a GLWB

▪ Positive: Fully guaranteed at amount planned

▪ Negatives: May result in very little left in accumulation accounts

Other risks may bite in this scenario, inflation being one key example

Nothing left for emergency needs

“Loss of control of funds,” aka liquidity risk

32

What can we do about it?

▪ Option 1: Meet our entire income need using a DIA/SPIA or a GLWB

▪ Positive: Fully guaranteed at amount planned

▪ Negatives: May result in very little left in accumulation accounts

Other risks may bite in this scenario, inflation being one key example

Nothing left for emergency needs

“Loss of control of funds,” aka liquidity risk

▪ The latter is very important to agents!!

33

Can we do better?

▪ I believe we can, via a more limited allocation to SPIA/DIA

▪ I will set up a case study to demonstrate:

▪ 30-year certain-period analysis (close to life expectancy of a 60-year old, but easier to grasp)

▪ Simulation based on independent lognormal annual returns, w/ parameters “mu” and “sigma”

Mu’s from 5-7%, net of expenses & fees

Sigma’s from 10-16%

▪ Varying planned withdrawal amounts

34

Can we do better?

▪ Assume that the policyholder has a planned withdrawal % of account value

▪ They will alter the $ amount as A/V varies

▪ (A “SWiP,” or Systematic Withdrawal Program)

▪ This changes the Lognormal net “Mu” only

▪ Cumulative returns then remain Lognormal

▪ Also assume that there is a minimum livable annual income of 70% of starting planned

▪ This gives us an array of “ruin” probabilities

▪ These can be used to compare strategies

35

Can we do better?

▪ For a 4.5% income strategy at Age 60, you get the following ruin probabilities:

36

Can we do better?

▪ A 5% income strategy at Age 60 produces results a bit more ominous:

37

Can we do better?

▪ Looking at those two parameters suggests something rather stunning, at least to me

▪ We’ve discussed the benefits of shifting fund mixes during the accumulation phase

▪ Does this work during retirement? No!

38

Can we do better?



▪ Does this work during retirement? No!▪ E.g., with 16% sigma and 7% net mu, a 5% w/d here comes

with an estimated 14.5% failure rate in year 15

39

Can we do better?





▪ By mixing in 33.3% fixed assets, I reduce sigma to 12% and mu to 6%, my failure rate drops to . . .

40

Can we do better?





▪ By mixing in 33.3% fixed assets, I reduce sigma to 12% and mu to 6%, my failure rate drops to . . . 13.8%

41

Can we do better?





▪ By mixing in 33.3% fixed assets, I reduce sigma to 12% and mu to 6%, my failure rate drops to . . . 13.8%

▪ Moral: We need to rethink “Safety”!

42

What do I do now, coach?

▪ This leads to an easy-to-grasp conception of the impact of adding a SPIA to an equity-based portfolio

▪ Say you have $100,000 invested in exactly the sort of fund projected in my scenarios, with the 30-year retirement horizon used

▪ You expect a net mu = 7%, Sigma = 16%

▪ Your desired income is $5k (w/ ruin at $3.5k)

▪ A retail SPIA is paying 6% per annum

▪ Clearly, using $83.3k to buy a SPIA would meet the entire desired income, with 0% risk

▪ But it would not leave much liquidity

43

And this matters because?

▪ But putting about $58.3k of your $100k in a SPIA has virtually the same risk impact!

▪ Why?

▪ It takes care of your “minimum income requirement,” leaving your liquid assets to hopefully cover the rest

▪ You have no chance of ever getting less than your $3,500 needed in any year – the SPIA ensures that!

▪ A 3.6% SWiP on your remaining liquid amount of almost $42k gets you to the desired $5,000 initially

▪ This deal makes it much more likely than “SWiP only” that the $ amount of the SWiP will grow over time

44

And this matters because?

▪ Generally, the best use under my assumption set (which is admittedly over-simplified) is when you have N years to go to retirement

▪ AT retirement, therefore a SPIA looks best

▪ But a DIA’s impact pre-retirement may be more pronounced than a SPIA at retirement:

▪ Because of the pre-retirement return volatility, a person retiring in 10 years has roughly double the ruin probability of a current retiree, if they stay in 100% Equity

▪ A 58% or so allocation to a DIA paying 12% of premium starting in year 10 still brings those to 0% 45

When Would a DIA be Better?

▪ In both cases, SPIA and DIA, the allocations can of course be lower:

▪ If the desired or minimum income levels are lower, or

▪ If the annuitant is willing to accept non-zero risk of ruin

▪ This lends itself to various sorts of tools that enterprising actuaries might develop for the field

▪ Such a tool would analyze allocations, using some optimization metric . . . .

46

Further Thoughts

▪ There are various other weapons in the annuity arsenal, which you’ve heard about, that could be applied

▪ Generally, GLWBs mimic either SPIA or DIA to some extent, depending on when they are first utilized by a client

▪ Are they better or worse than an Account Value / SPIA or DIA combo?

47

Further Thoughts

48

Topics

▪Educating “The People”

▪ Populace 1: Retirees

▪ Want to maximize value of accumulated assets

▪ Want to not outlive assets in decumulation

▪ Populace 2: Sales Force

▪ Want to maximize value of assets

▪ Want to maintain control of assets

49

First Question: Who is That?

▪ Populace 1: Retirees

▪ Want to maximize value of accumulated assets

▪ Want to not outlive assets in decumulation

▪ Populace 2: Sales Force

▪ Want to maximize value of assets

▪ Want to maintain control of assets

▪ Want to maximize value of assets controlled

50

First Question: Who is That?

▪ A mix of account value (“AV”) driven assets of some type with a SPIA/DIA is typically less risky than going full AV

▪ (The exception would be when the income % desired is higher than SPIA/DIA would provide)

▪ Outside of that exception, the client’s desire to not be starving at age 90 could make this an easy sell

▪ It should simply be a matter of assessing the client’s preferred risk (of AV depletion) level, and showing them how to achieve it

51

Retirees s/b easy to convince

▪ Payout (non-AV-driven) Annuities have long been equated with loss of asset control

▪ Ever hear of the term “annuicide”?

▪ Prospect of one last upfront commission at annuity date, has not been sufficiently motivational

▪ Any educational effort for the Sales Force has to focus at least as much on asset preservation as it does on retirement security

▪ Could be a misconception based on a “myth”

52

Sales Force may be less so

▪ What “myth” do we need to educate away to be successful in getting SPIA/DIA utilized?

▪ I hypothesize that it’s related to general human risk tolerance, but in an unusual way

▪ Let me ask you a few financial questions – Scenario 1:

▪ You get a $50 gift card from a friend

▪ When you go to the store to use it, the manager offers you a coin flip bet –tails you lose the card, heads he replaces it with a $100 one

▪ Do you take the deal or keep the original card?

▪ Second scenario:

• At a cousin’s birthday party, you find a $50 gift card on the floor

• Do you keep it, or tell the guest of honor? 53

Busting the “Myth”?

▪ Now how about this?

▪ You get a $150 red light camera ticket, which you know is bogus – there was a cop who waved you through, but he’s not in the photo

▪ The state allows you to settle things for $75 if you plead guilty & mail it in

▪ If you fight it, you estimate a 50% chance the judge will buy your story and let you off, but a 50% chance that you’ll now owe $150

▪ Do you take the $75 mail-in discount, or go fight the ticket in court?

54







▪ Here’s the thing: the first and third scenarios are stochastically identical

• Most of the time, response %s are different because in the third one, something is being “taken” from you and you become LESS risk averse in response, trying to fight to keep what’s yours

• The 2nd scenario was just so you wouldn’t notice, but if you turned in the gift card, take 5 minutes of professionalism credit

55







▪ Here’s the thing: the first and third scenarios are stochastically identical

• Most of the time, response %s are different because in the third one, something is being “taken” from you and you become LESS risk averse in response, trying to fight to keep what’s yours

• The 2nd scenario was just so you wouldn’t notice, but if you turned in the gift card, take 5 minutes of professionalism credit (kidding!)

56


▪ What “myth” do we need to educate away to be successful in getting SPIA/DIA utilized?

▪ I hypothesize that it’s related to risk tolerance

▪ “If I put 20% of my assets into a SPIA now, I’ll have only 80% left under my control.”

▪ “Something I had is being taken away from me.”

▪ “I’m willing to incur risk* to avoid that.”

▪ Is this analysis of the situation correct?

• In the very short term, yes, of course!!

• But it ignores the cash-flow picture of a 100% A/V strategy

*For my client, but also for myself, as we shall see! 57


▪ The following illustration assumes that the starting position is in a balanced (1/3 Equity, 2/3 Fixed) fund for “safety,” assuming 5% net AV growth w/ 8% vol, and the client wants a very typical 4% W/D

▪ Let’s assume that the agent is in “full control” of these funds – no CDSC or MVA, etc

▪ And let’s say his concern is this:

▪ He’ll get an upfront commission, roughly the same, on either a move into a final deferred annuity (remember DOL!) or a SPIA

▪ But on the deferred annuity, he’d get a 1% trail after year 7 – any SPIA money “loses out” on this

58

What is the “Myth,” Exactly?

▪ Here’s an illustration of where things might end up

59

Myth Busting

▪ I’ll note here that although I didn’t make a graph, the ruin odds for, say, 2/3 Equity aren’t as bad as you’d think, though in the tails, it accelerates a bit

▪ But your illustration system notes that with 20% in a SPIA paying 6%, one can invest the rest in 2/3 Equity, with better ruin probabilities throughout

▪ The SPIA takes care of 1.20% of the required w/d leaving only 2.8% to come from the fund

▪ The improved growth and lower w/d from the fund-value component illustrates very well!

60

Myth Busting

▪ Here is the revised illustration:

61

Myth Busting

▪ And here is what you may have missed . . . .

62

Myth Busting

▪ And here is what you may have missed . . . .

63

Myth Busting

▪ Can a Lifetime W/B benefit not accomplish the same thing, though?

▪ What if I illustrate a VAGLB that allows 4% W/Ds at our given issue age of 60?

▪ Presumably (in most cases, anyway), you still can’t be in 100% Equity

▪ Assume 2/3-1/3 again, and a fee of 100bp

64

Myth Busting

▪ Here is the VAGLB fund-value illustration:

65

Myth Busting

▪ The median return is worse off than the 20% SPIA/80% VA combo in years 12+

▪ All tail fund-value measures are much worse

▪ The tails are also, obviously, even more badly off over time than with the basic 4% w/d option

▪ It should be our job to get this word out to sellers

66

Myth Busting





▪ The policyholder ruin situation, though, is clearly superior with the VAGLB . . .

67

Myth Busting





▪ The policyholder ruin situation, though, is clearly superior with the VAGLB . . . or IS IT?

68

Myth Busting

▪ Why, come to think of it, are companies able to offer (despite the big tail risk and/or hedge costs, AND all that client liquidity) an income guarantee on a VA even remotely comparable to a SPIA?

▪ The only reasonable answer, I believe, is policyholder behavior

▪ The client and agent really should consider that risk aspect, too (and/or, what will happen to these benefits if policyholder behavior becomes broadly more efficient!)

69

Myth Busting

▪ FIA WB may be the worst case of all

70

Myth Busting

▪ You can improve your client’s ruin situation, AND your own long-term funds under control, by including some SPIA/DIA

▪ VAGLB and/or FIAWB show mixed results

▪ The client’s ruin risk can go to 0% IFF they use the benefit completely optimally; if not, who knows?

▪ Long-term fund values are generally worse; does client truly hope to live on their guarantee only?

▪ Moral: It makes tons of sense to mix some form of SWiP w/ SPIA/DIA!!

71

Myth Busting – Summary to Sellers

▪ I’ve ignored mortality today, because this session is mostly about financial risk

▪ However, it is conceivable that companies could assume higher mortality for lifetime WBs than for SPIAs and/or DIAs

▪ This, in combination with the behavior assumptions noted earlier, could create occasional situations where lifetime WBs pay more than SPIA/DIA

▪ This is worth considering, but the adverse side of behavior risk should nevertheless be part of the analysis

72

A final caveat

CONFIDENTIALITY Our clients’ industries are extremely competitive, and the maintenance of confidentiality with respect to our clients’ plans and data is critical. Oliver Wyman rigorously applies internal confidentiality practices to protect the confidentiality of all client information.

Similarly, our industry is very competitive. We view our approaches and insights as proprietary and therefore look to our clients to protect our interests in our proposals, presentations, methodologies and analytical techniques. Under no circumstances should this material be shared with any third party without the prior written consent of Oliver Wyman.

© Oliver Wyman

2© Oliver Wyman

Agenda

• Provide background of the NAIC VA reserve and capital reform initiative• Recap current state of the VA statutory balance sheet• Discuss recommendations for revisions to the current framework• Outline expected implications of revisions to VA industry

3© Oliver Wyman

Recent history of VA statutory reserve and capital standards

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Enactment of C3 Phase II for VA TAR

“Rise of VA captives”

• Poor alignment of statutory risk factors with economic – and GAAP – risk profile

• Increasing variation in company hedging objectives

• (Nearly) continuously falling interest rates

Timeline2006-2019

Enactment of AG 43 for VA reserves

NAIC commissions VA reform initiative

OW presents initial recommendations

QIS I QIS II

OW presents final recommendations

4© Oliver Wyman

Overview of the current VA statutory reserve and capital framework

Total Funding Requirement

Total Asset Req.(C3P2)

Reserves(AG43)

C3P2 Standard Scenario C3P2 Stochastic AG43 Stochastic AG43 Standard Scenario

CTE 90 “Best-efforts” run

CTE 90 “Adjusted” run

CTE 70 “Best-efforts” run

CTE 70 “Adjusted run

MAX

MAX MAX

Weighted avg. Weighted avg.

Difference between TAR and reserves, if positive, is the

RBC C3 charge

5© Oliver Wyman

The statutory balance sheet is characterized by asymmetric accounting, non-harmonized assumptions, and unstable reserve vs. capital boundary

Total Asset Requirement

(“TAR”)

Separate account value

Fair value of hedge assets

Assets Liabilities

Other GA assets

Statutory reserve

General account assets• Derivatives held at fair value

• Other assets mostly amortized cost

Required capital for

market risk

1

2

3

1

2 Statutory reserves• Entirely not fair value

– 50-70% of FV equity sensitivity– 10-20% of FV interest rate sensitivity

• Not comparable across companies

3 Required capital for market risk• Arithmetic difference between TAR and reserves, which have

dissimilar levels of market sensitivity

• Highly volatile, but reduced by voluntary reserves dollar-for-dollar

Volatile boundary

Surplus

Assumed long-term 20-yr. UST in industry

2 3 5 2 3

<4.0%4.00-4.49%4.50-4.99%5.00-5.49%≥5.50%

6© Oliver Wyman

To address these shortcomings in the current VA statutory framework, Oliver Wyman recommended five types of framework revisions

Shortcomings in the current framework Framework revisions

Economic-based hedging can adversely impact statutory financials Align economically-focused hedge assets with liability valuations

Volatile interactions between stochastic and Standard Scenario calculations

Reform Standard Scenario calculationsStandard Scenario is excessively conservative in some areas and aggressive in others

Volatile interactions between reserves and TAR, incentivizing voluntary reserves Align TAR and reserves

Derivative admissibility limits prevent hedging benefit from being fully recognizedRevise asset admissibility for derivatives and DTAs

DTA admissibility limits exacerbate mismatches between statutory and tax accounting

Companies use different capital markets assumptions for scenario generation Standardize capital markets assumptions

1

2

3

4

5

7© Oliver Wyman

The revisions align asset-liability valuations, stabilizes the boundary between reserves and capital, and removes incentives for using voluntary reserves

CTE 98



Assets Liabilities

Other GA assets

Statutory reserve

Required capital

1

2

Surplus 3

¼ × (1 − Tax Rate) ×(CTE 98 − Reserves)

General account assets• Hedge assets carried on a similar valuation basis as liabilities

• Other assets mostly amortized cost

1

2 Statutory reserves• If hedging fully: market-sensitivity aligned with fair value

• If not hedging: similar market-sensitivity as current framework

Revised Standard Scenario reserve floor

• Essentially CTE reserve with prescribed actuarial assumptions, calibrated based on industry data

3 Required capital for market risk• More stable, as CTE 98 and CTE 70 reserve have similar levels

of market sensitivity

• Requires $4 of voluntary reserves to reduce each $1 of C3

8© Oliver Wyman

What a “400% RBC” VA balance sheet looks like under today’s IR conditions

Total Asset Requirement (100% RBC)



Assets Liabilities

Other GA assets

Statutory reserve

(CTE 70)

CTE 98



Assets Liabilities

Other GA assets

Statutory reserve

(CTE 70)

Current framework Revised framework

Surplus or voluntary reserve

Hedging increases TAR – and therefore assets required for 400% RBC

Voluntary reserve

Hedging reduces CTE 98 – and therefore assets required for

400% RBC

Total Asset Requirement (100% RBC)

9© Oliver Wyman

Expected implications of the framework revisions on the VA industry

Implication Description

1 Increase in minimum funding required to meet target RBC ratio

• Harmonized interest rate scenarios are more adverse than many companies’ current assumptions

• Reduced capital benefit from voluntary reserves

• Partially offset by removal of Working Reserve, hedge run-off, and current Standard Scenarios

2 Greater incentives for more extensive economic hedging

• Current framework penalizes full economic hedging; thus, optimal strategy is to hedge partially

• Under revised framework, full economic hedging minimizes balance sheet volatility and target funding for a typical target RBC ratio

3 Reduced need for large capital buffer to maintain target RBC ratio, if hedging

• Total balance sheet volatility reduced for companies with extensive hedging

• Full economic hedging eliminates need for capital buffer, as hedge gains would fully offset liability movements in stress

4 Reduced proposition of VA as a capital-efficient vehicle for market risk-taking

• Current framework allows capitalization for unhedged VA market risk to be below fair value of guarantees in low interest rate environments

• Revised framework requires capitalization to be near fair value of guarantees in most interest rate conditions to achieve a typical target RBC ratio

5 More level playing field across carriers • Reserve and TAR floored at levels calculated using prescribed market and actuarial assumptions

Summary of recommendationsAppendix

11© Oliver Wyman

Summary of recommendations1 of 2

Framework Recommendation

CTE Amount Use VM-20 scenario generator for interest rate scenarios

Use VM-20 scenario generator for separate account returns, but recalibrated based on data from 1926 to 2016

Allow companies to use proprietary scenario generators if – and only if – they do not reduce Total Asset Requirement

Introduce principles to govern implied volatility scenario generation, with a “safe harbor” approach provided

Remove the Working Reserve when calculating scenario GPVAD

Discount deficiencies at the Net Asset Earned Rate on Additional Assets

Follow VM-20 guidance on general account asset projections, with additional constraint on borrowing cost

Permit immediate liquidation of currently-held hedges and non-reflection of mark-to-market hedge gains and losses

Reduce minimum allowable CDHS “error factor”, but require back-testing disclosure to support chosen “error factor”

Differentiate treatment of non-guaranteed revenue sharing income by affiliated funds vs. non-affiliated funds

Standard Scenario Amount

Align AG43 Standard Scenario calculations with CTE (“adjusted”)

Remove the C3 Phase II Standard Scenario

Project Standard Scenario on an aggregated basis, but with disclosure of aggregation benefit observed

Refresh prescribed policyholder behavior assumptions to align with industry experience

Use the Standard Scenario construct to govern model choices and actuarial assumptions only, via a reserve “add-on”

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12© Oliver Wyman

Summary of recommendations2 of 2

Framework Recommendation

Standard Scenario

Calculate Standard Scenario based on company-specific market paths (selected from a panel of standardized paths)

Allow the Standard Scenario Amount to be calculated as a CTE Amount with prescribed assumptions

C3 charge Calculate C3 as the difference between total statutory reserve and CTE 95 on same distribution

Permit smoothing to be conducted on the C3 charge, but not on the Total Asset Requirement

Disclosure requirement

Disclose Sharpe ratio and correlations for all funds not generated by mapping to the VM-20 scenario generator

Disclose modeled vs. actual hedge performance over the past 12 to 36 months for explicit CHDS reflection

Disclose historical Greek coverage over the past 12 to 36 months for implicit CDHS reflection

Disclose positioning of the dollar amount of CTE (“best-efforts”) relative to the unhedged CTE and fair value

Disclose a “cumulative decrement” analysis under companies’ own and prescribed Standard Scenario assumptions

Other topics Increase admissibility limit for designated VA hedges

Increase admissibility limit for VA-related DTAs

Endorse hedge accounting for interest rate derivatives that are part of VA hedge programs

Allocate aggregate reserve to seriatim level based on Present Value of Accumulated Product Cash Flows

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QUALIFICATIONS, ASSUMPTIONS AND

LIMITING CONDITIONS

This report is for the exclusive use of the Oliver Wyman client named herein. This report is not intended for general circulation or publication, nor is it to be reproduced, quoted or distributed for any purpose without the prior written permission of Oliver Wyman. There are no third party beneficiaries with respect to this report, and Oliver Wyman does not accept any liability to any third party.

Information furnished by others, upon which all or portions of this report are based, is believed to be reliable but has not been independently verified, unless otherwise expressly indicated. Public information and industry and statistical data are from sources we deem to be reliable; however, we make no representation as to the accuracy or completeness of such information. The findings contained in this report may contain predictions based on current data and historical trends. Any such predictions are subject to inherent risks and uncertainties. Oliver Wyman accepts no responsibility for actual results or future events.

The opinions expressed in this report are valid only for the purpose stated herein and as of the date of this report. No obligation is assumed to revise this report to reflect changes, events or conditions, which occur subsequent to the date hereof.

All decisions in connection with the implementation or use of advice or recommendations contained in this report are the soleresponsibility of the client. This report does not represent investment advice nor does it provide an opinion regarding the fairness of any transaction to any and all parties.

How Can We Win Over The Sales Force?

Chris Bartak

• Independent annuity agent channel & business model

• Product selection from an agent point-of-view

• Trends and (limited!) predictions for the future

Topics

• View is particular to my experience in this channel at this point in time

• Tilted towards Fixed Indexed Annuities, planning goes beyond that

• Specific examples hypothetical / representative

Disclaimers & Caveats

Parties & Terms

Client Agent FMO Carrier

CustomerConsumerRetiree

ProducerAdviser(or)

Field Marketing OrgIndependent Marketing Org(IMO)Wholesaler

Insurance CompanyUnderwriterProduct Manufacturer

1. Client

• In or near retirement, Age: 55-85, median ~63

• 500k - $2M in investable assets

• Current Adviser & Portfolio

Typical Profile

1. Retirement income planning2. Market volatility3. Social Security planning4. Longevity5. Legacy6. Impact of Long Term Care expenses7. Tax planning (RMDs)8. Accumulation of assets9. Inflation

Client ConcernsOne or more of:

2. Agent

• Prior experience

• Business Structure– Solo– Development of team

• Specialization

Profile

Business Flow

• Most difficult & expensive part of business

• Cost of customer acquisition drives the entire model

• Effective methods evolve over time, successful ideas can hit “capacity”

Direct Consumer Marketing

Direct Mailer to prequalified prospects– <1% response rate; several thousand / event– Invite to dinner event & presentation on topic of

interest to retirees– Clear language that annuities and other insurance

may be discussed, but no sales will be made at event– RSVP process

Ex. Funnel – Seminar Marketing

Event– Mid to high end restaurant– 15-30 attendees– Educational presentation; typically focused on one-or-

more of previous “client concerns”– Entirely group based– One-One appointment follow up process

Seminar Marketing part 2

Other marketing funnels1. Radio - shows / ads2. Television3. Book4. Referrals

– Much more than “have any friends?”– Proactive campaigns, events, community building

Client-Agent Meeting / Planning Process

Less More

Planning Process1. Typically multiple appointments

2. Most securities licensed & do comprehensive review of entire financial plan

– Investments– Income– Insurance

Example Planning Outcomes1. Not a fit, go separate ways2. Income

– FIA with GLWB to provide core pension-like income3. Accumulation

– No fee FIA as safe money bond alternative4. Legacy

– Leverage unneeded RMDs into legacy

Post Sale Service1. Annual reviews

2. Portfolio management

3. Policy service – withdrawals, rider utilization, claims, etc

3. FMO

Core Purpose #1Help agent support & grow their business

– Product access & education– Operations back office– Compliance / suitability– Materials, websites, brochures, brand– Coaching, development– Technology (electronic application, statement

aggregation, etc)

Core Purpose #2Deliver quality business to Insurance Carrier

– Efficiently market on a variable cost basis– Pre-screen and deliver apps IGO– Compliance / Suitability – Point of contact for agent

4. Carrier

First, do no harm

– Marketing materials accurately & simply describe products

– Website works, phone gets answered– New business ops & inforce service– Renewals & other non-guaranteed elements– Credible management– Vision for future

Second, win on customer value

– Though actual client facing sale may or may actually not be competitive, agents act as if it is• Agent typically has access to large number of carrier• Product flows & behavior chase strongest benefits

– Compensation?

Future

• Development from “annuity sales” into full service planners– RIA Platforms

• DOL• Technology

– 2018 large shift towards e-app– Integrated planning, CRM, reporting software

Trends

Douglas L. Robbins

May 9, 2018

The Science Behind Securing the “Golden Years” –Case Study

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Let’s use a more realistic look at “Ruin”

▪ No more “30-year certain” look

▪ We will instead use 70% of a2000 mortality, for simplicity (rather than messing with improvement factors)

▪ If the fund runs out, ruin now occurs with probability tPx

▪ Same fund characteristics, in terms of balancing Equity and Fixed

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Assume an Agent has a Potential Client

▪ Post-DOL world▪ Presume that one goal is to give advice that is unlikely to

be said to have failed in retrospect

▪ Agent and client basically agree on <2.5% P(Ruin)

▪ Client has $100k to invest

▪ Client is age 60 and plans to begin taking Social Security at 67

▪ Non-SS Income need is stated as $7.2k per year until 67, and $3.2k thereafter

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Chart of Income-Need Problem

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The Agent has 4 Relevant Key Tools

▪ 1. A Variable Annuity with a 7-yr CDSC, Comp of 5% now and 1% trail yrs 8+

▪ 2. Same, w/ 4.25% W/B rider for 150bp

▪ 3. A SPIA that pays 5% per year, and has 5% comp upfront, only

▪ 4. A DIA that pays 8.5% per year starting in year 8, also with 5% comp upfront

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The Agent’s Prior Practice was SWiP

▪ Would have used 20% Equity, 80% Fixed

▪ By using the Monte Carlo tool you’ve designed, they find that the probability estimate of ruin for that is about 8.3%

▪ The tool allows them to monkey with the fund mix, to little avail▪ Best case is 90% Fixed, still with P(Ruin) over 8%

▪ Reasonably close at 80% Fixed, so that is “Base”

▪ Median Base PV of Trail comp @3% = $11.0k

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What are some other options?

▪ Use some % of SPIA to underlie the entire series of cash flows

▪ Use some % of DIA to underlie the post-Age67 cash flows

▪ Use the VA, and include the VAGLB Rider:▪ Presume efficient policyholder behavior

▪ This rules out use for the pre-SSA excess amount, since this payout must be level

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An Effective Tool would Have a “Solve”

▪ I won’t go into all the detail today of what that might look like

▪ Essentially, though, this study will look by hand at some options that attempt to meet the client’s agreed upon Ruin need

▪ Of those options, we will attempt to maximize the PV of trail comp

▪ You can quickly see a couple general trends▪ More SPIA at the same Equity Mix reduces both Ruin% and PV (Comp)

▪ More Equity at the same SPIA mix does the opposite

▪ Ruin, once you’re at least partly into a SPIA, doesn’t mean the same thing as it does in a pure SWiP

▪ In Case 6*, Ruin ~= running out of “extra money”9

Here is a Chart w/ Inclusion of some SPIA

▪ DIA seems to be more helpful▪ The risk of Ruin in years 1-7 isn’t great if you don’t overspend on DIA

▪ The DIA structure, in this case, provides cheaper out-year protection

▪ In this case the Post-Ruin Outcome* is only true at ages 67+ -- this should be carefully conveyed

▪ Case 6** Ruin is similarly described as with SPIA

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Here is a Similar Chart for DIA

▪ I’ve expressed the fund-value component in terms of selling agent’s perspective, but it also measures likely “extra money” that a given policyholder will have around

▪ Something like this would be pretty easy to automate, and solve for a best possible outcome, assuming chosen conditions

▪ All outcomes are, of course, dependent on input market assumptions and SPIA/DIA rates; in my example, DIA was the “best deal”

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Important Follow-On Considerations

▪ The non-level income desired, and desire to use any VAGLB efficiently, rule out keeping 100% of funds in a VA

▪ Assume the extra $28k of withdrawals needed pre-age 67 can be bought for ~$25k at issue

▪ The remaining premium can fund the $3.2k per year as an efficient withdrawal stream

▪ The PV(Comp), with 0% chance of “ruin” in that case is $10.0k, better than SPIA options, but below best-case DIA

▪ Again, “ruin-free” assumes perfect utilization!

▪ And the probability of “extra money” going to $0 is 26%!!

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What About the VAGLB Option?

▪ Although it may seem like it, the goal of this study wasn’t to extol one form of guaranteed income over another

▪ It’s to argue that we can better educate, and design better tools for, the field, in this general area of practice

▪ I believe this is how we will ultimately best serve our true end clients

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Conclusion

Annuity-Based Solutions: Securing the 'Golden Years' Seminar · Annuities include all fixed and...

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