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www.rgare.comThe security of experience. The power of innovation.
How the financial crisis and impending accounting changes will change insurance productsGreg Goodfliesh
FSA
Vice President & CMORGA Reinsurance Company Japan Branch
2009.06.29
2
What we’ll cover
I.
The BackgroundII.
Case Study: Australian experience
III.
Products themes for the new worldIV.
Annuitization
–
An opportunity for
the global insurance industryV.
Challenges in Japan
VI.
Conclusions
3
I. Background
•
Internationalization of the world financial markets and other factors have led to increased volatility
•
Current accounting standards in Japan can give results that do not accurately show the underlying risks to which companies are exposed
•
Current solvency standards in Japan do not recognize all the risks companies are taking
4
I. Background
•
We don’t know when the accounting and solvency standards will change
•
We don’t know exactly how they will change
•
It is likely that new accounting standards will be based on market values
•
It is also likely that new solvency standards will be economic based
5
I. Background
•
Shareholders want stable earnings!•
Unhedged or unmatched positions in a market value accounting system could cause severe and immediate pain for insurance companies.
•
Your cost of your capital could be materially higher then your competitors if your balance sheet is more volatile.
6
“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing,”
7
"We finished the year, and we reported that we had $17 billion of cash sitting at the bank's parent company as a liquidity cushion. As the year has gone on, that liquidity cushion has been virtually unchanged."
8
“Good insurers accept only those risks that they are able to properly evaluate (staying within their circle of competence) and that, after they have evaluated all relevant factors including remote loss scenarios, carry the expectancy of profit. These insurers ignore market-share considerations and are sanguine about losing business to competitors that are offering foolish prices or policy conditions.They limit the business they accept in a manner that guarantees they will suffer no aggregation of losses from a single event or from related events that will threaten their solvency. They ceaselessly search for possible correlation among seemingly unrelated risks.”
9
II. Case Study -
Australia
•
In the late 80’s and early 90’s-
life insurance market was dominated by •
Complex products combining investment and insurance components
•
Products with long term guarantees (e.g. Whole Life)
•
Very similar to Japan today
•
Sales of these complex products were decreasing
10
Accounting
•
Accounting framework transitioned from a book value basis to a model similar to IFRS Phase 2.
•
Solvency framework transitioned to a model somewhat similar (but not nearly complex) as Solvency 2.
•
Did that spell the end of the insurance industry in Australia?
11
Consistent Growth in Australian Life Market
-
1,000
2,000
3,000
4,000
5,000
6,000
Dec-9
6
Jun-
97
Dec-9
7
Jun-
98
Dec-9
8
Jun-
99
Dec-9
9
Jun-
00
Dec-0
0
Jun-
01
Dec-0
1
Jun-
02
Dec-0
2
Jun-
03
Dec-0
3
Jun-
04
Dec-0
4
Jun-
05 Dec-0
5
Jun-
06
Dec-0
6
Inflo
ws ($
m)
Indiv
Death & TPD Indiv
Dis
Inc Ins Group Risk
Source: Merill
Lynch, Plan for Life
12
New Sales through Australian IFA Channel (A$ million)
35.847.2 47.4
41.4 38.944.8 46.7 45.0 40.3
46.5 48.9 49.742.8
53.0 58.1 61.2
19.1
27.0 26.7
23.522.0
25.5 26.1 24.422.4
25.726.5 26.8
24.1
29.832.8
33.4
7.2
10.0 7.9 10.4
9.6
13.0
12.712.4
-
20.0
40.0
60.0
80.0
100.0
120.0
Q1 2005Q2 2005Q3 2005Q4 2005Q1 2006Q2 2006Q3 2006Q4 2006Q1 2007Q2 2007Q3 2007Q4 2007Q1 2008Q2 2008Q3 2008Q4 2008
<January 2005 to December 2008>
MT –
Advisor Driven
Income Protection
Lump Sum Source: NMG Consulting
13
New Sales through Australian Bank Channel (A$ million)`
20.1 24.3 26.0 26.8 26.4 27.0 24.5 27.3 28.7 25.2
5.06.6 6.5 6.3 7.8 6.5 7.0
8.4 8.78.4
1.72.1 1.9
1.625.5
29.5
38.1 40.543.3 41.2 40.6
43.648.0 53.0
-
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
100.0
Q3 2006
Q4 2006
Q1 2007
Q2 2007
Q3 2007
Q4 2007
Q1 2008
Q2 2008
Q3 2008
Q4 2008
<July 2006 to December 2008>
MT –
Advisor Driven
Income Protection
Lump Sum
CCI
Source: NMG Consulting
14
How did the market thrive
•
Guarantees dramatically curtailed•
Products were simplified
•
Regulatory focus on quality of advice•
Greater training of agents
•
Larger sum insured’s sold to meet clients need
•
Industry focus on underinsurance
15
How did the market thrive
•
Focus on new distribution of risk products•
Independent agents, Bancassurance, Internet
•
Focus on making insurance sales easier for agents•
E-Underwriting, instant issue with no wet signature, etc…
•
Vibrant group market developed•
All players in a given industry will have insurance cover
16
Is the Australian model applicable to Japan?
•
In some ways yes•
In other ways no•
Guarantees do not have to be removed completely. There is a desire and need on the part of the public for some guarantees.
•
However, companies should limit volatile risks you can not hedge externally or internally (i.e. diversify away)
17
Traditional Product Shift? Allianz — …The deteriorating market conditions also made the sale of investment oriented products difficult — particularly through the banking channel. By contrast, business with traditional life insurance products remained stable. Source: Annual General Meeting of Allianz SE on April 29, 2009. Report by the Chairman of the Board of Management, Michael Diekmann of the development of the business Aviva — The company’s Annual Report for 2008 reported that growth in life and pension sales was offset by a fall in the sales of investment products. ING — …the crisis has created a shift in customer demand towards products that offer wealth-protection and risk reduction. Source: ING Group, Annual Report 2008 Zurich — Zurich Financial Services Group, in its Annual Report for 2008, reported an increased demand for protection products in its Global Life segment towards the end of 2008. AEGON — AEGON reports that their strategy in the United Kingdom is to move more of the business to higher-margin areas, such as annuities and protection products.
18
III. Product themes for the new world
•
Theme #1 –
Link unhedgable
portion of benefits to external indices
•
Theme #2 –
Extreme tail risk remains with the policyholder
•
Theme #3 –
Allow flexibility within product structure to manage tail events
19
Theme #1 –
Index unhedgable benefits
•
Whole life policies are unhedgable
in Japan (liabilities longer than assets)•
Rather than guaranteeing premium rates for life, only guarantee for 20 years, then reset future premiums to swap yields at year 20
•
Policyholder retains upside if interest rates increase. This would likely illustrate very well in today’s interest rate environment
•
Insurer retains a smooth earnings profile (with all associated benefits)
20
Theme #2 -
PH keeps tail risk
•
Vanguard issues a lifetime annuity in the US where payments increase with inflation, up to a cap
•
New York Life sells a term to age 90 policy where the rates are only guaranteed for a certain number of years
21
Theme #3 –
Product Flexibility
•
Some charges for optional benefits (GMxB) in the US can be changed up to a maximum amount
•
The crediting rate on many fixed annuities or UL products in the US can be adjusted annually down to a minimum level
22
IV. Annuitization
–
An opportunity for the global insurance industry
•
Globally there will be many people that are at a high risk of outliving their income
•
Japan is in better shape then some countries due to the National Pension and Employee’s Pension
•
However•
National Pension is very small
•
Employee’s Pension doesn’t cover all workers•
Will the pension schemes survive as the population declines?
23
24
Problems with Lifetime annuities
•
Customers don’t like them•
Worried about illiquidity
•
Don’t understand longevity•
Sales agents don’t like them•
Once money is locked up in a lifetime annuity, they can no longer provide advice on the funds under managment
•
Insurers don’t like them•
Not enough experience in older age mortality
•
Anti-selection currently exists when only healthiest of lives are purchacing
25
Why we need lifetime annuities
•
Customer•
Only privately sold product that will guarantee income for life
•
Government•
Eases pressure to provide for people that outlive their income
•
Insurers•
Only insurers can sell this product
•
Diversifies existing book (very important under Solvency II)
26
Action needed
•
Insurance industry must lobby the government •
Focus argument on preventing the population from outliving assets
•
Goal is•
Simple tax benefits for purchase of annuities or;
•
Mandatory purchase requirements from DC plans
27
Remember Theme #2 – Policyholder keeps the tail risk
•
Perhaps cap annuity payments at age 100?
In 2000, there were 70,000 people in the US that were aged 100 or greater. In 2050, this could figure could be as high as 2.4 million (1% of US population).
Source: Society of Actuaries, Living to 100 and Beyond: Implications for
Retirement
RECORD, Volume 28, No. 3
28
Remember Theme #1 –
Index unhedgable
benefits
•
Perhaps link the payments to industry wide mortality improvement•
If population mortality improvement is above some level, then payouts are reduced past some age (e.g. 90)
29
V. Challenges in Japan
•
Product approval process can be long
•
New product ideas aren’t easily approved
•
The current approval process seems to favor
guaranteed elements
•
Difficult to facilitate change in large companies
30
VI. Conclusions
•
Companies that prepare for the upcoming accounting changes will have huge competitive advantages
•
The time to prepare is now
•
Product development and delivery strategies are part of this preparation
•
Lifetime annuities are needed, do not let this opportunity pass you by
