© 2014 Oliver Wyman

Guillaume Briere-Giroux, FSA, MAAA, CFA

Indexed Annuity Risk Management Strategies

2014 SOA Annual Meeting & Exhibit

Orlando – October 28, 2014

© 2014 Oliver Wyman 1 1 © 2014 Oliver Wyman

Agenda

I. Risk and pricing paradigm

II. Product strategies

III. ALM and hedging strategies

IV. Key takeaways

2 2 © 2014 Oliver Wyman

Introduction to fixed indexed annuity (FIA) market risks Interest rate and credit risk are the primary FIA market risks

Product Credit Interest rates Equity Volatility

Fund

correlation /

basis risk

Base FIA

FIA GLWB

VA GMAB

VA GLWB

VA GMIB

SPIA

High

Low

Risk level

Risk and pricing paradigm

Unlike VA GLWBs, primary market risks on FIAs are “traditional ALM” related and carriers

expect to hold most of the supporting assets to maturity

3 3 © 2014 Oliver Wyman

Introduction to FIA insurance risks Lapse and benefit utilization are the primary FIA insurance risks

High

Low

Product Longevity Base lapse Dynamic lapse Withdrawals or

annuitization Morbidity

Base FIA*

FIA GLWB*

VA GMAB

VA GLWB

VA GMIB

SPIA

*With nursing home surrender charge waiver (base FIA) and nursing home benefit (FIA GLWB)

Risk level

Like VA GLWBs, FIA GLWBs are typically modeled with a cohort-based approach

Risk and pricing paradigm

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Overall, FIA GLWBs and VA GLBs have different risk management frameworks and pricing paradigms

Real World Risk Neutral Value lenses

Sim

ple

C

om

ple

x

Dynamic policyholder behavior

Static behavior scenarios

None

Behavior “scenarios”

Size of bubbles represents order

of scale for recent new business

volumes (LTC converted to

single premium equivalent)

Sales data from LIMRA

Dete

rmin

istic +

sensitiv

itie

s

Sto

chastic

Neste

d

sto

chastic

Dete

rmin

istic

Integrated dynamic behavior scenarios

Eco

no

mic

scen

ari

os

“Integrated dynamic behavior scenarios” consist of multiple behavioral paths, which are each

impacted by emerging conditions within individual economic scenarios

Risk and pricing paradigm

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Pricing framework

Product Stochastic equity

returns (RW)

Stochastic interest

rates (RW)

RN cost of

guarantees Behavioral cohorts Dynamic behavior

Base FIA

FIA GLWB

VA GMAB ?

VA GLWB

VA GMIB ?

SPIA ?

Risk and pricing paradigm

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Base product design strategies

Product strategies

Base design strategy Features Implications

1 Volatility control

indices

• Uncapped with spread methods

• Dynamic rebalancing

• Proprietary indices

• Length of term varies

• Economics

• Statutory

• US GAAP

• Risk management

2 VA / FIA hybrids

• “VA like” or “FIA like”

• Registered

• Floors less than zero

• “Buffers” or “floors”

• Higher upside

• Economics

• Statutory

• US GAAP

• Risk management

Base designs are becoming more complex!

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Benefit rider strategies

Product strategies

Rider design strategy Features Implications

1 Indexed-linked

income

• “Stacked” rollups (e.g. 4% + index credit)

• “Turbocharged” account value driving income

• Income increases after income start

• Economics

• Statutory

• US GAAP

• Hedging and risk management

2 Differentiation of

riders

• Variation in income structures

• Incremental changes in guaranteed income

• Economics

• Policyholder behavior

Riders are becoming more complex!

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ALM and hedging strategies are evolving to balance multiple risk drivers and constraints Accounting volatility is a “hot topic” for FIA carriers

ALM and hedging strategies

AG 33 / AG 43

Interest-sensitive

policyholder behavior

SOP 03-1 for GLWB

FAS 133 for base contract

Economics

Policyholder behavior sensitivity

to in-the-moneyness

Not so long ago, hedging indexed annuities was relatively simple: not so much now!

Target volatility indices

Hedge notional

management

ALM

Hedging

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Key takeaways

1 FIAs and VAs have distinct risk and pricing paradigms

2 New features are complex but help better balance constraints

3 Hedging and ALM targets are becoming multi-dimensional

Key takeaways