VA Writers Cut Benefits in 2011 to Reduce Exposure
|By Fran Lysiak|
|A.M. Best Company, Inc.|
Amid 2011's sharply volatile equity markets, some U.S. variable annuity writers have cut policyholder benefits to reduce their own financial exposure or exited the market. Regulatory changes were cited by two Canadian writers,
Heightened equity market volatility and low interest rates negatively impacted
Under the Canadian mark-to-market accounting regime, the future impact of equity market and interest rate levels measured at the close of the quarter are present valued and reflected in the current period income,
In 2011, Canadian insurers could adopt the Canadian version of IFRS, according to
"Accounting rule changes play a part of any strategic decision" but it's not the only factor, Hawkins said. For example, the ability to generate sufficient returns, or spreads, on fixed investments to support product pricing is a consideration.
Some variable annuity insurers are reducing guaranteed rates on guaranteed lifetime withdrawal benefit riders while others are developing new indexed annuities to broaden their portfolios, Hawkins said.
The top variable annuity sellers --
Multinationals have already diversified from variable annuities, or are moving in that direction,
Consumers in many other countries are less risk adverse, and don't need guarantees, so consequently a certain amount of capital "goes much further than in
"Due to volatile equity markets and the historically low interest rate environment that is expected to continue for an extended period of time,
Canadian regulatory capital requirements are about twice the level of capital held by U.S. companies, Lakenbach said. "Considering hedging costs, the value of the product to the company is low," he said. Between fund fees and rider charges, the customer pays about 400 basis points, Lakenbach said.
Before the financial crisis of 2008, variable annuity writers were competing intensely to offer better withdrawal benefits for life. But when the markets headed sharply south in the fall of that year, companies had to re-assess their offers, according to Conning. The guarantees of locked-in income were great for policyholders who saw their contract values rapidly decline. But most insurers have scaled back benefits and/or raised fees on new contracts since then.
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