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Ruminations, Reflections from the 2015 SOA Annual Conference


I got back this Wednesday from the Society of Actuaries’ Annual Conference held this year in Austin, Texas and thought I’d share some of my takeaways from the event.

I was privileged to speak on a panel that covered annuity product trends so I’ll start with a few things I learned from that experience. Moderator Simpa Baiye of PricewaterhouseCoopers LLP did a great job of covering big-picture economic trends affecting the annuity business as a whole. I then handled the VA part of the presentation, while Sheryl J. Moore, founder and principal of several businesses servicing the index-annuity space, such as Moore Market Intelligence and Wink, Inc., gave the FIA portion of the content.

Sheryl provided some clarity on a few perceptions I had about what’s going on in the FIA market. One was that I was under the impression that FIAs are grabbing sales away from VAs, but if that’s happening it’s not coming from the largest distribution channel for FIAs, namely independent agents, which produced 70% of FIA sales in 2Q15, according to Wink. That’s because the typical independent agent, who is not registered to sell securities, can’t recommend a client to 1035 exchange out of a VA (which is a security) into an FIA without getting into hot water. I would agree that it would be highly unsuitable for such an exchange to occur. Therefore any FIA traction is coming from other channels.

Also, the election rate for lifetime withdrawal benefits on FIAs is not quite as robust as I suspected (this sentiment was echoed by another speaker at the conference, Tim Pfeifer, a consulting actuary and principal of Pfeifer Advisory LLC). Sheryl said the GLWB take rate on FIAs has been dropping of late, to just around 59%, still a majority, and yet lower than the 77% we are seeing among VAs, according to LIMRA.

I was also hearing that some FIA players do not hedge their living benefits, or if they do, they use only static hedges; however Sheryl assured me that most employ the same kind of dynamic hedging programs used on the VA side.

Speaking of hedging, at an elective session on managed-risk funds, I picked up a few insights. From Zachary Brown of Milliman, Inc., a leading actuarial firm consulting on such funds, I learned that a factoid I heard from one of his colleagues in the past – that VA insurers can save as much as 0.96% on hedging costs annually by using managed-volatility funds – is still a valid one. Moreover Brown said using managed-vol funds relieves insurers from having to hedge as much Vega as they normally would in their internal hedge programs.

The other presenter on that panel, Samir Mathur of Capital Group, parent of the American Funds, provided insight into why the firm, in developing managed-vol portfolios for the VA space, decided to use an existing fund of the American Funds Insurance Series coupled with a volatility control overlay handled by Milliman, rather than constructing a wholly-new one.

Mathur said Capital Group wanted to keep core asset management of the fund separate and distinct from the vol overlay so that the managers could focus on their strengths, of providing strong returns in their chosen discipline. That made a lot of sense to me.

In his presentation Mathur touched on a current concern for managed-vol funds: how to benchmark them. While I’ve noticed some of these funds present their returns against mainstream indices like the S&P 500 in annual and semi-annual reports, it’s probably not an apples-to-apples comparison. Others are using blended and/or managed-vol indices and we assume that will become more standard practice in the future. Mathur also admitted that since these funds are still relatively new, it will take another market downturn to really find out if they are performing as advertised.

In an Indexed Product Deep Dive session I heard that indexed universal life sales will probably decline due to new rules regarding policy illustrations under Actuarial Guideline 49. Apparently, prior to AG 49, insurers were engaging in an “illustration beauty contest” which often involved insurers showing clients rosy policy growth rates in their hypotheticals. This kind of competition reminded me a bit of the VA arms race.

There was also plenty of discussion of the Department of Labor’s proposed new fiduciary rules, which many observers think will have a detrimental effect on VA sales, it seems that fixed annuities won’t escape entirely unscathed.

In a session on the employer’s role in retirement plans, I detected a degree of optimism on the part of presenters Michael Finke, an academic at Texas Tech University, and Gregory Ward, of Financial Finesse (a firm that advises employers on providing financial education programs to workers) that the DOL will make adjustments to the rules that will be fairly workable for the industry. Unfortunately I can’t say that everyone shares that sentiment.

I thought both Finke and Ward gave pretty strong arguments that DC plan providers should do more to help participants make financial decisions. In that sense they will be assuming more fiduciary responsibility. A key problem they highlighted was that, unfortunately, people in most need of assistance (read: those with the least saved for retirement) are the least likely to seek and get advice.  This is a conundrum the industry will need to work on in the years ahead.

As for my part of the proceedings, I hope I didn’t come across as too pessimistic, in my presentation, about what’s happening in the VA industry. I discussed the declining sales of the past few years, and the product de-risking that’s a big reason for that, and the fact that it looks like we’re in for another drop. That’s realistic, I think. What I might not have emphasized was that this industry has no shortage of creativity, and that there is a willingness to tackle some of the thornier issues that the industry is faced with. In time we’ll see if some of the newer solution s will provide the answers investors are looking for.


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