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Session 160 PD - Annuity Product Trends and Issues
Moderator:
Trevor D. Huseman, FSA, MAAA
Presenters: Nicholas E. Carbo, FSA, MAAA
Matthew R. Coleman, FSA, MAAA Aatman Naresh Dattani
SOA Antitrust Compliance Guidelines SOA Presentation Disclaimer
2017 SOA Annual Meeting & Exhibit
Moderator: Trevor Huseman, FSA, MAAA
Presenters: Aatman DattaniNicholas Carbo, FSA, MAAAMatthew Coleman, FSA, MAAA
Session 160 – Annuity Product Trends and Issues
October 18, 2017
SOCIETY OF ACTUARIESAntitrust Compliance Guidelines
Active participation in the Society of Actuaries is an important aspect of membership. While the positive contributions of professional societies and associations are well-recognized and encouraged, association activities are vulnerable to close antitrust scrutiny. By their very nature, associations bring together industry competitors and other market participants.
The United States antitrust laws aim to protect consumers by preserving the free economy and prohibiting anti-competitive business practices; they promote competition. There are both state and federal antitrust laws, although state antitrust laws closely follow federal law. The Sherman Act, is the primary U.S. antitrust law pertaining to association activities. The Sherman Act prohibits every contract, combination or conspiracy that places an unreasonable restraint on trade. There are, however, some activities that are illegal under all circumstances, such as price fixing, market allocation and collusive bidding.
There is no safe harbor under the antitrust law for professional association activities. Therefore, association meeting participants should refrain from discussing any activity that could potentially be construed as having an anti-competitive effect. Discussions relating to product or service pricing, market allocations, membership restrictions, product standardization or other conditions on trade could arguably be perceived as a restraint on trade and may expose the SOA and its members to antitrust enforcement procedures.
While participating in all SOA in person meetings, webinars, teleconferences or side discussions, you should avoid discussing competitively sensitive information with competitors and follow these guidelines:
• Do not discuss prices for services or products or anything else that might affect prices• Do not discuss what you or other entities plan to do in a particular geographic or product markets or with particular customers.• Do not speak on behalf of the SOA or any of its committees unless specifically authorized to do so.
• Do leave a meeting where any anticompetitive pricing or market allocation discussion occurs.• Do alert SOA staff and/or legal counsel to any concerning discussions• Do consult with legal counsel before raising any matter or making a statement that may involve competitively sensitive information.
Adherence to these guidelines involves not only avoidance of antitrust violations, but avoidance of behavior which might be so construed. These guidelines only provide an overview of prohibited activities. SOA legal counsel reviews meeting agenda and materials as deemed appropriate and any discussion that departs from the formal agenda should be scrutinized carefully. Antitrust compliance is everyone’s responsibility; however, please seek legal counsel if you have any questions or concerns.
2
Presentation Disclaimer
Presentations are intended for educational purposes only and do not replace independent professional judgment. Statements of fact and opinions expressed are those of the participants individually and, unless expressly stated to the contrary, are not the opinion or position of the Society of Actuaries, its cosponsors or its committees. The Society of Actuaries does not endorse or approve, and assumes no responsibility for, the content, accuracy or completeness of the information presented. Attendees should note that the sessions are audio-recorded and may be published in various media, including print, audio and video formats without further notice.
3
© Oliver Wyman
Annuity Product Development TrendsFixed Index Annuities & Registered Fixed Index Annuities2017 Society of Actuaries Annual Meeting
Boston, October 18, 2017
Nicholas Carbo, FSA, MAAA
1© Oliver Wyman
Agenda
1 FIA market update
2 RFIA market update
2© Oliver Wyman
6.5
11.7 12.7
22.4
26.5 25.3 25.226.8
30.132.3 32.4
34.1
38.7
46.9
53.1
58.255.1
0
10
20
30
40
50
60
70
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017Q2
Fixed indexed annuity sales trends (2001-2017)2017 FIA sales are on track to drop 5% vs 2016 based on Q2 2017 sales
Source: Wink’s Sales & Market Report1Q2 2017 sales were multiplied by two to get a 2017 annualized result
$ B
illio
ns
YTD Q2 20171
(Annualized)
15.7% CAGR (2001 -2016)
3© Oliver Wyman
Recent acquisitions reshaped the FIA marketAcquirer/Seller (date)
Transaction type: IPO Japanese insurers Alternative buyers
2010 2011 2012 2013 2014 2015 2016 2017
4© Oliver Wyman
Crediting methods and indicesTerm end point and hybrid indices continue to be strong in the FIA market
Crediting methods (Q2 YTD 2017) Indices (Q2 YTD 2017)
Annual point-to-point crediting method and S&P 500 index are still the most common, but “hybrid” and proprietary indices (e.g., target volatility and dynamic rebalancing indices) are gaining significant traction
Source: Wink’s Sales & Market Report
Term End Point (TEP),
14.3%
Annual Point-to-Point (A-
PTP), 49.2%
Daily / Monthly
Averaging (AVG), 6.5%
Monthly Point-to-Point
(M-PTP), 11.3%
Fixed, 14.4%
Other, 4.3%
S&P 500, 51.2%
NASDAQ-100, 1.5%
Russell 2000, 1.0%
Other public indices, 1.1%
Hybrid Indices, 28.6%
Rainbow / Multi-Index,
0.7%
Fixed, 14.4%Other, 1.5%
5© Oliver Wyman
FIA rider trendsGLWBs continue to be the main driver of sales, with other secondary differentiating features
• “Stacked” rollups (e.g. 4% + account value performance)
• Account value driving income
• Income increases after income start
• Rollups are compound / simple / or absent (e.g., vary income by age / duration)
• More income options (flat, guaranteed increase or index-linked increases)
• Offered for free or additional charge (e.g. 10 bps)
• Typically doubles the income for up to 5 years if cannot perform 2 of 6 ADLs
• Offered with or without GLWB (sometimes for an additional charge)
• Maximum payout
• Payout periods / reduced lump sum
GLWB INDEX-LINKED
INCOME GROWTH
OTHER GLWB
STRUCTURES
NURSING HOME INCOME
RIDERS
ENHANCED DEATH
BENEFITS
6© Oliver Wyman
Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017
December 2015
• Midland National– MNL Prosper 5
Fee-based FIA product launchesHalf of FIA writers have or plan to introduce a fee-based FIA in 2017, according to LIMRA
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
7© 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 FIAsThe removal of compensation from the product allows for benefits to the customer and insurance company
8© Oliver Wyman
Registered fixed index annuity product launchesProduct launches are 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 Only)
August 2016• CUNA introduces
Member’s Horizon Annuity
Feb 2017• AXA Structured
Capital Strategies Plus filed
In addition, Great West and Great American have filed prospectuses for
RFIA products
9© Oliver Wyman
Quarterly RFIA sales (2011Q3 – 2017Q1)Annualized RFIA sales are approaching $8BN
1.0
2.0
0.0
1.5
0.5
Qua
rter
ly P
rem
ium
($ B
N)
+68%
2017projected
201620152014201320122011AXAAllianz Met
Source: Morningstar
10© 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
∆
11© Oliver Wyman
Key takeaways
1 FIAs have become a mature market
2 Future of fee-based FIA
3 RFIA growth
Session Q&A
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US Department of Labor’s
Conflict of Interest Rule
October 2017
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Hmmm…
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Definition
Fiduciaryfi·du·cia·ry | fə-ˈdü-shə-rē
noun (pl) -aries
one who obligates himself or herself to act on behalf of another (as in managing money or property) and assumes a duty to act in good faith and with care, candor, and loyalty in fulfilling the obligation.
adjective
of, relating to, or involving a confidence or trust in a guardian acting in his fiduciary capacity.
From Merriam-Webster.com
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““Today, I'm calling on the Department of Labor to update the rules and requirements that retirement advisors put the best interests of their clients above their own financial interests.
– President Barack Obama, February 23, 2015
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Influential writings explore the mechanics of morality, markets, and capitalism in an industrialized society.
His work Wealth of Nations (1776) lays the foundations of modern capitalism.
Invisible Hand theory: The automatic market force whereby the individual self interests of the participants of a free market drive the supply and demand of goods and services to reach equilibrium.
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The World According to Adam Smith
“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” – Adam Smith
Self-interest drives supply, demand and competition.
Competition in the marketplace affects supply, demand and ultimately sets prices at efficient levels.
Much of the financial services industry, especially insurance, has been operating under these free market concepts.
So which is it?
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Annuity Regulation for Example
Current Annuity Regulation categories Product requirements (Nonforfeiture) Disclosure requirements (Prospectus, Securities Act of 1933) Seller requirements (Licensure, FINRA, RIA)
Implications Current rules govern the interaction, the seller and the product. Imply that the buyer and seller are acting in their own interests.
Recent Suitability Regulations Suitability requirements – modern fiduciary-lite regulation that requires the seller to consider the interest of the buyer,
generally.
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But Do Self Interest Driven Markets Work?Hard to say, but…
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Source: Wink Sales and Market Report
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But Do Self Interest Driven Markets Work?Hard to say, but…
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Source: Wink Sales and Market Report
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Seller or Advisor?
The new DOL Conflict of Interest Rule does not recognize the sale of products as distinct from advice.
The foundational congressional act, ERISA, from which the DOL Rule claims authority, historically applied a 5-part test to distinguish between sales and advice.
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Conflict of Interest
con·flict of interest \ˈkän-ˌflikt-\
a conflict between the private interests and the official or professional responsibilities of a person in a position of trust.
a conflict between competing duties (as in an attorney's representation of clients with adverse interests).
first known use of “conflict of interest”:1860.
The central question: Is an insurance agent understood to be an agent of the company she represents, or is she assumed to be “in a position of trust” and thus an agent of the customer?
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A Fundamental Change
The Conflict of Interest Rule fundamentally reorients the financial & insurance industries from capitalistic, market-oriented model to a regulation/litigation oriented model.
The capitalistic, market-oriented model recognizes and assumes conflicts of interest are inherent in every interaction. Conflicts of interest are addressed via disclosure and competition. The buyer is primarily the arbiter of their own interest.
A regulation/litigation-oriented model identifies conflicts of interest as problematic.
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How the DOL Rule Works
All transactions involving qualified money (especially Fixed, Indexed and Variable Annuities and mutual funds) where commissions are paid, become Prohibited Transactions under the rule.
Prohibited Transactions are subject to IRS tax of 100% of any amount received.
Certain defined Prohibited Transaction Exemptions (PTE’s) allow for commission to be received including PTE 84-24 and the new BICE PTE.
PTE’s under the new rule require either contractual or declarative statements whereby the advisor (or agent) acknowledges fiduciary duty to impartial conduct standards.
These fiduciary standards are principles based and no safe harbor is provided under the rule.
The Department of Labor has no enforcement arm. This rule employs increased legal jeopardy as a means of enforcement.
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Impartial Conduct Standards
Effective 6/9/2017 for all qualified transactions.
Provide investment advice that is in the “Best Interest” of the retirement investor. Act with care, skill, prudence and diligence. Act without regard to financial interest of advisor or financial institution. Receive no more than “reasonable compensation.” Make no material misleading statements.
Some believe that the updated requirements for 84-24 which require commission disclosure still apply.
Violations of the fiduciary obligations may lead to: Civil action by the DOL Civil action by the investor Excise taxes by the IRS
Both the DOL and the IRS have stated that during the period prior to 1/1/2018, they will focus on compliance assistance with those who are working diligently and in good faith to comply.
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Executive Action
2010: Original Conflict of Interest Rule proposed2011: DOL rescinds rule under significant bipartisan and industry pressure2016 (April): Strengthened Final rule promulgated01/20/2017: Perez resigns & long-time DOL employee, Ed Hugler becomes acting Labor Secretary02/03/2017: President Trump issues Executive Memorandum to Labor Department requesting: Review of impact on retiree access to retirement products Review of impact on increased litigation and associated costs on retirees Review of impact on effect on small business (advisory business)02/16/2017: President Trump nominates Alexander Acosta as Labor Secretary03/01/2017: Hugler proposes 60 day delay to complete Presidential Memo requirements03/03/2017: Acosta declares he will follow the president’s guidance in examining the rule04/07/2017: 60 day delay is final04/10/2017: Original Effective Date of Rule04/26/2017: Secretary of Labor Acosta confirmed06/09/2017: Delayed effective date for Fiduciary Conduct Standards07/01/2017: Nevada shifts from a Suitability Standard to a Fiduciary Standard08/09/2017: DOL Seeks a 18 month delay08/29/2017: OMB approves delay to 07/01/2019
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Legal Action
4 Lawsuits have been levied against the DOL. 3 of the 4 have been rejected by the courts.
1. NAFA vs DOL, Washington DC District Court, 11/4/2016 Challenged the rule on numerous grounds. Contended the rule would be catastrophic for FIA’s. Judge found DOL has authority to issue rule. (Nov 2016)
2. Market Synergy vs DOL, Kansas Federal Court, 11/28/2016 Challenged the DOL’s inclusion of FIA’s into the BICE requirements. Judge found that plaintiffs did not prove that DOL failed to follow procedures. (Late 2016)
3. US Chamber of Commerce vs DOL, Texas District Court Challenged the rule on numerous grounds. Contended that one-time transactions should not be burdened with heavy regulation. Judge found DOL has authority to issue rule. (Feb 2017) Appealed to the 5th Circuit. (July 2017) May be first victory for rule opponents. Decision expected later this fall.
4. Thrivent vs. DOL, Minnesota District Court Challenged the rule regarding fraternals ability to require arbitration. DOJ wrote to Judge: “class action provision will likely be mooted in the near future.” (Aug 2017)
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Legislative Action
Financial Choice Act of 2017 A revision of similar bill tabled in 2016 Weakens elements of Dodd-Frank Repeals the DOL Rule Passed the US House of Representatives (June 2017) Faces possible filibuster in the Senate
Protecting Advice for Small Savers (PASS) Act of 2017 Passed the US House Financial Services Committee (Oct, 2017) Establishes a best-interest standard for broker-dealers Repeals DOL Fiduciary Rule
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Key Takeaways
Financial product sales and regulations have historically been market based.
Capitalistic markets recognizes conflicts of interest and address them via transparency and competition.
The Conflict of Interest rule: Broadens the fiduciary requirement to all sellers of qualified financial products. Regulates conflicts of interest via increased legal jeopardy.
The Impartial Conduct Standards aspect of the rule are currently effective.
The significant aspects of the BICE have been delayed until 7/1/2019.
Most legal action has supported DOL jurisdiction, but two cases that challenge the rule remain outstanding.
The US House has passed bills aimed at gutting the DOL rule.
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Our Labor Continues …
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About Willis Towers Watson
Willis Towers Watson (NASDAQ: WLTW) is a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. With roots dating to 1828, Willis Towers Watson has 40,000 employees serving more than 140 countries. We design and deliver solutions that manage risk, optimize benefits, cultivate talent, and expand the power of capital to protect and strengthen institutions and individuals. Our unique perspective allows us to see the critical intersections between talent, assets and ideas – the dynamic formula that drives business performance. Together, we unlock potential. Learn more at willistowerswatson.com.
Matthew ColemanSenior Consultant
101 South Hanley Road, Suite 900, St. Louis, MO 63105-3437
T +1 913 689 8679 E Matthew.Coleman@willistowerswatson.com
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SOA Annual Meeting Variable and Fixed Annuity Trends
Aatman Dattani
October 15-18, 2017
Agenda Overview of the Annuity Market Variable Annuities
Sales Trends Guaranteed Living Benefits – Sales, Distribution Channels and Elections Product Related Updates Recent Product Changes Structured Variable Annuities Milliman Hedge Cost Index Global Response to the Low Interest Rate Environment
Deferred Income Annuities Sales Trends of DIA and QLACs
Fixed Annuities Sales Trends Product Updates
Overview of the Annuity Market
3 2017 sales are annualized based on 2017 Q2 YTD sales Source: LIMRA
Variable Annuities United States
Overview of the Variable Annuity Market 2017 YTD Variable Annuity Sales (“VA”) declined by 8% vs. 2016 The VA sales to equity market correlation does not hold anymore
Source: LIMRA
-
500
1,000
1,500
2,000
2,500
3,000
0
5
10
15
20
25
30
35
40
45
50
2007
Q1
2007
Q3
2008
Q1
2008
Q3
2009
Q1
2009
Q3
2010
Q1
2010
Q3
2011
Q1
2011
Q3
2012
Q1
2012
Q3
2013
Q1
2013
Q3
2014
Q1
2014
Q3
2015
Q1
2015
Q3
2016
Q1
2016
Q3
2017
Q1
S&P
500
$ in
bill
ions
Variable Annuity Sales by Company There has been a reshuffling in ranks of the top 10 VA writers vs. 2012
De-risking, diversification of product offerings, changes in regulation (fair value, DOL) likely impacted sales
Sales in $ billions Source: LIMRA
Variable Annuity – Sales by Distribution Channel Sales by distribution channel have stayed consistent in spite of an overall decline in sales
Source: LIMRA
34% 33% 35% 36% 34% 32%
24% 25% 24% 24% 25% 27%
19% 17% 16% 16% 15% 14%
11% 12% 13% 12% 13% 12%
2011 2012 2013 2014 2015 2016
Independent BD Career Agents Full Service Nat'l BD Banks
Variable Annuity – Guaranteed Living Benefit Sales The percentage of VA’s available without GLB’s has risen from 7% in 2013 to 21% in 2016 GLWB is the most elected rider (around 65% of the time) with GMIB a distant second (7-10%)
Source: LIMRA
67% 64% 59% 56% 52% 48%
9% 9% 12% 15% 14%
12%
7% 9% 11% 13% 17% 21%
17% 19% 17% 16% 16% 20%
2011 ($158bn) 2012 ($147bn) 2013 ($145bn) 2014 ($140bn) 2015 ($133bn) 2016 ($105bn)
GLB Elected GLB Available, Not Elected GLB Not Available Employer Plan
Variable Annuity – Guaranteed Living Benefits Sales - Continued
Independent Agents are the largest seller for GLWBs while Career Agents lead in GMIB and GMAB GLB elections have typically declined
Source: LIMRA
19% 11%
42%
11%
51%
44%
9%
46%
59%
16% 39%
82%
12% 6% 7% 12%
31%
GLWB GMIB GMAB GMWB Hybrid
Rider Sales by Channel 2Q 2017
Wirehouses Independent Career Bank
90 88 87 84 85 83 82 80 80
77 78 77 77 77 80 80
83 80 78
75 74 73
2012
Q1
2012
Q2
2012
Q3
2012
Q4
2013
Q1
2013
Q2
2013
Q3
2013
Q4
2014
Q1
2014
Q2
2014
Q3
2014
Q4
2015
Q1
2015
Q2
2015
Q3
2015
Q4
2016
Q1
2016
Q2
2016
Q3
2016
Q4
2017
Q1
2017
Q2
Election Rates when GLBs are available
Variable Annuity Market Product Changes VA products in the last year have been de-risked using the following strategies:
Increase in Rider
Fees
Benefits that Differ
by Age
Links to VIX, Treasury Indexes
Reduction in Benefits
New Products e.g. IOVA
Closing Existing Products
Fund Allocation Limitations
Limitations in Contributions
Volatility Control Funds
Structured Variable Annuities Companies introduced this product to diversify their product offering Built on VA chassis but share downside risk with policyholder Sales have increased over 100% in 2016 to $5.4 billion Impact of rising interest rates Demographics of buyers
Source: LIMRA
Milliman Hedge Cost Index Estimated Hedge Cost for a typical Lifetime GMWB Rider fee of 1.15%; M&E and Investment Management Fees of 2.25% Annual 5% rollup and resets; lifetime withdrawal rates of 4-6% depending on attained age Modeling Assumptions based on typical actuarial and behavioral assumptions used by VA writers Target fund volatility of 10%; calculations based on end of month US swap rates
60708090
100110120130140150160170180
Dec
-13
Feb-
14A
pr-1
4Ju
n-14
Aug
-14
Oct
-14
Dec
-14
Feb-
15A
pr-1
5Ju
n-15
Aug
-15
Oct
-15
Dec
-15
Feb-
16A
pr-1
6Ju
n-16
Aug
-16
Oct
-16
Dec
-16
Feb-
17A
pr-1
7Ju
n-17
(bps
)
International Variable Annuities
Strategic shift
Low Rates here to stay
Move away from interest rate risk
Focus on unit linked and protection products
Pension reforms
Low Rates here temporary
Continue writing protection products
Optimize capital efficiency and reduce costs
Negative Interest Rates
USD, AUD and NZD denominated products replaced GMAB (JPY)
SPWL with VA Features
Variable Life with GMDB converted to fixed life in 15-20 years (FIT)
Premium invested in two buckets during FIT: stable + aggressive
Stable fulfills guarantee, aggressive allows for upside
Q1 2016 Sales dropped 8% in UK, 45% in France and 18% in Rest of Europe.
GMWB sales dropped while GMAB sales rose.
Product De-risking to blame?
Global Impact of the Low Interest Rate Environment on VAs
Deferred Income Annuities United States
US Deferred Income Annuities Deferred Income Annuities sales were $2.79bn
Career agents account for 62% of DIA sales.
Qualified Longevity Annuity Contracts (QLAC) compliant DIA’s are increasingly being offered in the market Career agents account for 41% of DIA sales. The issue age and premium amounts are significantly different between QLAC and non QLAC products likely due to
IRS restrictions on the limitations on investments in QLAC accounts
Top 10 Companies / Sales in Millions DIA DIA w QLAC New York Life $926 $109 Northwestern Mutual Life 669 35 Massachusetts Mutual Life 311 NA Principal Financial Group 210 76 Guardian Life of America 178 31 Metlife 141 27 Pacific Life 82 17 AIG 82 18 Thrivent Financial for Lutherans 47 3 Lincoln Financial Group 43 6
Fixed Annuities United States
US Fixed Annuities Sales – Book Value and MVA Fixed annuity sales (Book value and MVA) were $38.7bn in 2016, up 25% vs. 2015
The low interest rate environment continues to pressurize fixed rate annuity sales
The split between qualified and non qualified products has narrowed
Source: LIMRA
35%
45%43%
40%44%
46%
65%
55%57%
60%56%
54%
2011 2012 2013 2014 2015 2016
Qualified Non-Qualified
US Fixed Annuities Sales- SPIA SPIA sales were $9.1 billion, 6% down vs 2014 but fairly robust vs historical sales
The low interest rate environment and mortality table updates likely impacted sales
The majority of SPIA sales include lifetime benefits 77% of the SPIAs sold in 2016 included a lifetime benefit Lifetime benefit election declined from 81% in 2015 to 77% in 2016 in spite of the low interest rate environment
Source: LIMRA * 2017 amounts are annualized based on 2017 Q2 YTD Sales
6.5
7.97.5 7.6
8.17.7
8.3
9.79.1 9.2
8.4
0
2
4
6
8
10
12
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017*
Sale
s ($
in b
illio
ns)
Thank you Aatman Dattani aatman.dattani@milliman.com
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