PD-23 Guaranteed Minimum Withdrawal Benefits

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Presented by: Pierre VincentFriday June 26, 2009 9:30am – 10:45am

Key features of GMWB products

A segregated fund product that offers some or all of the following features:

• Income Benefit Guarantees– Income for specified period / life – Income bonuses – Resets (automatic / client initiated)– RRIFs– Spousal benefit

• Death Benefit Guarantees– 75%, 100% or more of deposit – Resets (automatic / client initiated)

• Deposit / Contract Maturity Guarantees– 75%, 100% or more of deposit after 10 (or more) years – Resets

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Key features of GMWB products

A segregated fund product that offers some or all of the following features:

• Deposit flexibility– Maximum Age– Minimum & maximum deposit– Deposit/redeposit restrictions– Minimum age to start taking withdrawals

• Investment options – Maximum equity percentage allowed– Policyholder’s ability to select

• Company’s ability to change – Fees– Features– Fund selection

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Key risks to consider • Equity market returns and volatility• Interest rate• Longevity / mortality• Lapse• Currency • Regulatory• Market conduct• Sales distribution

– Age– Sex– Registration status– By fund– Multiple contracts

• Advisor behavior• Policyholder behavior

– Timing of deposits to maximize bonuses– Re-deposits– Lapse behavior– Withdrawal behavior

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Understanding the various risks

Modeling is key to understand and quantify the various risks:

• Projection of revenue, benefits, reserves and capital is complex

• Market assumptions– Real world – Market consistent– Real world assumptions with cost of hedging

• Scenario generation– Number of scenarios– Parameters– Fitting investment selection to scenarios– Different scenarios for cash flow projections, reserve and capital?

• Non market assumptions– Relevant experience

• Inclusion of policyholder behavior– Related to each scenario

• Interpreting the results

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Understanding the various risks

• Diversifiable risk?– Mortality– Lapse– Equity– Interest rate– Currency

• Controllable risk?– Product design– Management action

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Appetite for risk • Determine risk tolerance

– Impact on capital and reserves – Risk limit – Risk / reward

• Options:– Keep risk– Manage / hedge risk– Reinsure

• Considerations:– Impact – Cost– Availability– Effectiveness– Knowledge/expertise

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Capital management • Keep risk:

– Impact on reserves and capital can be severe– Ability to raise capital in adverse scenarios

• Reinsure risk:– Ability to get capital credit– Predictability of income– Counter-party risk

• Hedge risk:– Long term instruments are not effective due to multitude of product

options– Dynamic hedging is required to hedge risk– Difficult to get capital credit for GMWB products based on current rules– High cost of hedging and low capital credit– Predictability of income

What is the solution?

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Changes can occur quickly

Sample cost of hedging of a balanced fund:• Q2 2008: 1.3%• Q4 2008: 3.4%

How should insurance companies react?

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