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Variable Annuities

Variable Annuities. Faculty of Actuaries Sessional Meeting 17/03/08. The Next Big Thing. Bridges the gaps left by the decline of with-profits and defined benefit pension schemes Strong growth in the USA and Japan Product launches in the UK and throughout Europe. Sample Product Design.

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Variable Annuities

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  1. Variable Annuities Faculty of Actuaries Sessional Meeting 17/03/08

  2. The Next Big Thing • Bridges the gaps left by the decline of with-profits and defined benefit pension schemes • Strong growth in the USA and Japan • Product launches in the UK and throughout Europe

  3. Sample Product Design • Guaranteed Minimum Withdrawal Benefit • 5% pa guaranteed income at age 65 • Annual Step-Up (subject to 15% maximum to age 75) • 60 % Equity Backing Ratio • Charge for Guarantee 0.75 % pa

  4. Customer Outcomes (1)

  5. Customer Outcomes (2)

  6. Customer Outcomes (3)

  7. Customer Outcomes (4)

  8. Cost at 30/06/07 = 0.49 % pa Sensitivity 1% absolute fall in interest rates – 0.82 % pa 25% relative increase in equity vol – 0.67 % pa Longevity 80% of central assumptions – 0.60 % pa Pricing

  9. Instantaneous Stresses

  10. Projection over time – Unhedged

  11. Hedged

  12. Measures of Economic Capital at Risk

  13. Regulatory Constraints • Example 1 – poor investment returns and withdrawals lead to GAD Max falling below guaranteed income constraining pension • Example 2 – GAD Min increases above guaranteed income forcing higher payments at expense of long term guarantee level

  14. Market Conditions

  15. Discussion Topics (1) • Is the authors’ optimism regarding the prospects for the product justified ? • Is there a genuine consumer benefit from these products ? • Will domestic companies succeed in this market or will companies with established track records elsewhere dominate ?

  16. Discussion Topics (2) • Will hedging techniques perform as intended in extreme market conditions ? • What changes to legislation would facilitate better outcomes for the customer (and acceptable outcomes for HMRC) ? • Are actuaries well equipped to develop and market these products ?

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