Presentation by Marc Altschull and Doug Robbins - Actuary.com

Stochastic Modeling Workshop
— Policyholder Behavior
Southeastern Actuaries Conference
Marc N. Altschull
Douglas L. Robbins
November 19, 2003

Agenda
Introduction
Introduction
GMDB Results
GMDB Results
GMIB Results
GMIB Results
Conclusions
Conclusions
2

Objective
The
The
results
results
presented
presented
in
in
this
this
paper
paper
will
will
enable
enable
insurers
insurers
to
to
better
better
understand
understand
that
that
policyholder
policyholder
behaviors
behaviors
need
need
to
to
be
be
modeled
modeled
in
in
order
order
to
to
evaluate
evaluate
the
the
volatility
volatility
of
of
results,
results,
using
using
variable
variable
annuity
annuity
guarantees
guarantees
as
as
an
an
example.
example.
3

Evolution of VA Features: Recent Focus on
Richer Guarantees
1985 . . . 1990 . . .
2003
Multi-manager
One-time
ratchet GMDB
Enhanced GMDB
(annual ratchet,
5% roll-up)
7% Solution
GMDB
Menu products
Living benefits
Enhanced
DCA rates
LTC rider
Credit/bonus products
M&Es below 100 bp on
retail products
Significant trailer
commissions
C-share/no surrender
charge products
Earnings enhancement
rider
L-share
Quarterly ratchet/
combo GMDB
GMAB
GMWB
4

VA Sales Have Coincided with the Ebb and
Flow of the Equity Markets
S&P 500
1600
1400
1200
1000
800
600
400
40
35
30
25
20
15
10
5
0
Quarterly Gross VA Sales 1
1st Qtr 95
1st Qtr 96
1st Qtr 97
1st Qtr 98
1st Qtr 99
1st Qtr 00
1st Qtr 01
1st Qtr 02
1st Qtr 03
1
Annual sales for 1995 through 1999 distributed uniformly. Source: Variable
sales from Tillinghast VALUE Survey, includes all non-pension variable annuity
premiums (first-year and renewal, separate account and fixed account).
5

Methodology
Projected inforce deferred VA
Issue date = one month prior to model start date
Initial surplus = 0
Annual surplus projected 20 years
500 stochastic scenarios
Discount at after-tax, general account earned rate
Total Capital Requirement = CTE 90
6

Guaranteed Benefits Considered
GMDB
Greater of annual ratchet to age 80 and 5% premium
roll-up to age 80
Cost included in base product asset charges
GMIB
5% roll-up to age 80
10-year waiting period for annuitization
35 bps additional asset fee
7

Summary of Base Results
Guaranteed Benefits
GMDB Only
C3 Capital Requirement
88 bps
GMDB and GMIB 91
8

Scenario Calibration Modifications
Purpose: to determine sensitivity of results to scenario
calibration
1% reduction in annual expected returns
120% multiplier on annual return volatility
9

Summary of Scenario Calibration Results
(Change from Base)
Guaranteed Benefits
(Base)
1% Reduction in
Expected Returns
120% Multiplier on
Return Volatility
GMDB only
(88 bps)
GMDB and GMIB
(91 bps)
30 bps 27 bps
97 39
10

Agenda
Introduction
Introduction
GMDB Results
GMDB Results
GMIB Results
GMIB Results
Conclusions
Conclusions
11

GMDB Behavioral Assumptions
Lapses
Partial withdrawals
Dollar-for-dollar
Proportionate
Transfers to the fixed account
Transfers to a “safer” separate account fund
12

GMDB Dynamic Lapse Results (Changes from
base C3 requirement of 88 bps)
Assumption
Dynamic increased
lapsation in down markets
Dynamic lapse reduction
over 20% of GMDB
Dynamic lapse reduction
over 40% of GMDB
Change in C3 Requirement
(13) bps
25
20
13

GMDB Deterministic Lapse Results (Changes
from base C3 requirement of 88 bps)
Assumption
200% lapse rates in all
years
50% lapse rates in all
years
200% lapse rates after
surrender charge period
50% lapse rates after
surrender charge period
Change in C3 Requirement
(32) bps
31
(4)
9
14

Dollar-for-Dollar with Dynamic Partial
Withdrawals Increase C3 Requirement 217 bps
88 bps
217 bps Increase
305 bps
Base
Dollar-for-Dollar
15

GMDB Transfers to Fixed Account Results
(Changes from base C3 requirement of 88 bps)
Assumption
Transfers from SA to GA
(no dynamic lapses)
Dynamic lapses with
transfers from SA to GA
Change in C3 Requirement
3 bps
33
Dynamic lapses only 25
Dynamic lapses with
transfers from SA to GA
and 0% guarantee on GA
15
16

Agenda
Introduction
Introduction
GMDB Results
GMDB Results
GMIB Results
GMIB Results
Conclusions
Conclusions
17

GMIB Behavioral Assumptions
GMIB utilization
Lapses
Transfers to the fixed account
Transfers to a safer separate account fund
18

GMIB Utilization Assumption (Changes from
base C3 requirement of 91 bps)
Maximum annual
GMIB election rate
increased from
25% to 50%
22 bps
vs.
67 bps
GMIB election rate
increased from
50% to 100% of
“in-the-moneyness”
12 bps
Combination: Election
rate of 100% with max
of 50%
19

GMIB Lapse Assumption Results (Changes
from base C3 requirement of 91 bps)
Assumption
Dynamic Lapse Tests
Dynamic lapse reduction
over 20% of GMIB
Dynamic lapse reduction
over 40% of GMIB
Change in C3 Requirement
224 bps
164
Deterministic Lapse Tests
200% lapse rates in all years (80)
50% lapse rates in all years 281
20

Dynamic Lapses Amplify C3 Requirement
Sensitivity to GMIB Utilization
60 bps
33 bps
12 bps
22 bps
Combination:
Election rate of 100%
with max of 50%
GMIB election rate
increased to 100% of
“in-the-moneyness”
Maximum annual
GMIB election rate
increased to 50%
91 bps Base
36 bps
52 bps
224 bps Dynamic
lapses
91 bps
No Dynamic
Lapses
Dynamic
Lapses
21

Negligible Impact of Transfers to the Fixed
Account: GMDB vs. GMIB
3 bps
Transfers from
SA to GA
(no dynamic lapses)
8 bps
88 bps Base 91 bps
GMDB
GMIB
22

Transfers to a Safer Separate Account Provide
Counterintuitive Results
Transfer
from large
cap to
bonds
207 bps
Net C3
Requirement
with
Dynamic
Lapses
522 bps
Transfers
Net C3 Dynamic
Requirement lapses from
with
turned large cap on,
Dynamic
to
Lapses but bonds no
71 bps (no transfers dynamic
42 bps
25 bps lapses) 44 bps
(42) bps
(46) bps
Net C3
Requirement
with No
Dynamic
Lapses
88 bps
GMDB
Base
Net C3
Requirement
with No
Dynamic
Lapses
135 bps
91 bps
GMIB
224 bps
23

Agenda
Introduction
Introduction
GMDB Results
GMDB Results
GMIB Results
GMIB Results
Conclusions
Conclusions
24

GMDB Observations
Certain behaviors can be comparable to moderate
changes in economic scenarios for average issue ages
Partial withdrawals on products with dollar-for-dollar
GMDB reductions can be significant
Behavioral changes in early policy durations dominate
later durations for average issue age
Moderate scenario changes dominate most behavioral
changes for older issue ages
25

GMIB Observations
Many behaviors influence C3 much more than
moderate changes in economic scenarios
Impact of behaviors compounds
Late duration behaviors more important than with
GMDB only
26