1. Session 12: Panel on Life Annuities Jeffery Yong IAIS Secretariat Regional Training Seminar IAIS-ASSAL San Salvador, 25 November 2010

2. Session 12: Panel on Life Annuities225 Nov 2010 San Salvador Agenda 1.Overview – pension gap 2.Recent product developments Variable annuities 3.Risks Longevity risk Low interest rate environment Recent risk mitigation instruments 4.Regulatory developments

3. Session 12: Panel on Life Annuities325 Nov 2010 San Salvador Mind the pension gap Source: OECD Pension at a glance 2009

4. Session 12: Panel on Life Annuities425 Nov 2010 San Salvador Agenda 1.Overview – pension gap 2.Recent product developments Variable annuities 3.Risks Longevity risk Low interest rate environment Recent risk mitigation instruments 4.Regulatory developments

5. Session 12: Panel on Life Annuities525 Nov 2010 San Salvador Variable annuities - structure Unit-linked products offering access to investment funds Guaranteed Minimum Death Benefit Guaranteed Minimum Accumulation Benefit Guaranteed Minimum Income Benefit Guaranteed Minimum Withdrawal Benefit Guaranteed value on death Guarantee on fund value Guarantee income levels on minimum conversion rates when moving from accumulation to income phase. Guarantee regular income from the fund during defined period. E.g. 7% for first 15 years; 5% for life upon reaching age 65 Examples: return of premium premium rolled-up at pre-set interest rate highest point the fund ever reached average fund value over the last few policy years

6. Session 12: Panel on Life Annuities625 Nov 2010 San Salvador An example of the guarantees Source: AXA

7. Session 12: Panel on Life Annuities725 Nov 2010 San Salvador Growing interest in variable annuities - Japan Source: Watson Wyatt Fund under management for variable annuities in Japan (in JPY) Gross sales of variable annuities in the US

8. Session 12: Panel on Life Annuities825 Nov 2010 San Salvador Why are variable annuities popular? Replace other savings-type of life products e.g. with-profits policies – opaqueness, discretion Offer attractive returns with guarantees BUT there is no free lunch! –Surrender charges –Insurance charges –Policy charges –Fund management charges –Guarantees charges

9. Session 12: Panel on Life Annuities925 Nov 2010 San Salvador Risks associated with variable annuities VA Risks Market risk Longevity and mortality risks Operational risk Credit risk

10. Session 12: Panel on Life Annuities1025 Nov 2010 San Salvador Agenda 1.Overview – pension gap 2.Recent product developments Variable annuities 3.Risks Longevity risk Low interest rate environment Recent risk mitigation instruments 4.Regulatory developments

11. Session 12: Panel on Life Annuities1125 Nov 2010 San Salvador Ageing population – a global phenomenon Percentage of people aged 65 and over Source: Swiss Re, OECD

12. Session 12: Panel on Life Annuities1225 Nov 2010 San Salvador Time in retirement will be longer despite higher retirement ages due to increasing longevity Pension Ages in the OECD 1960-2050 Source: OECD Expected time in retirement 1960-2050

13. Session 12: Panel on Life Annuities1325 Nov 2010 San Salvador Longevity improvements are not uniform Heat map of estimated annual rates of mortality improvements for England and Wales (LHS: Male; RHS: Female) Source: Institute of Actuaries

14. Session 12: Panel on Life Annuities1425 Nov 2010 San Salvador Falling interest rate putting pressure on guarantees Source: Sun Life

15. Session 12: Panel on Life Annuities1525 Nov 2010 San Salvador Annuity rates are falling with interest rates Annuity rates and 10 year gilt yields Note: Annuity rate is for a 65 year old male purchasing a single-life annuity non- guaranteed annuity for GBP10,000 Source: ABI

16. Session 12: Panel on Life Annuities1625 Nov 2010 San Salvador Longevity bonds and swaps Unknown future annuity payouts Variable payments matching - longevity index - actual experience exchanged InsurerCounterparty InsurerCounterparty Issue price Mortality dependent cash flow Longevity Swap Longevity Bond

17. Session 12: Panel on Life Annuities1725 Nov 2010 San Salvador Agenda 1.Overview – pension gap 2.Recent product developments Variable annuities 3.Risks Longevity risk Low interest rate environment Recent risk mitigation instruments 4.Regulatory developments

18. Session 12: Panel on Life Annuities1825 Nov 2010 San Salvador Regulatory developments in response to variable annuities EUUS Canada Draft report on VA just issued for consultation oTechnical/actuarial issues – hedging, technical provisions, capital adequacy oGovernance issues oGroup/colleges issues oSystemic/ macroprudential issues New principles-based reserving requirements Enhancements to annuity disclosure to identify potential risk (e.g. interest rates movements) Enhancements to internal model calibration for segregated funds

19. Session 12: Panel on Life Annuities1925 Nov 2010 San Salvador Thank you for your attention. Any questions/ comments? jeffery.yong@bis.org www.iaisweb.org