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July 7, 2010, Cover Stories, Annuities
How Many VA Owners Will Bail Out?
Issuers of variable annuities with income benefits could face lower-than-expected lapse rates and higher reserve requirements over the next 18 months, says Oliver Wyman.
With billions of dollars worth of variable annuity contracts with in-the-money living benefit riders leaving their surrender periods over the next 18 months, the issuers of those contracts will soon learn if their lapse rate assumptions were close or not.
For those who guessed right, no great shock is in store. For issuers who guessed widely wrong, say analysts at Oliver Wyman Group, lower-than-expected lapse rates could translate into higher-than-expected reserve requirements and a potential dent in profitability.
“We should see lower lapses than in previous nonguaranteed blocks,” said Todd Solash, partner, and senior manager Aaron Sarfatti at the global consulting firm, which advises insurance companies on risk management and overall strategy.
Industry-wide, reserve requirements could rise by $1 billion to $5 billion over the next 18 months for the $400 billion in outstanding VAs with living benefits, they said.
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