Charges related to changes in policyholder assumptions on variable annuities with guaranteed benefits may emerge among life insurance companies in the U.S., putting a dent in earnings and capital, according to a new Moody's report in the wake of ING's announcement that it would take a 4th-quarter charge to earnings.
ING Group just took a $1.1 billion charge for changes in policyholder "behavior" assumptions related to the closed block of VA policies in its U.S. operation (p.24). And these assumptions could hold sway at other insurers as well, according to the report by Laura Bazer of Moody's.
She said that while assumptions charges are common, the specific ING charge could be part of a trend, as policyholders are becoming more informed about their complex insurance policies, and are acting to gain the value of guaranteed insurance benefits when they are "in the money."
In pricing and hedging the risks of their VA contracts, companies must also make assumptions about how many customers will hold on to their policies long enough to be eligible for benefit, how many of them will exercise guaranteed benefit options when they become available and how many more of them may exercise those options, the report explains.
If the company's assumptions underestimate how aware customers are in timing and making these decisions, "there can be significant unexpected additional economic costs to the company," Bazer stated.
