Regulators May Update Indexed Annuity Capital Thermometer

Yan Fridman, an actuary with Great American, has told members of the working group that regulators originally kept indexed annuities out of the C-3 Phase I rules because of a belief that the big problem with indexed annuities would be the volatility of investment indexes linked to the performance of the stock market.

Today, Fridman said, life insurers have shown that they can do a good job of managing stock market-related risk by using instruments such as derivatives to hedge their risk.

The real challenge the issuers have is risk related to the performance of bonds and other fixed-income holdings, which is the same risk they have when issuing traditional fixed annuities, Fridman said.

"Therefore, the C-3 Phase I scope should include indexed annuities without riders that are well-hedged without riders because this would recognize the benefit of well-matched assets and liabilities and result in the product being treated in a manner consistent with other fixed annuities," according to the working group meeting summary.

Living benefits riders should still be excluded from the C-3 Phase I RBC calculation framework, because living benefits riders do involve exposure to equity risk, Fridman said, according to the meeting summary.

A Third Risk

Birny Birnbaum, director of the Center for Economic Justice, said he has concerns about applying the same RBC rules to indexed annuities as to traditional fixed annuities.

Traditional fixed annuities involve exposure to interest rate risk and mortality risk, Birnbaum said, according to the meeting summary.

Indexed annuities involve exposure to interest rate risk, mortality risk and hedging risk, Birnbaum said.

The costs of hedging are not fixed, and those costs may vary along with changes in economic conditions, Birnbaum said.

Resources

Links to Life Risk-Based Capital Working Group documents are available here, in the Meeting Materials section.

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