EBIG notes: Structured VAs

At the Society of Actuaries's recent conference on Equity-Based Insurance Guarantees, one of the more interesting sessions (for me) related to structured variable annuities. These are a relatively new product, and fill a market gap between traditional variable annuities (VAs) and fixed indexed annuities (FIAs). They offer the consumer more downside protection than VAs, while offering more upside opportunity than FIAs.

The session was presented by Ari Linder of Munich Re and Simpa Baiye of PwC. As both explained, a structured VA is constructed off of a reference market index. However, client funds are not invested in the index. Rather, the annuity writer creates index exposure through derivatives -- selling an out-of-the-money put option, and using the proceeds to purchase a call spread. The put creates downside protection; the call spread, upside opportunity. Client funds are invested in the annuity writer's general account. Investment income on the funds, along with product fees, is used to cover administrative expenses and profit margins.

I've simplified, of course. There is quite a lot more to the product, including variations in the product offering, operational details, typical sales channels, accounting treatment, and so on. However, what most interested me as a former risk manager is the product's risk profile for the annuity writer.

Similar to an FIA without living benefits, the structured VA writer bears very little market risk at the outset. The payoff to the client is mirrored by the payoff on the derivatives used to construct the product. Basis risk is minimal, because market indices are selected on the basis of derivatives market liquidity. Volatility and interest rate risk are mitigated because the writer can adjust the product parameters (cap, buffer, floor) at each reset -- and higher volatility can reasonably be expected to increase proceeds from the sale of the put as well as the cost of the call spread. That's not to say market risk disappears. As Baiye noted, there may be opportunities for an annuity writer to exploit offsetting payoffs on traditional VA products to offset risk internally and reduce hedging costs; this would require more active market risk management. And as with FIAs, there is a need for the annuity writer to aggregate annuity contracts into cohorts that are large enough to buy derivatives against. Writers will need to bear or hedge some market risk at the margins.

That said, the larger risk in structured VAs is one we know well at Ruark: Policyholder behavior risk. The product contains various disincentives to policyholders surrendering their policies, but there is always some surrender activity on financial products. Circumstances change -- both personal circumstances and market circumstances. So it makes sense for the annuity writer to buy derivatives on less than 100% of the exposure. But how much less? That depends on the annuity writer's assumptions about persistency.

Will policyholder behavior on structured VAs resemble that of FIAs? Or that of VAs? With or without living benefits? A case can be made either way, especially with the confluence of distribution channels for VAs, FIAs, and even structured retail products. Surely today's annuity writers are seeing experience, but how might that experience change in the future? As product sales grow -- they are currently about $8bn per year -- we can expect the question to grow in importance.

Image credits: Simpa Baiye, PwC

Organizational news at Ruark

Hi folks, a few quick updates so you are acquainted with who's doing what for you in our shop: * Sally Osit has taken on the new role of Chief Administrative Officer, responsible for centralized functions such as project management, IT, HR, and administration for Ruark's large block of annuity reinsurance treaties. * Eric Halpern has recently joined us as Chief Operating Officer, responsible for leading our consulting operations, with a primary focus on policyholder behavior analytics, including industry- and company-level experience studies, predictive modeling and assumption model development, and related client projects. The rest of our team is still here and as vital as ever, myself hopefully included. Congratulations to Sally and Eric in their new roles. We know that these changes will help us to more efficiently provide the excellent products and services that you have come to know and expect from us. Please feel free to contact any of us with questions. Tim

Our 2017 plans for behavioral analytics



Are your assumptions informed by credible industry experience?


checkWe provide a powerful combination of industry- and company-level experience studies, predictive modeling, traditional analytical techniques, and expert judgment, based on seriatim monthly data since 2007, covering approximately 70% of the annuity industry.

Is your analytical framework robust as new data emerges?

checkWe work with you to customize and implement our behavioral analytics framework, with transparent linkage from experience data to assumption models, naturally suited to regular updates for inforce and new business.

Are your analytics granular enough to mitigate anti-selection and proactively manage changes in your business mix?

checkWe address the many factors of influence and their changes over time, including product and guarantee type, surrender charge period and duration, moneyness of guarantees on actuarial and nominal bases, contract size, tax status, age, gender, distribution channel and compensation structures, and income utilization and efficiency.

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checkIt is to us too. We provide the timely and immediately actionable results you need to efficiently manage your company’s behavioral risks.


We aim to be the platform and industry benchmark for principles-based insurance data analytics and risk management.


2017 VA and FIA Behavioral Modules

For each of: Options
VA Surrenders       VA Income Utilization       VA GMIB Annuitization       FIA Surrenders       FIA Income Utilization 1 2 3
Experience Studies – industry results in aggregate, along with your company results, in a detailed report with numerical exhibits covering key factors, cohorts, and dynamics
Customized assumption model – initially calibrated to industry results, and tailored to your company based on credibility techniques
Review of your current assumptions, and comparison to the customized model above
Benchmarking of your results relative to peers
Presentation and discussion with our team
Membership on our Behavioral Analytics Advisory Council




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Timothy Paris

How well can you model GLWB behavior?

In collaboration with UCONN's Goldenson Center for Actuarial Research, we have developed a remarkable approach to modeling policyholder behavior for deferred annuities (particularly GLWB income utilization), with strong goodness of fit to historical data and high predictive power. All of this is fueled by industry-level data, and then tailored to each company using credibility procedures. Actuaries, A/E ratios in the 99-101% range?! Yes, it can be done. Hit us up.

Join us at the 2017 Retirement Industry Conference

Tim Paris will be moderating the session "Leadership Perspectives: Industry Benchmarking, Behavioral Analytics, and Executive Communication". Hope to see you there.


Podcast - Growing Your Company’s Predictive Analytics Capabilities.

Steve Wright and Tim Paris participated in this podcast of the Society of Actuaries' Predictive Analytics and Futurism section.

Predictive Analytics Case Study – Growing Your Company’s Capabilities

February 22, 2017

Length: 16:11

Sponsor: Predictive Analytics and Futurism Section

Description: Listen in as Shea Parkes, FSA, MAAA interviews Timothy Paris, FSA, MAAA and Steve Wright, FSA, MAAA from Ruark Consulting.  Tim and Steve have developed predictive analytics expertise at their company over the last few years.  They share stories from that journey and some suggested resources for others wanting to do the same.



Tim Paris sharing policyholder behavior insights in London


Non-traditional Life Insurance Products with Guarantees:From Variable Annuities to CPPI

8th - 9th March 2017, London

Tim Paris will be sharing policyholder behavior insights from the US market at the Non-traditional Life Insurance Products with Guarantees event next week in London.  http://www.training.risk.net/va/static/home