Variable Annuities by Kannoo Ravindran & Kalberer Tigran

Author:Kannoo Ravindran & Kalberer, Tigran [Kannoo Ravindran]
Language: eng
Format: epub
Publisher: Risk Books
Published: 2009-11-30T16:00:00+00:00

International insurance groups use internal reinsurance arrangements as a tool to centralise risk management and benefit from the economies of scale or to take advantage of a certain regulatory treatment. For the centralised internal reinsurer, the considerations for external reinsurance are the same as for a stand-alone VA writer. Furthermore, the ability to centralise is also affected by the peculiarities of the products in local markets, and this can in turn limit the economies of scale. External reinsurance may also be used to address any limitations that may arise.

A new driver for reinsurance is the story a company wants to tell to its investors. Companies that have had their fingers burnt by financial-market risks in the past can now use reinsurance and communicate to their shareholders that they have fully reinsured their VA business. Doing this helps to increase their credibility in the marketplace among shareholders and puts to rest concerns regarding exposure to such products, contrary to some of the recent press releases in regards to VA writers incurring heavy losses due to the lack of a prudent and effective risk management programme.

TREATY CONCEPTS

The most common reinsurance agreement focuses only on the guarantees of the product. The reinsurance benefit is the positive difference between the guarantee level and the actual fund value at the time of the claim. In certain specific circumstances it may be beneficial to the parties for the fund management to be transferred to the reinsurer as well. However, this is usually not required.

The reinsurance premiums are normally expressed in basis points of the fund value. This means that the dollar value of the premiums is lower when the guarantees are in-the-money (and therefore valuable) and higher when the guarantees are out-of-the-money. Alternative charging structures for reinsurers are based on the single premium or on the guarantee levels and are therefore less sensitive to policyholder behaviour (eg, high lapses in the case of out-of-the money guarantees have less impact on the overall profitability, since the corresponding reinsurance charges are not higher than those for the other scenarios.) Such an approach needs to be considered at the product-design stage if alignment between the reinsurance premiums and customer charges is desired.

As long as the guarantees are fully transferred to the reinsurer, the statutory treatment of the reinsurance agreement is clear in most regulations. Due to the fact that the reinsurer is now liable for meeting those guarantees, the original risks are replaced by the counterparty risk of the reinsurer. As long as the reinsurer can meet its liabilities, the ceding company will be able to pay the guarantees. This is commonly referred to as “reserve credit for reinsurance”, which means that the ceding company no longer has to establish its own reserves for the guarantees. Instead, the insurer may have to hold a reserve or capital provision against the counterparty risk of the particular reinsurer taking over the guarantee risks .

In most cases, ceding companies are looking to pass the guarantee risks to the reinsurer in a comprehensive way.

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