RILA and VA GMxB U.S. Statutory Reporting Offsets: Implications to Pricing and In-force Management

By Nicholas Carbo, Carson Cook, and David Elliott

Product Matters!, February 2023

Registered Indexed Linked Annuity (RILA) product sales have boomed in recent years due to an attractive proposition of upside crediting potential combined with market protection (see Figure 1). RILA offers many benefits to insurers including expanding their annuity suite to meet the needs of clients with different risk tolerance levels.

Due to the potential for a policyholder to lose money, RILA products are classified as Variable Annuity (VA) products and therefore subject to VA nonforfeiture law, VM-21, and C3 Phase 2. This results in a unique opportunity for insurers to aggregate blocks of RILA and VA with guaranteed minimum benefits (VA GMxB) for the purpose of U.S. statutory reserve and capital calculations. This article highlights the impacts to reserves and capital due to offsetting risks when aggregating RILA and VA GMxB along with the implications to capital planning and pricing.

Figure 1
2015–2022 Deferred Annuity Sales ($B)

Source: LIMRA LOMA U.S. Individual Annuity Sales Study

 

Figure 2
RILA cap with buffer design

Reserve and Capital Impacts

Two potential offsets exist when combining RILA and VA GMxB blocks:

1. Point-in-time reserve and capital diversification
2. Offsetting equity exposures

Point-in-time reserve and capital diversification benefits are realized when aggregating RILA and VA GMxB blocks within scenario reserve calculations. VM-21 reserves and C3 Phase 2 capital are calculated using CTE 70 (average of worst 30% of scenario reserves) and CTE 98 (average of worst 2% of scenario reserves) respectively. Aggregating RILA and VA GMxB blocks in CTE calculations can provide an offset relative to standalone calculations because:

• Worst scenarios may be different between RILA and VA GMxB
• RILA scenario reserves may be less than cash surrender value (CSV), even for tail VA GMxB scenarios, which are floored on a standalone basis

RILA and VA GMxB blocks provide offsetting equity exposures when aggregated due to the design of the products. This offset is highlighted in the following two cases shown in Table 1:

Table 1
RILA and VA GMxB offsetting equity exposures

Equity performance	RILA	VA GMxB
Positive	Liability increases due to positive index credits	Liability decreases due to lower expected rider claims
Negative	Liability decreases due to negative index credits	Liability increases due to higher expected rider claims

 

RILA writers can leverage the offsetting equity exposures by combining RILA and VA hedging. RILA writers that do not combine their RILA and VA hedge programs may still see the offsetting equity exposures in the U.S. statutory reserve and capital CTE adjusted runs. Although the combination of RILA and VA hedge programs is outside the scope of this article, the offsetting equity exposure is explored through the CTE adjusted runs in the section below.

Illustrative Analysis

To demonstrate the potential offsets of RILA and VA GMxB aggregation, reserve and capital analysis are shown based on sample RILA and VA products (see Table 2).

Table 2
Sample product designs

RILA	VA	Other modeling considerations
Term length: 1 year Index: S&P 500 Buffer level: 10% Cap rate: Solved* Business type: New business Amount: Varying	GMxB rider: GMWB Death benefit rider: ROP Equity exposure:  65% Benefit base / AV: 143% Business type: In-force Amount: 10 billion	RILA hedging: Static VA hedging: Implicit method Error factor: 10%

* Solved to maintain level pricing spread based on the economic environment

The Total Asset Requirement in excess of cash surrender value is summarized in Tables 3 and 4. Results vary by the following factors:

• Standalone for each of RILA and VA GMxB and aggregate for both RILA and VA GMxB
• Amount of RILA account value
• Reflecting inclusion and exclusion of future RILA index hedge credits in adjusted runs

 

Table 3
Total asset requirement in excess of CSV*: reflects future RILA index hedging in adjusted run
$millions, except RILA contract value

RILA CV	TAR-CSV: RILA	TAR-CSV: VA GMxB	Sum	Aggregate	Impact of aggregation
$0	0	503	503	503	0
$1B	6	503	509	487	(22)
$2B	13	503	516	472	(44)
$3B	19	503	522	460	(62)
$4B	26	503	529	449	(80)
$5B	32	503	535	439	(96)
$7.5B	48	503	551	418	(133)
$10B	64	503	567	400	(167)
$15B	97	503	600	378	(222)
$20B	129	503	632	384	(248)

* Values based on sample products and can vary greatly by product design, economic environment, etc.

Table 4
Total asset requirement in excess of CSV*: Ignores future RILA index hedging in adjusted run
$millions, except RILA contract value

RILA CV	TAR-CSV: RILA	TAR-CSV: VA GMxB	Sum	Aggregate	Impact of aggregation
$0	0	503	503	503	0
$1B	64	503	567	483	(84)
$2B	128	503	631	465	(166)
$3B	192	503	695	451	(244)
$4B	255	503	758	462	(296)
$5B	319	503	822	494	(328)
$7.5B	479	503	982	607	(375)
$10B	639	503	1,142	732	(410)
$15B	958	503	1,461	999	(462)
$20B	1,277	503	1,780	1,292	(488)

* Values based on sample products and can vary greatly by product design, economic environment, etc.

Key Takeaways

Aggregating RILA and VA GMxB blocks results in a lower TAR in excess of CSV than on a standalone basis, as a result of point-in-time reserve and capital diversification and offsetting equity exposures.

Offsets are larger when excluding future RILA index hedging in the adjusted run. The point-in-time reserve and capital diversification is realized regardless, while the additional offset as a result of offsetting equity exposures is also realized when future RILA index hedging is excluded.

Aggregated RILA and VA GMxB TAR in excess of CSV is lower when excluding future RILA index hedges in the adjusted run when RILA CV is $3 billion or less and lower when including future RILA index hedges in the adjusted run when RILA CV is $4 billion or more.

As the RILA total CV increases, the aggregated TAR in excess of CSV declines until an inflection point when it begins to increase, as follows:

• When reflecting future RILA index hedges, the excess increases once RILA CV exceeds $15 billion
• When excluding future RILA index hedges, the excess increases when RILA CV exceeds $3 billion

The latter is driven by the unhedged CTE adjusted run spiking after RILA CV exceeds $3 billion (see Figure 4). For the sample products, this trend suggests the offsetting equity exposure is optimized when RILA CV is 30% of VA CV.

Figure 4
CTE 98 (adjusted) aggregated asset requirement in excess of CSV*: Ignores future RILA index hedging ($10B of VA CV)

* Values based on sample products and can vary greatly by product design, economic environment, etc.

Capital Management Considerations

Capital will fluctuate over time as the scale of RILA and VA GMxB blocks change. RILA writers should project out the aggregation offset to understand future capital dynamics under various economic conditions and sensitivities to policyholder behavior assumptions (e.g., lapses).

RILA lapsation could lead to increases in capital if lapses are higher than assumed in the scenario reserve calculations. This increase could particularly come into play in the RILA shock lapse period. Shock lapse experience for RILA products is currently limited. If the actual shock lapse is greater than assumed, a spike in TAR could occur due to a lower aggregation offset than projected. RILA writers should sensitivity test their RILA shock lapse assumption to assess the impact of a large shock lapse.

M&A and Reinsurance Implications

As VA GMxB blocks have matured, mergers and acquisitions (M&A) and reinsurance transactions have become very common. The presence of a RILA block could impact transactions for divesting and acquiring these blocks. Values from Table 3 with a $1 billion RILA block are used to illustrate potential impacts. The following considers a transaction in which the writer of both VA GMxB and RILA is looking to sell their VA GMxB block to a buyer with neither VA GMxB nor RILA.

The transaction will have implications for both parties, Table 5. The seller will retain $6 million of TAR in excess of CSV while the buyer will be responsible for $503 million of TAR in excess of CSV. If all supporting assets are transferred, the buyer would need an additional $16 million of funding. The seller would need to post an additional $6 million of capital for the standalone RILA capital requirement.

Table 5
Total asset requirement in excess of CSV ($M): Seller has RILA but the buyer does not

Pre-transaction	Post-transaction		Additional funding
Seller	Seller	Buyer	Seller	Buyer	Total
487	6	503	6	16	22

 

A buyer with an existing RILA block could be positioned with a more competitive bid to help win the VA GMxB block. In the example above, if the buyer had a RILA block, and the seller did not, then the buyer would realize the $22 million aggregation offset when acquiring the block, which could be factored into the price offered.

Pricing Impacts

Many RILA writers reflect the reserve and capital diversification in evaluating profitability for their RILA products. According to an Oliver Wyman survey (as of March 2022) Figure 5, 46% of participants included VA GMxB / RILA diversification in RILA pricing. Common ways that pricing teams reflect the benefit is through either holding zero C3 Phase 2 capital or applying a percentage reduction to reserve and capital values, subject to a capital floor.

Reflecting these benefits in VA GMxB pricing is less common because these blocks typically dominate the reserve and capital calculations.

Figure 5: Aggregation offset in RILA pricing

If reflecting aggregation offsets in pricing, RILA writers should be aware that capital offsets from RILA may decrease as more RILA is issued relative to VA GMxB. Figure 6 shows the incremental change to aggregate TAR in excess of CSV for each additional $1 billion of RILA sales added, based on the data used in Table 3.

Figure 6
Incremental capital benefit: varying level of RILA CV and $10B of VA CV

* Values based on sample products and can vary greatly by product design, economic environment, etc.

Key Considerations

RILA and VA GMxB aggregation benefits from point-in-time reserve and capital diversification and the offsetting equity exposures between RILA and VA GMxB products. The offsets can vary over time, so RILA writers should ensure their capital planning team is aware of potential capital fluctuations. Below are a few areas that should be analyzed:

• Changes to RILA sales levels
• RILA shock lapse assumptions
• VA GMxB block runs off slower or faster than expected
• M&A and reinsurance implications

RILA writers should consider how to reflect the offsets in pricing and answer the following questions:

• How / if the aggregation offset is reflected in pricing? If so, will the offset be reflected in RILA, VA GMxB, or both?
• Should the benefit grade off over time? If so, how do you determine the grade off approach?
• How should the offset be reflected for different levels of RILA sales?

Regardless of the pricing approach, when evaluating profitability RILA writers should periodically assess reasonability by comparing to the actual offset realized.

Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries, the editors, or the respective authors’ employers.

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Nicholas Carbo, FSA, MAAA, is a Senior Principal with the Actuarial Practice of Oliver Wyman. He can be reached at nicholas.carbo@OliverWyman.com.

Carson Cook, FSA, MAAA, is a Manager with the Actuarial Practice of Oliver Wyman. He can be reached at carson.cook@oliverwyman.com.

David Elliott, FSA, CERA, MAAA, is a Senior Manager with the Actuarial Practice of Oliver Wyman. He can be reached at david.elliott@oliverwyman.com.