9 May 2014 News

Re-opening of VA market is a positive

The re-emergence of an active reinsurance market for variable annuity (VA) risk is a potential positive development for US life insurers that sell VAs.

This is according to Fitch Ratings, which found that improved pricing and less aggressive investment guarantees are leading to a re-opening of the reinsurance market in this segment, giving writers of VAs an alternative to in-house VA hedging programmes.

The presence of the active market is seen positively by Fitch, but it stated that it is unclear the extent of the impact this will have on the risk profile of VA writers.

It could result in a reduction in the industry's exposure to VA risk or, conversely, it could simply allow insurers to sell more VAs than they otherwise would. Fitch expects the ultimate answer to lie somewhere between the two extremes.

“The VA reinsurance market has been very volatile in terms of supply. It was very active in the 1990s but virtually dried up following the equity market correction in 2000-2002. After reinsurers re-entered the market in 2006-2007, it dried up once again following the equity market correction in 2008-2009,” said the rating agency.

Fitch reported an increase in reinsurance transactions involving variable annuity risk. CIGNA, previously a reinsurer entered into a reinsurance transaction in February 2013 with a subsidiary of Berkshire Hathaway on an in-force book of variable annuities.

In the fourth quarter of 2013, Lincoln National’s largest insurance operating subsidiary entered into a reinsurance treaty with Union Hamilton Reinsurance, a Bermuda-domiciled subsidiary of Wells Fargo & Co. This transaction was particularly notable in that the reinsurance agreement involved future new business.

Fitch believes that more VA writers are exploring potential opportunities to cede a portion of the risk associated with their VA guarantees, but no other significant announcements of such treaties have yet emerged.

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