Assessing Changes in Variable Annuity Expected Payments Due to New Contract Features

The Situation

As the market for variable annuities expanded, insurers developed new features that resulted in complex, option-like benefits. One particular feature is an investment fund combined with the variable annuity. Some reinsurers of variable annuity contracts with these innovative features alleged that the fund additions increased the risk of the reinsurance to an extent that violated the reinsurance contract. Such insurer and reinsurer disputes are often addressed in arbitration.

NERA's Role

Issuers of variable annuities engaged NERA to analyze the effects of adding investment funds to variable annuity products. NERA’s work included risk comparisons of available and added funds, consideration of potential shifts in investor allocations due to fund additions, and comparisons of particular variable annuities with other products in the market. Through Monte Carlo simulation of potential market and fund returns, and the option-like death benefits, NERA analyzed the effects of fund additions on risk to the reinsurer and valued death benefits with and without fund additions.

The Result

NERA’s analyses led to rulings by arbitrators that left the reinsurance contracts in place (in some cases with revised rules for fund additions).