What’s Next for Fixed Indexed Annuities and their Income Riders? Presented by Noel Abkemeier Iowa Actuaries Club March 12, 2013 Page based on Title Slide from Slide Layout palette. Design is 1_Title with photo. Title text for Title or Divider pages should be 36 pt titles/28 pt for subtitles. PRESENTER box text should be 22pt. DATE text box is not on master and can be deleted. The date should always be 18 pts.

2March 12, 2013 Topics  Why focus on income riders today?  Issues on income riders –Design –Pricing –Reserving –Capital requirements –Hedging  Issues on underlying FIAs –Investment yield –Crediting methods  Direction of income rider market Page based on Title and Text from Slide Layout palette. Design is 1_Title with photo Subtitles are Part of Title Field, then Modified Manually (see next page)

3March 12, 2013 Why focus on income riders today?  Retirement income solutions are increasing in importance –Baby Boomers are magnifying the need for longevity protection –Investment unpredictability creates need for stable solutions  Income riders play a significant role on FIAs –Approximately two-thirds of sales include an income rider –Their experience can have a significant impact on profitability Page based on Title and Text from Slide Layot palette. Design is 1_Title with photo Subtitles are Part of Title Field, then Modified Manually (see next page)

4March 12, 2013 Many aspects of income riders deserve attention  Design  Pricing  Reserving  Capital requirements  Hedging Page based on Title and Text from Slide Layot palette. Design is 1_Title with photo Subtitles are Part of Title Field, then Modified Manually (see next page)

5March 12, 2013 How Might Income Rider Design Change?  Can risk be narrowed? –Shape of roll-up Non-constant? Vary by attained age? –Non-linearity of withdrawal percentages? –Index-based roll-up could become standard Narrow dispersion of risk –Greater use of separate early and late utilization designs  Will rider bonuses become more detached from premium bonuses? Page based on Title and Text from Slide Layot palette. Design is 1_Title with photo Subtitles are Part of Title Field, then Modified Manually (see next page)

6March 12, 2013 How Might Income Rider Design Change? (cont’d)  Will benefits expand? –Will LTC “Doublers” become “Triplers”? –Will death benefits based on remaining benefit bases thrive or contract?  Simplicity vs. multiple features –How much complexity is enough?  Vary cost by accumulation option? –“Overperformance” varies by design Page based on Title and Text from Slide Layot palette. Design is 1_Title with photo Subtitles are Part of Title Field, then Modified Manually (see next page)

7March 12, 2013 What might change pricing?  Design changes, particularly index-based roll-up –Lower risk creates lower costs  Rise in interest –Affordable rider roll-up tracks base annuity crediting  Data on utilization –Current data are sparse –Variable annuity data not necessarily transferrable  Reserve changes  RBC changes  Income rider hedging Page based on Title and Text from Slide Layot palette. Design is 1_Title with photo Subtitles are Part of Title Field, then Modified Manually (see next page)

8March 12, 2013 How will reserving change?  Current status: –AG 33 sets severe standard Assumes worst case utilization and 100% persistency More severe impact if guaranteed alternative death benefit equals remaining benefit base –Some state regulators allow use of AG 43 (variable annuity methodology) Iowa, Kansas, and Connecticut (if in separate account) Page based on Title and Text from Slide Layot palette. Design is 1_Title with photo Subtitles are Part of Title Field, then Modified Manually (see next page)

9March 12, 2013 How will reserving change? (cont’d)  Short term options on the table: –No change –Modification in AG 33 –Use of AG 43  Current direction: –Ultimately, new methodology in VM-22 (2016?) –NAIC waiting to see probable direction of VM-22 –Reasonable chance of interim solution in 2013 AG 33 with realistic utilization and persistency assumptions? “Standard Scenario” type of approach Page based on Title and Text from Slide Layot palette. Design is 1_Title with photo Subtitles are Part of Title Field, then Modified Manually (see next page)

10March 12, 2013 What next for RBC?  Currently RBC effectively is C-1 and C-3 on incremental reserves  Specific RBC requirements in C-3 Phase x –Stochastic? Page based on Title and Text from Slide Layot palette. Design is 1_Title with photo Subtitles are Part of Title Field, then Modified Manually (see next page)

11March 12, 2013 Is there income rider hedging in the future?  Hedging of income riders is uncommon to non-existent –Primary risk is reinvestment, but today that is a virtual non-risk  Hedging could be required in the future –Rating agency expectation when risk seems material? –Enterprise risk management Page based on Title and Text from Slide Layot palette. Design is 1_Title with photo Subtitles are Part of Title Field, then Modified Manually (see next page)

12March 12, 2013 Underlying FIAs affect income rider pricing  Investment returns  Crediting strategies Page based on Title and Text from Slide Layot palette. Design is 1_Title with photo Subtitles are Part of Title Field, then Modified Manually (see next page)

13March 12, 2013 What can impact investment returns?  Rise in yields on fixed yield investments –Creates opportunity for stronger income rider roll-ups or withdrawal allowance percentages  Entry of private equity investors –New investment approaches –Specific set of investment expertise –How will additional yields be utilized? Page based on Title and Text from Slide Layot palette. Design is 1_Title with photo Subtitles are Part of Title Field, then Modified Manually (see next page)

14March 12, 2013 Are there higher yielding crediting strategies?  Actively-managed indices  Direct or indirect use of margin/spread fee –“Optimized Overperformance”  Volatility-controlled indices –Lower cost hedging, thus better formulae Page based on Title and Text from Slide Layot palette. Design is 1_Title with photo Subtitles are Part of Title Field, then Modified Manually (see next page)

15March 12, 2013 Where is the income rider market heading?  Income riders will continue to meet a growing need for guaranteed lifetime income  Income approaches with access to assets should maintain an advantage  Rising interest rates will embellish the proposition  FIA with income riders, which are the lowest cost income riders, should maintain a strong position Page based on Title and Text from Slide Layot palette. Design is 1_Title with photo Subtitles are Part of Title Field, then Modified Manually (see next page)

16March 12, 2013 Questions? Page based on Title and Text from Slide Layot palette. Design is 1_Title with photo Subtitles are Part of Title Field, then Modified Manually (see next page)