How financial solutions are shaping the U.S. annuity market

00:00:03:

00:00:16: What role financial solutions play in the U.S.

00:00:19: annuity market, why they matter for managing capital across both new and enforced business and how they help insurers offer competitive products while meeting regulatory and shareholder expectations.

00:00:33: Welcome to Replay by Hannah Vary.

00:00:34: I'm your host, Susanna Loomis, and today we'll talk to Tiffany Norman about how financial solutions are shaping the U.S.

00:00:40: annuity market.

00:00:42: This podcast is for general information only, no professional advice, and is subject to change.

00:00:47: You can find the full disclaimer in our show

00:00:49: notes.

00:00:50: Welcome to our podcast, Tiffany.

00:00:52: Guten Tag, Susanna.

00:00:54: Very good.

00:00:55: And now good to have you here in Germany.

00:00:57: It's great to have a visitor from our U.S.

00:01:00: local offices.

00:01:02: Tiffany's executive VP head of annuity solutions at our U.S.

00:01:06: subsidiary and she'll talk about how financial solutions are helping insurance navigate capital challenges and shape the U.S.

00:01:13: annuity market.

00:01:15: To start us off, can you briefly explain why annuity products are such a popular offering for primary insurance?

00:01:23: Of course.

00:01:24: Much of the world will think of an annuity as a product that converts an upfront investment into a stream of lifetime benefits at the time of retirement.

00:01:32: In other words, an immediate decumulation of an investment for longevity protection.

00:01:37: While this is a fundamental element of every annuity product, it is not the dominant use of annuities in the United States.

00:01:45: What is the typical use in the US?

00:01:47: The prevailing use of an annuity product in the US focuses on accumulation.

00:01:52: Someone will still provide an upfront investment but that is typically fifty to twenty years before retirement and the investment is intended to accumulate over time with tax advantages and often some investment guarantees and various benefits from the insurance company.

00:02:07: These tax advantages, investment guarantees and benefits make annuities attractive to include in a diversified retirement portfolio.

00:02:16: While annuity sales have been increasing and are expected to exceed four hundred billion of annual sales this year, annuities are actually not as popular as they should be in the US.

00:02:26: We will discuss that a bit today.

00:02:28: Great.

00:02:29: Let's get into it then.

00:02:31: If annuities are still underutilized despite their benefits, is that because insurers are running into obstacles?

00:02:38: Like what financial challenges do they typically face when offering competitive annuity products?

00:02:44: Annuity products, much like life insurance, are consumer protection products.

00:02:50: Insurance companies must establish statutory liabilities and regulatory capital.

00:02:55: They typically pay heaped commissions to sales agents and must cover the cost of business.

00:03:00: all while having to meet required return on shareholder equity.

00:03:04: If that wasn't challenging enough by itself, this all needs to be balanced with competitiveness of other products in the markets.

00:03:10: Yeah, that sounds a bit like a balancing act.

00:03:13: Insurance companies must be efficient with their capital in order to provide quality products to the market while still meeting their shareholders' metrics, their regulators' requirements, and rating agency targets.

00:03:24: Balancing these items can make offering attractive products to consumers challenging.

00:03:29: Yeah.

00:03:30: And how do financial solutions help address those complexities?

00:03:34: I'll start by dispelling a misconception.

00:03:37: When people hear financial solutions, they sometimes think of overly complex or opaque arrangements.

00:03:45: A financial solution simply means reinsurance arrangements that are driven to optimize insurance business, specifically to address Some of the challenges I noted earlier to make insurance business more efficient, either by supporting new business or by improving the financial profile of an enforce block.

00:04:06: Both ultimately help insurers deliver better products to consumers while still meeting shareholder expectation and regulatory requirement.

00:04:15: This concept is not unique to the US, but the market is large and very active.

00:04:21: Yeah.

00:04:21: And that active U.S.

00:04:23: market has been a major focus for you.

00:04:25: And you've been with Hanover East since two thousand and six.

00:04:29: So that's quite a number of years.

00:04:31: And you've helped it reach significant growth in the U.S.

00:04:34: annuity market.

00:04:36: What has kept you going personally?

00:04:38: And what are some of the biggest changes you've seen in the industry over time?

00:04:42: What has kept me going?

00:04:44: Early in my career, I relied on the blessing of youth.

00:04:48: I was burning both ends of the candle as the phrase goes.

00:04:52: I realized pretty quickly that was not going to end well for anyone.

00:04:57: I rebalanced my life and my schedule, prioritized my health and my wellness.

00:05:02: And I just strive to be a happy, healthier person for my family, my friends, my colleagues.

00:05:08: And I'm never perfect, but always progressing daily.

00:05:13: Progress is a great commitment to growth.

00:05:16: That's perfect.

00:05:17: As far as changes, I honestly don't remember a time in my career when things weren't drastically changing.

00:05:24: I started my actual career when we were entering a global financial crisis in in two thousand six, two thousand seven.

00:05:31: following declining and historically low interest rates.

00:05:35: Then we had the first major tax reform in the United States since the nineteen eighties, then a global pandemic followed by drastically increasing rising interest rates.

00:05:46: In between these drastic economic events were major shifts in the insurance industry.

00:05:51: I've witnessed changes in accounting standards, reinsurance regulations, actual guidelines, the introduction of principles based reserves.

00:06:00: the entrance of private equity into the insurance sector and now drastic growth of annuities and pension risk transfer in the US.

00:06:09: Yeah, you've seen it all.

00:06:11: So I've settled on the fact that change is just another normal day and our role at Hanover Rea and my role in leading the annuity solutions team is constantly create solutions for the new normal and prepare the team to do it again year after year.

00:06:26: Yeah.

00:06:26: That's true.

00:06:28: And thank you so much for sharing that.

00:06:30: So personal growth and professional resilience really shaped your journey.

00:06:35: And it's also a reminder that our industry is all about adapting to change and protecting people's futures and building solutions that hold up in, you know, uncertain times.

00:06:46: Would you walk us through the most common challenges you see in your work?

00:06:51: Right now, the most common challenge our clients bring us to solve is new business strain or surplus strain.

00:06:58: When insurers issue annuity products, they must establish statutory reserves in capital, pay heaped commissions and acquisition expenses, leaving them in a strained position at issue.

00:07:09: This makes it challenging to price profitably from an internal rate of return perspective.

00:07:15: And what about enforced blocks?

00:07:17: Enforced blocks can create a similar issue in terms of trapped capital or embedded value, which may restrict dividends or prevent and ensure from investing in other attractive ventures.

00:07:28: While these are similar issues, the discussions take place at different points in time of the lifecycle of a book of business.

00:07:36: Okay, so ensure us face pressure at different stages.

00:07:40: And how do you work through that with them?

00:07:43: For new business, we often collaborate with a carrier earlier in product development.

00:07:49: So they can incorporate the value and financial support.

00:07:51: The reinsurance provides their products directly into the pricing.

00:07:55: This often allows them to offer more competitive rates to the market.

00:07:59: We usually work directly with the new business or product team on these arrangements.

00:08:04: This can be an iterative process as the insurer develops new features and refines the product rates.

00:08:10: We then refine our reinsurance solution with both parties ensuring that the final product and reinsurance arrangement meets desired objectives.

00:08:19: This process can take anywhere from six to eighteen months, depending on the product and priority for the insurer.

00:08:26: And is that the same for enforced blocks?

00:08:28: For enforced blocks, the key driver of reinsurance is typically a strategic initiative or overall capital management objective.

00:08:36: Sometimes we will work with the product team But more often, it would be the reinsurance or capital management teams.

00:08:44: These reinsurance transactions tend to be less iterative and more driven by a target date so that the insurer can achieve a desired objective.

00:08:54: But there is still a fair amount of optimization that can take place on the arrangement in terms of reinsurance coverage, allowances, tenure, financing rates, investment guidelines, collateral.

00:09:06: the list goes on.

00:09:07: Got it.

00:09:08: And looking at the product itself, do you think consumers today have a sufficient understanding of how annuities work and what they offer?

00:09:18: I read an unfortunate statistic in an article the other day that nearly seventy-nine percent of adults struggled to identify the correct definition of an annuity.

00:09:29: Now, this was a bold headline to attract readers.

00:09:32: The survey was on a sample of twenty-five hundred people or so credible, but still it did not surprise me that so many people truly did not know how annuities work.

00:09:45: And how do we help reach that gap?

00:09:47: As a reinsurer, our clients, our policy holders, our insurance companies, this is where most of our attention and advocacy focuses on that relationship.

00:09:59: But we are equally a supporter of the insurance industry and insurance products for the consumer.

00:10:06: There are excellent educational efforts out there aimed at helping people better understand retirement planning and the role annuities can play in it and we are large supporters of those.

00:10:17: Yeah, absolutely.

00:10:18: Education and advocacy are key to improve understanding.

00:10:22: And those product design, how do you tailor solutions to different types of annuities like fixed, indexed, or structured products?

00:10:32: The basic principles of financial solutions are the same, no matter the underlying product.

00:10:39: We need to understand the insurer's objectives for reinsurance.

00:10:43: Do they need to improve new business pricing?

00:10:46: Do they need to lessen capital constraints?

00:10:49: Do they need to reduce balance volatility?

00:10:52: Then we need to understand the insurance product itself, the rates, the features, the benefits, the accounting requirements.

00:11:00: Then we have to understand the underlying risk of the product, the biometric risk and the economic risk.

00:11:07: And then we will structure a reinsurance agreement that accomplishes the insurer's objectives.

00:11:12: while balancing Hanover Reeves objectives, considering all of the aforementioned items.

00:11:20: It is challenging to me to start with the solution and work backwards.

00:11:25: I prefer to start with all of the foundations of the components and then build a solution.

00:11:30: Yeah, I get that.

00:11:32: And what role does client collaboration play in developing these solutions?

00:11:38: It varies on the experience of the insurer.

00:11:41: in these types of arrangements, we need our clients involved in giving us feedback on our proposals, mainly how it impacts the insurer and if we are meeting their objectives.

00:11:54: But for companies that have not transacted a financial solutions before, we are comfortable taking the lead and developing the solution.

00:12:03: If an insurer can simply describe their problem or their constraint on a block of business, Sometimes that is all we need to know to develop a solution.

00:12:12: Okay, that makes sense.

00:12:14: So once you understand the insurer's pain point, you can start shaping a solution.

00:12:19: And what trends are you seeing in the annuity market that we should be paying attention to?

00:12:24: The retirement market and annuities have always been fascinating to me.

00:12:29: The sheer size of the US market is massive, standing well over forty four trillion dollars.

00:12:38: with a T. That accounts for sixty percent of the total global retirement assets.

00:12:46: These are primarily held in individual accounts.

00:12:51: with a significant portion backing pensions and over four trillion dollars supporting annuity products alone.

00:13:00: There is a term called peak sixty five, which is the demographic shift.

00:13:05: We're about twelve thousand Americans are turning sixty five every day.

00:13:11: This has significant implications for retirement planning and is driving innovation in the annuity market to meet the needs of these consumers.

00:13:21: Yeah, and how's the industry responding to these large numbers?

00:13:26: Transom scene in the market include the continued impressive sales of deferred annuities, a renewed focus on annuities with guaranteed living benefit riders, a massive increase in sales of registered indexed linked products, Target innovation for the in-plan space which offer annuities through employers and individual retirement accounts.

00:13:54: All around I'm pleased with the progress of the industry bringing more annuities along with more protection and guarantees to the market.

00:14:02: And I look forward to that continuing for the next twenty years of my career.

00:14:08: And how do you think financial solutions will change over the next few years?

00:14:12: Financial solutions have become table stakes in some product lines and markets as partnering with a strong third party brings significant value that can be incorporated into the rates of the product.

00:14:24: This brings richer benefits and guarantees to the policy holders issued by the insurers and backstopped by reinsurers.

00:14:31: The structures of the transactions will certainly change as they have many times in my twenty years but I do not see the role of financial solutions necessarily changing at least in the U.S.

00:14:42: These are valuable solutions to insurance companies that allow them to issue better products to the consumer.

00:14:48: So what's next on the horizon?

00:14:51: What we may see is a broadening of these solutions on newer products or products that are reaching large volumes, such as pension risk transfer, registered index linked annuities, in-plan annuities and payout products focused on immediate care or long-term care needs.

00:15:09: Not to mention that we are entering a new reserving regulation under Evaluation Manual twenty-two.

00:15:16: Companies will be adopting the new regulation over the next three years and will have varying reserve requirements depending on their books of business and their asset management strategy.

00:15:26: There will be more to come and very interesting developments here.

00:15:30: Great.

00:15:30: And do you have any advice for insurance?

00:15:33: who are thinking about using re-insurance, not just as a risk transfer tool, but as a strategic enabler?

00:15:39: Quite

00:15:39: often the best advice is simple.

00:15:41: Reach out to Hanover Re.

00:15:43: We would love to talk to you.

00:15:45: Yes, absolutely.

00:15:46: And a little sales pitch.

00:15:47: Never hurt anyone, especially when it's backed by everything we've heard today.

00:15:51: Thank you so much, Tiffany.

00:15:52: Thank you.

00:15:53: It was my pleasure.

00:15:54: So today we spoke about what the annuity landscape looks like in the US insurance market.

00:15:59: We touched on the challenges insurers face across the product lifecycle and how financial solutions can help address them.

00:16:06: Thank you for listening to Replay by Henevere and we hope you found this conversation

00:16:10: helpful.

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00:16:16: Until next time!

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