Capital-efficient participating annuity products in practice

Speaker(s): Jürgen Bierbaum (ALTE LEIPZIGER – HALLESCHE Konzern)

As a result of strongly declining interest rates and increasing capital requirements due to Solvency II the guarantees included in traditional participating annuity products have been widely debated. Several market participants have left the respective market segment while others have replaced these traditional products with "capital-efficient" products. In this talk we explain the major changes in product design that are observed in the German life insurance market and analyse their effects on interest rate and longevity risks as well as the impact on customers. Of course, in order to reduce guarantee risks it is possible to simple lower the level of guarantees. However, there are two other mechanisms that lead to a decline in the cost of options and guarantees and an increase in solvency that are more sophisticated. First, it is possible to use different guaranteed interest rates for the annual development of the contract and for the terminal lump sum guarantee or guaranteed annuity, respectively. Second, a recalculation of the annuity at the time of annuitization also proves to have a strong positive impact. We show how these mechanisms work and perform some simulations in order to derive quantitative results for the value of financial options and guarantees as well as for Solvency II figures.