After Financial Crisis, Asia Emerges as Variable Annuity Growth Area

Variable annuity growth will be driven by Asia in the post-financial crisis era, due to favorable regulatory moves and a rising affluent population in emerging Asian markets — particularly China, according to Ernst & Young.

Sino-foreign life insurance joint ventures are "better prepared" and "more eager" to launch variable annuity products in mainland China, while domestic insurers may have different sales priorities than joint ventures and "expect significant investment" in building up the risk management infrastructure, said Jackie Chu, an actuary at consultancy Ernst & Young, in a survey.

Chinese insurers need to pay attention to sound risk management tools and educating policyholders about variable annuities, Hong Kong-based Chu added.

The China Insurance Regulatory Commission said last May that its new pilot program for variable annuities should generate new business opportunities for insurers at a time when innovation in life and pension products is deteriorating amid intense competition (Best's News Service, May 24, 2011).

Variable annuity products, though risky from an insurer's perspective, are "very attractive" to policyholders relative to traditional and participating policies because they offer the benefits of "income and capital protection guarantees," according to the research report by HSBC. While participating policies only offer shareholders at least 70% of excess return, the variable annuity product offers a possible return 100% (net of fee) with capital protection on the downside.

HSBC said it is unclear whether Chinese capital markets are deep enough to hedge some of the basic guarantees, especially as some guarantees can be seen as like put options against the market. Consultancy McKinsey & Co. said in a report that insurers are able to manage the risk of guarantees cost-effectively using reinsurance, hedging and improved product design.

Variable annuities had long enjoyed successes in North America, where sales took off in the 1990s with total assets under management reaching a high in 2007 before the financial crisis. Since then, the market has recovered and sales have resumed double-digit growth, while assets under management in 2011 surpassed the previous peak set in 2007, according to Ernst & Young.

The variable annuity was introduced in Japan in 1999 and reported an "explosive" growth, said Ernst & Young. The product was then developed in other regional markets like South Korea, Hong Kong, Taiwan, Singapore and India.

Some writers exited the variable annuity market in 2009 after the financial crisis, but Ernst & Young said there is "significant interest" in China after the CIRC launched its variable annuity pilot program.

In 2007, prior to the global financial crisis, the United States reported US$170 billion in premium income from variable annuities, accounting for around 68.5% of the country's total annuity market and 20% of its individual life insurance market. Total assets in U.S. variable annuities were US$1.5 trillion, according to the China Insurance Regulatory Commission.

In Japan, the asset balance of variable annuities reached 16.5 trillion yen (US$207 billion) as of 2007, accounting for around 70% of the individual pension insurance market, noted the Chinese regulator.

Although the global financial crisis shrunk the variable annuity market in North America by 15% and reduced its assets under management by 24%, the product remained an important one overseas, noted the CIRC. In 2009, variable annuities accounted for nearly 50% of the domestic U.S. annuity market.

(By Rebecca Ng, Hong Kong news editor: [email protected])