GMDB Reinsurance

[JuniorASA]

I am working on the reinsurance on GMDB. Just wonder what is the common reinsurance structure for GMDB features.

Approach 1
Are they reinsured through the normal YRT approach so that the reinsurance premium will be paid based on NAAR * Reinsurance Premium Rate / 1,000?

Approach 2
Or it will be paid by the % of asset under management let's say 20 b.p. of the fund value?

If under approach 2, the investment risk is still within the company. As the reinsurance premium (expected claim) will be more once the investment performance is worse (I.e. The NAAR is getting bigger due to its Guaranteed Refund of Premium Feature.)

What are the common approach to handle this practical issues?

[JMO]

I haven't been in this business for quite a while now, but what I had seen was approach 2. From the reinsurer's perspective, a stock market decline results in a double hit - more amount at risk, less premium income.

If I understand what you are saying about where the investment risk lies, you need to rethink a bit. It's option 1 that would put more risk on the ceding company.

[MathGeek92]

option #1 won't be paid by a direct writer because they do not charge that way.

Option #2 is the way they will pay you... you simply hedge the risk and make a fee for doing it.

You will charge more than the direct writer because VA writers give away the option for less than the hedge cost, typically. You want to make a profit, so you charge the hedge cost plus a fee.

Anything less than that, please tell me who you work for so I can short the stock

:D

[JuniorASA]

Interesting answer. If that is the case, I should short it myself first.

Any idea what will be the range for charge level for this kind of coverage? I heard from some consultant that it should be around 30 b.p.??

Thanks,

[The President]

option #1 won't be paid by a direct writer because they do not charge that way.
They could pay YRT and effectively exchange their actual mortality for expected mortality. Either way, they are going to shell out money for claims in a way that is not proportional to fees they are charging.

[JMO]

They could pay YRT and effectively exchange their actual mortality for expected mortality. Either way, they are going to shell out money for claims in a way that is not proportional to fees they are charging.
The same as if they hadn't reinsured it, no?

[MathGeek92]

on the YRT, most quotes I have seen work where:

NAR is fixed at the beginning of the year. If the they die you get NAR paid (regardless of whether the AV went up or down for the year). thus from a re perspective... the reinsurer is only on the hook from A/E of a YRT death benefit only... i.e. NO market risk.


as for the bps charge... totally depends upon the benefit type and are you reinsuring an inforce block or new business only.. age of the person whom the DB is paid (owner annuitant, joint owner possibility? etc)

Get all the details of the policy and run a MC valuation... that should be the minimum you charge

[Numbers Nerd]

Don't forget the cost of setting up reserves and capital. Depending on jurisdiction, this cost (and the resulting volatility of financial results) can be quite onerous.