Fitch: U.S. Life Insurers Face Increasing Risk from Variable Annuities
By Daniel at 23 October, 2008, 4:03 pm
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Fitch: U.S. Life Insurers Face Increasing Risk from Variable Annuities
CHICAGO, Oct 23, 2008 (BUSINESS WIRE) — Fitch Ratings sees equity market
performance 2008 as having a dramatic impact on U.S. life insurers active in the
variable annuity market. Persistent adverse market conditions will pressure life
insurer’s earnings and risk-based capital levels for the balance of 2008 and into
2009. The industry ability to manage this growing risk exposure represents one of
the most significant risk management challenges confronting U.S. life insurers.
Fitch’s Special Report, ‘2008 Financial Turmoil Increases Variable Annuity Risk’
released today, summarizes Fitch’s views on the variable annuity market,
including a summary of current market trends, an examination of the key risks,
and an assessment of capital needed to support the variable annuity business
given recent market performance.
Fitch estimates that capital (and reserves) needed to support the variable
annuity business in the U.S. has increased by up to $15 billion during 2008
year-to-date due to the dramatic decline in the equity markets. At the same time,
earnings have been negatively affected due to lower fee income from declines in
net asset values, higher hedging costs, and increased reserve requirements to
support the product guarantees.
‘Equity market performance in 2008 constitutes a significant stress scenario for
variable annuity writers in the U.S.,’ said Douglas Meyer, a Managing Director in
Fitch’s U.S. Insurance group. ‘We are concerned that insurers are overly
optimistic about the effectiveness of their hedging programs, which are designed
to mitigate the losses associated with a downturn in the equity market.
Challenges brought on by unfavorable market conditions will likely drive further
consolidation in the variable annuity market.’
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