How the financial crisis andimpending accountingchanges will change
insurance products
Greg Goodfliesh FSA
Vice President & CMO
RGA Reinsurance Company Japan Branch
2009.06.29

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What we’ll coverI.

The Background

II.

Case Study: Australian experience

III. Products themes for the new world
IV. Annuitization – An opportunity forthe global insurance industry
V.

Challenges in Japan

VI. Conclusions
2I. Background• Internationalization of the world financial
markets and other factors have led toincreased volatility• Current accounting standards in Japan cangive results that do not accurately show theunderlying risks to which companies areexposed• Current solvency standards in Japan do notrecognize all the risks companies are taking

3

I. Background• We don’t know when the accounting andsolvency standards will change• We don’t know exactly how they willchange• It is likely that new accounting standards
will be based on market values• It is also likely that new solvency
standards will be economic based4I. Background• Shareholders want stable earnings!
• Unhedged or unmatched positions in amarket value accounting system could
cause severe and immediate pain for
insurance companies.
• Your cost of your capital could bematerially higher then yourcompetitors if your balance sheet ismore volatile.

5

“When the music stops, in terms ofliquidity, things will be complicated.
But as long as the music is playing,you’ve got to get up and dance.
We’re still dancing,”

6

"We finished the year, and wereported that we had $17 billion of
cash sitting at the bank's parentcompany as a liquidity cushion. Asthe year has gone on, that liquidity
cushion has been virtuallyunchanged."7

“Good insurers accept only those risks that they areable to properly evaluate (staying within their circleof competence) and that, after they have evaluated
all relevant factors including remote loss scenarios,
carry the expectancy of profit. These insurers
ignore market-share considerations and aresanguine about losing business to competitors thatare offering foolish prices or policy conditions.
They limit the business they accept in a manner thatguarantees they will suffer no aggregation of lossesfrom a single event or from related events that will
threaten their solvency. They ceaselessly searchfor possible correlation among seemingly unrelatedrisks.”8II. Case Study - Australia• In the late 80’s and early 90’s- life
insurance market was dominated by• Complex products combining investment
and insurance components• Products with long term guarantees (e.g.
Whole Life)• Very similar to Japan today• Sales of these complex products
were decreasing
9

Accounting• Accounting framework transitioned
from a book value basis to a model
similar to IFRS Phase 2.

• Solvency framework transitioned toa model somewhat similar (but notnearly complex) as Solvency 2.
• Did that spell the end of theinsurance industry in Australia?

10Consistent Growth inAustralian Life Market
6,000

Inflows ($m)

5,000

4,000

3,000

2,000

Indiv Death & TPD

Indiv Dis Inc Ins

Dec-06

Jun-06

Dec-05

Jun05

Dec-04

Jun-04

Dec-03Jun-03

Dec-02

Jun-02

Dec-01

Jun-01

Dec-00

Jun-00Dec-99Jun-99Dec-98

Jun-98Dec-97

Jun-97-Dec-96

1,000Group Risk

Source: Merill Lynch, Plan for Life11

New Sales through Australian IFA Channel (A$ million)<January 2005 to December 2008>
120.0

100.0

12.4

12.7
13.0

80.0

10.4

7.9

10.0
7.2

60.0

26.7

27.0

26.1

25.5

23.5
19.1

24.1

22.4

22.0

29.8

26.8

26.5

25.7

24.4

33.4

32.8

9.6

40.0

20.0

47.4

47.2

41.4

35.8

46.7

44.8

38.9

45.0

48.9

46.5

40.3

61.2

58.1

53.0

49.7

42.8

4
Q

3
Q

2
Q

1
Q

4
Q

3
Q

2
Q

1
Q

4
Q

3
Q

2
Q

1
Q

4Q

3
Q

2
Q

1
Q

08
2008
2008
2008
2007
2007
2007
20072006
2006
2006
2006
2005
2005
2005
2005
20

MT – Advisor Driven
Income Protection
Lump Sum

Source: NMG Consulting
12

New Sales through Australian Bank Channel (A$ million)`<July 2006 to December 2008>
100.0
90.0
80.0
70.0
60.0
50.0

43.3

40.5

38.1

48.0

43.6
41.2

53.0

40.6

29.5
40.0

25.5

30.0
20.0
10.0

1.9

2.1
6.6

7.8

6.5

1.7
7.0

8.4

8.7

6.5

6.3

26.0

26.8

26.4

27.0

24.5

27.3

28.7

1.6
8.4

5.0
24.3

20.1

25.2

4
Q

3Q

2
Q

1
Q

4
Q

3Q2Q

1Q

4Q

3
Q

08
2008
2008
2008
2007
2007
2007
2007
2006
2006
20

CCI
MT – Advisor Driven
Income Protection
Lump SumSource: NMG Consulting
13

How did the market thrive• Guarantees dramatically curtailed• Products were simplified• Regulatory focus on quality of advice• Greater training of agents• Larger sum insured’s sold to meet clients need• Industry focus on underinsurance

14

How did the market thrive• Focus on new distribution of riskproducts• Independent agents, Bancassurance, Internet• Focus on making insurance sales easierfor agents• E-Underwriting, instant issue with no wet
signature, etc…

• Vibrant group market developed• All players in a given industry will have insurance
cover

15

Is the Australian model
applicable to Japan?
• In some ways yes• In other ways no• Guarantees do not have to be removed
completely. There is a desire and needon the part of the public for someguarantees.
• However, companies should limit volatilerisks you can not hedge externally orinternally (i.e. diversify away)16

Traditional Product Shift?
Allianz — …The deteriorating market conditions also made the sale of investment oriented
products difficult — particularly through the banking channel. By contrast,
business with traditional life insurance products remained stable.
Source: Annual General Meeting of Allianz SE on April 29, 2009. Report by the Chairman of theBoard of Management, Michael Diekmann of the development of the business

Aviva — The company’s Annual Report for 2008 reported that growth in life andpension sales was offset by a fall in the sales of investment products.
ING — …the crisis has created a shift in customer demand towards products thatoffer wealth-protection and risk reduction.
Source: ING Group, Annual Report 2008

Zurich — Zurich Financial Services Group, in its Annual Report for 2008, reported
an increased demand for protection products in its Global Life segment towards theend of 2008.
AEGON — AEGON reports that their strategy in the United Kingdom is to move
more of the business to higher-margin areas, such as annuities and protection
products.
17III. Product themes for the new world• Theme #1 – Link unhedgable portionof benefits to external indices• Theme #2 – Extreme tail risk
remains with the policyholder• Theme #3 – Allow flexibility within
product structure to manage tailevents

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Theme #1 – Index unhedgablebenefits• Whole life policies are unhedgable inJapan (liabilities longer than assets)• Rather than guaranteeing premium rates for life,
only guarantee for 20 years, then reset futurepremiums to swap yields at year 20• Policyholder retains upside if interest rates
increase. This would likely illustrate very well intoday’s interest rate environment• Insurer retains a smooth earnings profile (with allassociated benefits)

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Theme #2 - PH keeps tail risk• Vanguard issues a lifetime annuity in
the US where payments increase withinflation, up to a cap• New York Life sells a term to age 90
policy where the rates are only
guaranteed for a certain number ofyears

20Theme #3 – Product Flexibility• Some charges for optional benefits(GMxB) in the US can be changed up
to a maximum amount• The crediting rate on many fixedannuities or UL products in the US canbe adjusted annually down to aminimum level21IV. Annuitization – An opportunity for theglobal insurance industry• Globally there will be many people thatare at a high risk of outliving their income• Japan is in better shape then somecountries due to the National Pension
and Employee’s Pension• However• National Pension is very small• Employee’s Pension doesn’t cover all workers• Will the pension schemes survive as thepopulation declines?
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Problems with Lifetime annuities• Customers don’t like them
• Worried about illiquidity• Don’t understand longevity• Sales agents don’t like them
• Once money is locked up in a lifetime annuity,
they can no longer provide advice on the funds
under managment• Insurers don’t like them
• Not enough experience in older age mortality• Anti-selection currently exists when only
healthiest of lives are purchacing24Why we need lifetime annuities• Customer• Only privately sold product that will guarantee
income for life

• Government• Eases pressure to provide for people that outlive
their income• Insurers• Only insurers can sell this product• Diversifies existing book (very important underSolvency II)
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Action needed• Insurance industry must lobby thegovernment• Focus argument on preventing thepopulation from outliving assets• Goal is• Simple tax benefits for purchase ofannuities or;• Mandatory purchase requirements fromDC plans26

Remember Theme #2 –Policyholder keeps the tail risk
• Perhaps cap annuity payments at age
100?
In 2000, there were 70,000 people in theUS that were aged 100 or greater. In
2050, this could figure could be as highas 2.4 million (1% of US population).
Source:Society of Actuaries, Living to 100 and Beyond: Implications for Retirement
RECORD, Volume 28, No. 327

Remember Theme #1 – Indexunhedgable benefits• Perhaps link the payments toindustry wide mortality
improvement• If population mortality improvement isabove some level, then payouts are
reduced past some age (e.g. 90)

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V. Challenges in Japan• Product approval process can belong• New product ideas aren’t easily
approved• The current approval process seems
to favor guaranteed elements• Difficult to facilitate change in large
companies

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VI. Conclusions• Companies that prepare for the upcoming
accounting changes will have hugecompetitive advantages• The time to prepare is now• Product development and delivery strategies
are part of this preparation• Lifetime annuities are needed, do not let thisopportunity pass you by30