NEW YORK & CHICAGO--(BUSINESS WIRE)--

Fitch notes the latest product offering aimed at the longevity risk protection market, the contingent annuity (CA), is generating controversy. From a ratings perspective, we are concerned with the ultimate risk profile of any CA products, pricing adequacy, questions of transparency, and how the product will be reserved for considering the level of capital required under regulatory capital ratios.

The market for longevity risk protection is enormous and growing rapidly, as underscored by an ongoing shift toward defined contribution pension plans and baby boomers reaching retirement age.

To date, U.S. life insurers have been actively selling variable annuities and other lifetime income annuities that protect against the risk of outliving one's assets. The CA product structures that have been proposed would offer similar lifetime income benefit guarantees but would not require the policyholder to transfer the assets to the insurance company. We are aware of only a handful of U.S. life insurers that have actually sold a CA type product; however, a large number of insurers are looking to potentially enter this market given recent policy statements from the Treasury and Labor departments encouraging lifetime annuities.

We share key concerns voiced by U.S. life insurance companies, regulators, and trade group, including the potential for mispricing that could lead to significant financial problems for the life insurance industry down the road. Due to investment guarantees embedded in variable annuity products, the industry suffered material financial losses in the 2008-2009 financial crisis. We also share concerns that the CA product offering could cannibalize sales of existing annuity products and will not necessarily increase market share.

We do not portend any rating impact over the near term associated with the development of CA offerings and note that there has been very little business written in the new product to date. Over the near term, we will be actively monitoring further developments related to the CA market, including forthcoming recommendations from the subgroup recently formed by the National Association of Insurance Commissioners (NAIC) to examine this market, and will discuss potential reserve and capital requirements.

Additional information is available on http://www.fitchratings.com

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Fitch: Insurance Longevity Product Raises Questions and Concerns