Variable annuities (VAs) are unit-linked life insurance contracts with investment guarantees which, in exchange for single or regular premiums, allow the policyholder to benefit from the upside of the unit without losing out when the unit loses value. VAs have a experienced a growth in sales in US and Japan since the 1990s and are now also becoming increasingly widespread in Europe.
Guarantees entailed in VAs can vary considerably and imply an increase of risks for insurers relative to pure unit-linked product; insurers have managed those risks in different ways which have varied across time, countries and market players. A common business model for EU VAs features relevant cross-border as well as group aspects - usually VAs are sold by large European insurance groups either by their local subsidiaries or by specific subsidiaries dedicated to that business underwriting in several Member States, through freedom of establishment.
CEIOPS therefore decided to establish common EU guidelines for supervisors that would foster convergence and spread best practices for the supervision on insurers selling such products; guidelines should be adapted by each supervisor to fit the exact features of each VA product.
CEIOPS TF was mandated to draft those guidelines having in mind two main areas of interest, i.e. i) technical and actuarial issues and ii) governance and colleges of supervisors. The TF was also asked to give a preliminary analysis of whether more widespread variable annuities may be the source of a new systemic risk or generate pro-cyclicality in the case of a market downturn. The issue of selling practices is outside of the scope of the work of the TF.
Guidelines should include recommendations that can be put immediately in place but that will also be relevant for the upcoming Solvency II supervisory regime: therefore, the TF investigated on desirable supervisory treatment of VAs in a Solvency I as well as in a Solvency II context in the view of opportunity of a smooth transition from Solvency I to Solvency II.
Further to this assessment, each chapter provides for some recommendations to supervisors and to insurers; where appropriate, recommendations applicable in a Solvency I and/or in a Solvency II context are highlighted separately. For the sake of clarity, the draft report provides for separate recommendations; however, there are interrelationships among different aspects, for example the same recommendation might be relevant for governance issues and for systemic risk.
Deadline for comments is 25 January 2010.
© CEIOPS
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