The BCG Pension Insider
August 2023 – Volume 142, Edition 1
Spotlight Series – Q&A with F&G
Navigating Mortality Risk: The 9-Digit Zip Code Advantage in Pension Risk Transfer Annuities
F&G Annuities & Life, Inc.
|Des Moines, IA
|Number of Employees
|Assets Under Management
* As of March 31, 2023
Vice President, PRT Business Development
With nearly 25 years of insurance industry experience, Jay is responsible for managing relationships with external consultants and internal functional partners in support of pension risk transfer new business activities.
Jay Dinunzio can be contacted at 860-681-1457 or Jay.Dinunzio@fglife.com
BCG: How is F&G working in the PRT marketplace today?
Dinunzio: F&G made the strategic decision to enter the PRT marketplace in 2021 and assembled an experienced team of professionals to support the initial build and subsequent growth of a leading PRT business. Since our entry, we have been fortunate to have successfully partnered with annuity consultants and their pension plan clients in the sourcing of more than $3B in PRT premiums.
Our initial focus was on retiree-only buy-outs, but this year we have expanded our strategy to include participating in plan termination deals which involve non-retired (active and terminated vested) pensioners.
Deal size is an important consideration for F&G where we focus on deals primarily in the $100M - $500M range. PRT has helped grow the reach of F&G’s business by increasing our policyholder count by more than 60,000 lives. We expect PRT will continue to be an important component of F&G’s business strategy in the years ahead.
BCG: Generally speaking, what role does mortality play in PRT pricing?
Dinunzio: Mortality, or the life expectancy of pensioners covered under a group annuity contract is a key risk for PRT insurers to assess within their pricing. Longer life expectances drive annuity payment cash flows further into the future and create a higher premium amount, and vice versa. The difference between shorter life (aka blue collar) mortality and longer life (white collar) mortality can range from 5-7+% of the present value of annuity cash flows.
Furthermore, PRT is a non-participating, single premium product, where the insurance company only gets one opportunity to set their price and must live with their pricing assumption. Insurers must balance protecting their expected profitability with having a competitive price to help drive sales needed to sustain a healthy line of business. Simply stated, mortality is a critical component of PRT pricing and competitiveness and thoughtfully assessing the best estimate of annuitant mortality is a key risk for PRT product issuers to manage.
BCG: What are some of the various approaches that PRT insurers may use to help support PRT mortality assumption setting?
Dinunzio: Insurers have a variety of information at their disposal to help support analyzing and ultimately arriving at a specific mortality basis that backs a PRT price quotation. Below is a high-level overview of these items:
- Plan Sponsor Industry – provides a general sense of the specific work being performed by the annuitant group which may influence mortality rates
- Pension Industry Society of Actuaries (SOA) Tables – consistent with information used by pension actuaries for ongoing pension plan valuations
- Transaction Census Data – contains useful indicators such as benefit size, salary/hourly, union/non-union, state, ZIP Code, and years of service, which provide additional information on a life-by-life annuitant basis
- Insurer In-force Block – for insurers with large existing PRT blocks, experience studies can be a useful additional source of information
- Third-Party Data – can be obtained from data analytics providers who support the needs of pension and insurance providers
- Mortality Experience Data (MED) – for larger plan sponsors seeking larger PRT transactions (typically greater than $300M), plan-specific MED data can be developed by the pension plan’s actuary that provides specific insights into the actual rate of death experienced by the specific plan population. Depending on the size of the MED dataset, it may or may not be fully credible and may possibly need to be blended with other information to arrive at a final conclusion.
BCG: What is the difference between 5-digit and 9-digit ZIP code information and what is the benefit of providing PRT insurers with 9-digit ZIP codes?
Dinunzio: 5-digit ZIP codes represent the most basic and larger geographic regions of the two systems in the Unites States Post Office mail system. 9-digit ZIP codes, or ZIP +4 codes, identify smaller regions and provide a higher level of precision. This higher level of precision provides more granular data for the PRT insurer mortality underwriting process and supports development of a more precise mortality estimate.
F&G recently conducted an analysis of how the availability of 5-digit ZIP code vs. 9-digit ZIP code could impact mortality assumption setting. We found that 75-80% of pensioners were able to be priced with additional precision due to the increased granularity provided by 9-digit ZIP codes. We further observed that some pensioners shifted to longer life expectancies while others shifted to lower life expectancies, and the specific net impact of this shift is expected to vary based on the plan demographics.
By providing 9-digit ZIP code data for all annuitants in a PRT transaction, pension plan sponsors can reduce the likelihood that the PRT insurer may use a more conservative mortality assumption or “pad” their assumption to account for the lack of precise geographic data. The potential effect of this conservatism may vary across different PRT insurers and specific transactions but could generally be thought of as being an additional cost of 0% - 1% of the total premium (or up to $500,000 of additional cost per $50 million of PRT transaction annuity premium).
BCG: What are some of the barriers which have historically limited fuller incorporation of 9-digit ZIP code data into the competitive PRT bid process?
Dinunzio: The quality and consistency of pension administration data can vary widely across different pension administrators and their clients. While 5-digit ZIP code is viewed as a “need to have” data item, the fuller 9-digit ZIP is often viewed as a “nice to have”. Therefore, we tend to see that 9-digit ZIP code information is not readily and consistently available in most PRT bid census data files without some proactiveness by the plan sponsor and their administrator in advance of engaging the annuity placement process.
Required annual pension plan mailings (e.g., annual funding notices) present an easy opportunity for pension sponsors and administrators to enhance their ZIP code data, which can typically be done with a low amount of effort and cost. As Ben Franklin once said, “an ounce of prevention is worth a pound of cure”.
The decision to pursue a plan termination or retiree-buyout annuity purchase certainly creates motivation for pension plan sponsors and their service providers to partner on enhancing the plan’s ZIP code data since it will help support a higher level of engagement with PRT insurers. Data quality is an important underwriting consideration that often drives an insurer’s decision to participate in a transaction or not. The more insurer’s bidding on an annuity transaction is a critical factor to achieve the most optimal cost.
BCG: There’s been much discussion on how the COVID-19 pandemic has impacted mortality, especially related to future mortality improvement. Has F&G taken pandemic mortality into consideration when evaluating mortality experience and improvement?
Dinunzio: We have observed that the potential COVID impact on PRT mortality can vary on a deal-by-deal basis with different impacts for blue-collar vs. white-collar populations. Availability of plan mortality experience data is a helpful tool to support development of a post-COVID case specific mortality assumption. In general, we have seen low to medium impacts on our pricing due to COVID, and expect that to further lessen as we move further away from the immediate aftermath of the pandemic.
BCG: In closing and changing topics a bit, we are hearing more and more about PRT reinsurance, and have seen some new insurers and reinsurers, both new and traditional, focusing on PRT. Will the future demand for PRT match the increasing supply?
Dinunzio: We expect to continue to see strong future levels of PRT demand from sponsors who have well-funded pension plans which have become increasingly hedged against interest rate risk, as fixed income allocations have considerably increased in the past decade. More than a decade of consistent PRT marketplace growth has significantly raised plan sponsor awareness of the attractive cost/benefit profile of PRT. Within a vibrant future PRT market, it also seems likely that deal types may begin to shift towards full plan termination transactions which may have longer project timelines, involve larger (more white-collar) benefits, and require insurer support of complex benefit features.
“F&G” is the marketing name for Fidelity & Guaranty Life Insurance Company issuing insurance in the United States outside of New York. Life insurance and annuities issued by Fidelity & Guaranty Life Insurance Company, Des Moines, IA.
About BCG Pension Risk Consultants | BCG Penbridge (“BCG”)
BCG specializes in assisting defined benefit plan sponsors with managing the costs and risks associated with their pension plans. Since 1983, BCG has successfully helped over 2,500 organizations achieve their pension de-risking goals.
ANNUITY PURCHASE RATES
Sample Interest Rates for a Pension Annuity Buyout
(Assumes no lump sums, disability, or unusual provisions)
Retirees (duration of 7) – 4.81%
Term Vesteds (duration of 10) – 4.77%
Actives (duration of 15) – 4.70%
Annuity Purchase Rates as of August 1, 2023