In an interview with The Insurance Journal, Neil Skelding, President and Chief Executive of RBC Insurance confirmed that the company is developing its own guaranteed minimum withdrawal benefit (GMWB) product, which he says will be conservative to mitigate the type of risks that have caused major reserving issues for some of the early entrants into this market.
RBC Insurance expects to launch its GMWB toward the end of this year or early next year. "We're not rushing the product out. We want to make sure that it is sustainable."
Mr. Skelding says the company has been considering a GMWB product for some time and has come up with a couple of product designs. But it held back in the view that the early entrants' products were not conservative enough from a risk mitigation standpoint.
"We thought some of the early entrants into the market and some of those products that were attracting a lot of deposits may not be sustainable. We decided to wait and just see how the market unfolded, and the current situation, where product features are being pulled back and the products are being made more conservative, was not unexpected from our perspective."
The market is now seeing some pullback in pricing, he observes. "These products, the initial versions anyway, were very aggressively priced from the fee standpoint for the client and I think you're going to see that pricing increase."
How will RBC Insurance avoid the trouble that some GMWB players experienced during the market crisis? "I think where companies that are in the market today have run into trouble is primarily on hedging. They've taken market risk without any or very limited hedging strategies. That's simply something that we don't think is sustainable and we would avoid that scenario."
The lack of hedging leads to an inability to withstand a market downturn "which is what we've just experienced and you've seen the result of that quite clearly in the market place," he adds.
GMWB features also need to be sustainable in the long run, he adds. He expects that some optional features, such as living benefit guarantees which are popular in the U.S. in particular, will be re-priced, pulled back or adjusted.
RBC Insurance is currently looking at all these aspects as it builds its GMWB product, he explains. "We're just kind of picking and choosing features, doing a lot of modelling and what we come up with will be quite conservative and very sustainable."
The company has very stringent risk management protocols and when it introduces its GMWB offering, advisors will be able to count on it for the long-term, Mr. Skelding says, "and that features would not be stripped and products closed."
He considers RBC Insurance's approach to be very cautious. "We feel that hedging is very, very important to the sustainability of these types of products. Even with some of the market recovery that we've had, it's still important to mitigate the risk of the product in the long-term for the next cycle and the cycle after that."
On the flip side, GMWBs are an important part of a financial plan, he adds. They are a solution designed for the payout phase when retirees' assets accumulated in investments such as segregated funds and mutual funds are converted into an income stream. The market crisis has only increased the need for products such as GMWBs that provide a guaranteed income solution, Mr. Skelding believes. "Clients will be seeking this kind of surety - that payments will be maintained irrespective of the market conditions."
He doesn't expect demand to drop even as product features and pricing are pulled back or adjusted. "This product absolutely has a long-term place in the market. That's why we need to be in it."
RBC is also a very large mutual fund company and these assets will be turning over into the payout phase, he adds. "We want to be a part of that."
In addition, RBC Insurance's advisor channel is requesting a GMWB product. "There's a huge demand by advisors...This is certainly an area that our advisors think their clients have a need and that we should be filling that."