The initiative by Australian Prudential Regulation Authority (APRA) to improve the capital framework for annuity products has been welcomed by the Actuaries Institute of Australia (AA).
In a press release the Institute said many Australian retirees could enjoy higher standards of living if lifetime income products such as annuities played a larger role in the retirement system. When considered among the mix of product solutions for funding retirement, annuities distinctly deliver a guaranteed income stream. They are therefore an effective option for retirees wanting to increase confidence and manage the risk of exhausting their own financial resources during retirement (longevity risk).
AA chair of Annuity Capital Settings Working Group and member of the Institute's Life Insurance Practice Committee Danny Bechara said, "APRA has set a sound pathway for how guaranteed income streams could help more Australians optimise their retirement income while maintaining strong capital settings to protect policyholders’ interests.
Mr Bechara said, "While current capital settings for annuities are not considered the primary reason for Australia's annuity market currently being small relative to the size of Australia’s broader retirement income system, greater alignment with comparable regimes and capital standards internationally would support the sector's capacity to scale with Australia's ageing population demands."
In its submission, the AA Institute has recommended:
- Moving more towards a principles-based approach by permitting the appointed actuary of the insurer to better tailor the approach to the specific annuity portfolio; and
- Rewarding insurers that demonstrate sound risk management practices and higher risk controls with commensurate reductions in capital requirements.