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#This is one of the biggest and most complex areas, and of course lower interest rates has made this a larger reserve needed.
As universal life with lifetime secondary guarantees, lower rates have made these contracts to be more valuable to their customers, and therefore, we've had to increase the reserves on them.
Well, we are seeing less people annuitize.
If you annuitize, you don't pick dollar-for-dollar.
So less people annuitize, more people pick dollar-for-dollar.
But the actuarial calculations are highly complex.
We run tens of thousands of runs over a wide range of scenarios.
So when we talk about these interest rates, these are the average interest rates, both even in stat and GAAP.
It's just the mean of those interest rates in stat reverts to roughly this 4.25% in 2027, whereas the GAAP piece, if you pick dollar-for-dollar a piece of your risk, the guaranteed piece, the certain period of your annuity, has to be reserved under GAAP using a mean reversion interest rate of 1.36%, and that's a very wide difference, including your separate account returns.
And I want to stress, that's a separate account return before fees.
So you generally having negative returns in your separate accounts, so you can see how that can have a high cost to this.
If interest rates migrate higher, and you have to mark this every quarter to the current yield curve.
So if interest rates go up, this charge becomes less, as you go through time.
So we also wanted to give you the wide range of the changes, because what the ultimate cost of these things will be will depend on interest rates and what policyholders do.
I would also like to stress, this is over a long period of time.
Our average age of these contracts is in the 60s, and people will elect these options well into their 80s and higher.
So these are long-term contracts, and how this works out over time will be the ultimate cost.
But we do match this to our experience, and we do it on a regular basis, as we get credible experience, and we now have a new industry study that we just got that had some good credible experience for GMIBs, and that's why we set our reserves appropriately.
