Counterparty risk not a barrier to annuities

Concerns that counterparty risk is acting as a barrier to the uptake in annuity products are misguided, according to Challenger life chief executive Richard Howes.

"The reality is that in the same way that a bank offering deposits and lending money to business operates within a strict prudentially-regulated environment, so too does a life office," Howes told an Actuaries Institute Financial Services Forum.

The capital required to offer annuities is significantly more onerous than a bank offering term deposits, as well as being regulated in a mark to market sense, he said.

An APRA-regulated authority will have sufficient assets to support its policy holders even after a shock to the system, Howes said.

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Should those buffers ever be violated, then APRA can appoint a manager who can sell risky assets and replace them with risk-free assets, he added.

The notion that policy holders need to hold defensive assets directly ignores the extent of that buffer, he said.

Howes also attacked concerns that annuities are too expensive to hold.

Their returns can compete with term deposits in the short term and are likely to beat measures like the bond index over the long term, he said.

"The uncertainty caused by one's own specific longevity relative to population averages helps life insurance companies price their product," he said.

The mortality credit created by that circumstance created a higher return for a lifetime annuity relative to a fixed term annuity of the same maturity, Howes said.