Voya 2013 Annual Report Download - page 48

is effective in balancing numerous critical metrics, we are subject to the risk that our strategies and other
management procedures prove ineffective or that unexpected policyholder experience, combined with
unfavorable market events, produces losses beyond the scope of the risk management strategies employed, which
may have a material adverse effect on our results of operations, financial condition and cash flows. We are also
subject to the risk that the cost of hedging these guaranteed minimum benefits increases as implied volatilities
increase and/or interest rates decrease, resulting in adverse impact to net income (loss).
Risk Related to Hedging. Our risk management program attempts to balance a number of important factors
including regulatory reserves, rating agency capital, RBC, underlying economics, earnings and other factors. As
discussed above, to reduce the risk associated with guaranteed living benefits, non-reinsured GMDB and fees
related to these benefits, we enter derivative contracts on various public market indices chosen to closely
replicate contract owner variable fund returns.
The Company’s risk management program is constantly re-evaluated to respond to changing market
conditions and manage trade-offs among capital preservation, earnings and underlying economics.
Hedging instruments we use to manage risks might not perform as intended or expected, which could result
in higher realized losses and unanticipated cash needs to collateralize or settle such transactions. Adverse market
conditions can limit the availability and increase the costs of hedging instruments, and such costs may not be
recovered in the pricing of the underlying products being hedged. In addition, hedging counterparties may fail to
perform their obligations resulting in unhedged exposures and losses on positions that are not collateralized.
Risk Related to Policyholder Behavior Assumptions. Our CBVA segment is subject to risks associated with
the future behavior of policyholders and future claims payment patterns, using assumptions for mortality
experience, lapse rates, GMIB annuitization rates, and GMWB/GMWBL withdrawal rates. We are required to
make assumptions about these behaviors and patterns, which may not reflect the actual behaviors and patterns we
experience in the future. In particular, we have only minimal experience on policyholder behavior for our GMIB
and GMWBL products, and, as a result, future experience could lead to significant changes in our assumptions.
Our GMIB contracts have a ten-year waiting period before annuitization is available, with most of these GMIB
contracts issued during the period 2004 to 2006. Those contracts first become eligible to annuitize during the
period from 2014 through 2016, but contain significant incentives to delay annuitization beyond the first
eligibility date. As a result, to date we have only a statistically small sample of experience used to set
annuitization rates. Therefore, we anticipate that observable experience data will become statistically credible
later this decade, when a large volume of GMIB benefits begin to reach their maximum benefit over a four-year
period from 2019 to 2022. It is possible, however, that more policyholders than we anticipate will choose to
annuitize soon after the first eligibility date, rather than delay annuitization to receive increased guarantee
benefits, in which case we may have increasingly statistically credible experience as early as the period from
2014 through 2016.
Similarly, most of our GMWBL contracts are still in the first four to six policy years, so our assumptions for
withdrawal from contracts with GMWBL benefits may change as experience emerges. In addition, like our
GMIB contracts, many of our GMWBL contracts contain significant incentives to delay withdrawal. We expect
customer decisions on annuitization and withdrawal will be influenced by customers’ financial plans and needs
as well as by interest rate and market conditions over time and by the availability and features of competing
products. If emerging experience deviates from our assumptions on either GMIB annuitization or GMWBL
withdrawal, we could experience gains or losses and a significant decrease or increase to reserve and capital
requirements.
We also make estimates of expected lapse of these products, which is the probability that a policy will not
remain in force from one period to the next. Lapse rates of our annuity products may be significantly impacted by
the value of guaranteed minimum benefits relative to the value of the underlying separate accounts (account
value or account balance). In general, policies with guarantees that are “in the money” (i.e., where the notional
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