University Business - January 2010 - (Page 38)

viewpoint gift annuity terminates. This could be decades into the future. So, in effect, the more gift annuities a program has, the more illiquid assets it must maintain. Through a reinsurance arrangement, an institution can gain access immediately to the gift portion of the donation. (Note: Because state laws vary on the use of immediate annuities to reduce reserves that charities must maintain in connection with gift annuities, it’s important to consult a legal advisor on this issue.) Since the insurance company is now providing income that matches the university’s gift annuity obligations, the remaining funds (those not used to purchase the commercial annuity) are freed up and available for the university’s programs. What’s more, these freed-up funds may actually exceed the present value of that portion of the gift that becomes available in the future when the gift annuity obligation ends. Insurance companies are well suited to take on the risks associated with annuity payment obligations. Insurers typically deal with tens of thousands of lives, and although they face the same market and longevity risks mentioned earlier, the risks are spread over all those lives. This concept is known as “risk pooling” and the law of large numbers. It’s used by insurance companies that have the scope and scale needed for effective risk management. Therefore, the negative impact that one life can have on the entire portfolio of annuities is significantly less for an insurance company than it would be for a university, which has far fewer lives over which to spread the risk. Simply put, through reinsurance, colleges and universities have a ready way to utilize the advantages of the risk pooling employed by insurance companies. Building in FlexiBility Reinsurance also provides universities with a high degree of flexibility in gift annuity program implementation. Institutional leadership can examine the total 38 | January 2010 book of existing gift annuities and determine which ones should be reinsured in order to strengthen the overall position of the institution. For example, they may decide to reinsure the largest annuities to limit the exposure concentrated in just a few lives. The university may also consider reinsuring multiple annuities issued to the same donor to limit the potential impact one life can have on the program’s total performance. The same flexibility applies to new gift annuities, as well. development opportunities In one of the toughest fundraising climates on record, a charitable gift annuity program can be advantageous for attracting new donors. As reinsurance strength- versity may entice such potential donors to consider giving to the school even in this belt-tightening environment. A sound solution Over the past year, many universities have seen their gift annuity programs become potential drains on their endowment pool instead of contributing to it. This comes about as a result of risk taking and circumstances far beyond the control of any program director. Reinsurance has emerged as a sound solution for many of the financial challenges that can strike a gift annuity program and erode its prime objective—to generate additional resources for the college or university. To summarize, reinsurance can help an institution: • Transfer significant risks inherent to the program—such as longevity and market risks— to an insurance company. • Put donor funds to work immediately. • Provide flexibility in limiting negative exposure posed by just a few lives. • Better forecast the funds that will be available for specific programs. When considering reinsurance, it is crucial to consider the financial strength of the insurance company. While the insurance company assumes the risks associated with a gift annuity program via the immediate annuity, the obligation to pay the donor remains that of the school. Selecting a financially strong insurance company will only solidify the gift annuity program. It can also provide an extra degree of comfort to donors entering into a gift annuity contract with the university. A well-designed charitable gift annuity program can be a great asset for any school or charitable organization. A decision to utilize reinsurance will help an organization make the most of its program by helping it limit its downside while expanding opportunities for continued growth. universitybusiness.com Donors will get to see their money doing good for the university now, while they’re still alive. ens the underlying gift annuity program, it supports marketing opportunities for the development office. The charitable gift annuity program may attract additional donors utilizing reinsurance, because: • In many cases, the gift portion may be used right away, which means donors will get to see their money doing good for the university while they’re still alive. Promoting this benefit may potentially attract additional donations. • It can be reassuring for donors to know that the income obligation is now backed by a large and financially sound insurance company (whose financial resources may be more substantial than those of the school). In these challenging times, charitable gift annuities may also attract donors who would otherwise give an outright gift, but who are not in as generous a position as they once were. The prospect of receiving a lifetime income from the uni- http://www.universitybusiness.com

Table of Contents for the Digital Edition of University Business - January 2010

University Business - January 2010
Contents
Editor's Note
Company Index
College Index
Advisory Board
Behind the News
Community Colleges
Sense of Place
Viewpoint
Human Resources
Money Matters
Endowments 2010: Risk Management, Liquidity, Stewardship
Donor 3.0
Reporting for Duty
End Note

University Business - January 2010