I had the opportunity to hang out with a group of variable annuity wholesalers at a recent broker conference. While they all tried to outdo each other with their expense account stories, I set out to discover the state of the VA industry from some of its top -- albeit slightly inebriated -- foot soldiers.
Variable annuities continue to be very popular with investors. In 2006, VA sales climbed to almost $160 billion, posting an 18 percent gain over 2005. I find it interesting that 85 percent of those sales came in the form of 1035 exchanges (the replacement of an existing annuity). New money made up only 15 percent of the sales! So, it appears the battleground isn't in finding new VA investors; it is in finding newer, sexier VAs to replace older, decrepit versions.
Since it's tough to slip a VA into a negligee, the VA's sexiness must come from its accessories, otherwise known as riders and benefits. It wasn't all that long ago when variable annuities were anything but sexy. In fact, by today's standards, they were downright prudish. Old annuities did offer you a chance to invest in the stock market, while guaranteeing that your account would never be worth less than what you paid for it. In order to trigger this great benefit, you only had to do one thing: Drop dead.
While this feature alone used to be enough to drive the industry, eventually the consumer concluded, "Hey, what if the unthinkable happens . . . and I live?" Hence, the "living benefit," which is currently enjoying its heyday, was born.
Of course, this new-fangled benefit hasn't quite been met with cheers all around. "Whatever happened to the good old days when some golf balls, a stuffed whale, and a squishy ball bought you at least $5 million in production?" said one slightly over-J?germeistered wholesaler from Ohio. Much to the dismay of the group, they are now being forced to compete based solely on the merit of their product and not their charming personalities and expense accounts. Ouch!
In addition to solving all the world's problems that night, we all agreed that as the consumer gets savvier, VAs will have to continue to adapt. In order keep the 1035 exchange pump primed, insurance companies will have to come up with new and exciting benefits to convince the retiring baby boomers to exchange their old VA contracts for today's sexier, more X-rated models.
So what exactly could some of these future riders and benefits be? By this point, most of my crack panel of experts were speaking gibberish. After one more round, I was able to convince the few remaining semicoherent annuity pros to make some predictions. According to them, the next big thing in variable annuities is something called Cosmetic Riders.
Rick, a Boston area wholesaler, said, "Think about it. Has there ever been a more vain generation than the baby boomers? They don't want to go limping quietly into the nursing home for a final farewell. They'd rather drop dead on the spot, looking good, replete with their artificial joints, implants, and freakishly tight skin!"
Rick went on to say that his company was working on a rider he thought baby boomers couldn't live without. It's called the Hair Rider. For an extra 50 basis points in expenses, your rider will cover all hair removal procedures. "Ear, nose or back," Rick said, "our rider will wax it!"
Jeff, a Chicago-based wholesaler, lifted his head off the bar long enough to add, "I think the boomers are looking for joints -- you know, knees and hips. How about a Joint Rider?"
Everyone started joining in with suggestions -- and, just about the time someone mentioned a Laxative Rider, the barkeep thankfully announced last call. My glimpse into the future of the annuity industry was over.
Once a mildly amusing comedian and a recruiter for a top independent broker-dealer, Bill Miller now works as an industry wholesaler; reach him at email@example.com.