Todays Environment Is Fertile One For Market Value-Adjusted Annuity Sales
The comeback of fixed annuity products has been well documented in this and other industry sources.
But theres an interesting subplot to this story that, up to now, has not received much attention. This is the disproportionate growth in sales of market value-adjusted deferred annuities.
According to statistics published by LIMRA International, Windsor, Conn., the percentage of fixed annuities sold in 2000 that contained market value-adjustments jumped to over 17%, after exhibiting flat proportional growth for most of the preceding five years.
In 2001, indications are that market value-adjusted annuities represented an even greater percentage of overall fixed annuity sales.
(Note: These products have appeared under various appellations–MVAs, Modified Guarantee Annuities, and MGAs, for instance. This article will use the MVA moniker.)
Based upon the level of MVA product development seen so far, it seems likely that MVAs will continue to gather increasing market share in coming months. Well see why in a few moments.
First, heres a refresher on these products. The MVA is a declared rate fixed annuity. But it differs from the traditional “book value” fixed annuity in an important way: In the event funds are withdrawn from the MVA due to full or partial surrender (and sometimes death or annuitization), the insurer calculates an adjustment to the values paid to the policyholder. This is the market-value adjustment.
The insurer makes the adjustment prior to any withdrawal penalties. (Note: Under certain conditions, it may be waived.
The insurer uses a contractual formula to perform the calculation. The purpose is to simulate the potential capital gain or loss the insurer could incur if it were to sell the underlying assets to generate the cash needed to fulfill the policyholders request.
This formula could result in either a positive or negative adjustment to the policyholders values, depending upon changes in market interest rates since the initial credited interest rate was established.
The market value adjustment feature has the effect of passing some of the investment risk associated with the fixed annuity back to the policyholder. However, the insurer usually still retains a significant amount of the risk, especially when the amount of a negative market value adjustment is limited (so that the contract satisfies minimum state cash value requirements).
MVAs have been around for several years, so the question for today is: Why the recent uptick in MVA market share? There are several reasons.
To start with, as interest rates have fallen and compressed, insurers, producers, and customers are looking for ways to raise credited returns. Since MVAs pass some investment risk to the policyholder, insurers are permitted to allocate less risk capital to their MVA business, and may invest somewhat more aggressively. This translates into higher customer credited rates.
Also, as you may know, multiple-year credited rate guarantees have become a popular fixed annuity design over the past few years. But since such products do not allow insurers the flexibility to manage their renewal rates for a period of years, insurers are increasingly turning to the MVA structure. Thats because the MVA affords insurers some protection in the event policyholders withdraw funds in an adverse interest rate scenario.
Indeed, most MVA products are structured as multiple-year rate guarantee products.
Another factor is that producers are becoming more comfortable with the workings of MVA products. Although these products contain the added complexity of a market value-adjustment formula, the calculation usually resembles a bond pricing formula, which is familiar to certain distributors, particularly wirehouse reps.
Such reps find that the increased credited rate is worth the incremental complexity of the sale, particularly for those policyholders who do not intend to withdraw funds from their accounts during the rate guarantee period.
On the other hand, banks have historically found MVAs difficult to sell to their client base. Some progress is being made in this area, however.
Still another factor is that market value adjusted subaccounts within a variable annuity contract have also risen in prominence as of late. Although product developers must take care in designing such subaccounts, particularly in the transfer rules to and from the variable subaccounts, they have moved forward on offering market value-adjusted funds because such funds can offer a strong degree of return stability.
Finally, administrative systems are now routinely equipped to accommodate a wide array of MVA designs and adjustment formulas. Accordingly, the time needed to launch a typical MVA product has declined considerably.
As MVAs have grown in popularity, regulatory issues have also increased. For example, carriers must make strategic decisions about whether the MVA design will be constructed to be considered a security by the Securities and Exchange Commission. If so, certain securities laws become important.
Even if the MVA is designed not to be a security, insurers usually can choose to fund the product through either a non-unitized separate account or the insurers general account. There are advantages and disadvantages to both choices, but certain states mandate a structure (e.g., Florida requires a non-unitized separate account).
Other states have particular concerns about the parameters of the market value adjustment formula itself.
At one time, MVAs were subject to potentially unfavorable federal income tax treatment at the insurer level, but subsequent rule changes have leveled the tax playing field between MVAs and variable annuities.
If interest rates continue to operate at or near their current levels, it is likely that multiple-year rate guarantee products will dominate the market even more than they do today.
In this environment, MVAs will almost assuredly assume a greater role. Already, the number of carriers launching their first MVAs is growing.
Perhaps the trend will evolve in such a way that market value adjusted life insurance (MGLs) products will emerge, as a new product variation on MVAs.
Timothy C. Pfeifer, FSA, MAAA, is a principal at Milliman & Robertson, a Chicago actuarial consulting firm. His email is email@example.com.
Reproduced from National Underwriter Life & Health/Financial Services Edition, February 4, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.