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 But it differs from the traditional “book value” fixed annuity in an important way: In the event funds are withdrawn from the MVA due to full or partial surrender (and sometimes death or annuitization), the insurer calculates an adjustment to the values paid to the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.