Expect Enhanced Rate DCA Accounts To Spread To Other Products
For policyholders who may need a little extra help to make the move into a variable life or annuity contract, insurers have offered a unique spin on dollar cost averaging.
For the past few years, they have offered so-called enhanced rate DCA accounts. These feature very attractive interest crediting rates for funds inside the DCA accounts, but require the funds to channel out into other variable subaccounts within a short period of time, usually within six to 12 months. The design helps address concerns about investors inability to time the market.
When they were first introduced, it looked as if they might be a temporary feature, offered for use during unique market conditions. But as you will see, it now seems enhanced rate DCA accounts have gained a more permanent footing.
The interest crediting rates offered by these accounts are typically well above “market.” Thats why the rate can only be maintained for short periods of time.
For example, it would not be uncommon to see six-month DCA rates at levels 600 basis points (6%) above Treasurys, and 12-month DCA rates at 400 basis points (4%) above Treasurys.
Theoretically, these enhanced rate DCA accounts can be used for both variable annuity and variable life contracts. However, in practice, they are commonly found in VAs, but less common in VLs.
For some insurers, these enhanced rate DCA accounts are offered as a periodic “special,” to energize sales for select periods of time. Often, these carriers find that they face pressure to maintain the enhanced rates permanently.
Some variable products are structured to allow for enhanced DCA rates on subsequent deposits into a flexible premium deferred annuity. More products, however, limit the enhanced rates to initial premium deposits or to deposits received a short time after issue.
The destination accounts for the enhanced rate DCA funds are often limited to the variable subaccounts of the variable product. In some cases, though, the product allows the enhanced rate DCA funds to be transferred to the fixed, general account offerings of the product. In this way, the insurer can offer a very attractive fixed return guarantee for six to 12 months.
How does the product support such attractive interest crediting, given that the insurer cannot invest its general account assets in rates anywhere near the DCA credited rates?
In most cases, insurers view the “negative spread” on their enhanced DCA accounts just as they do any upfront acquisition expense. That is, the increased upfront expenses are paid for through one or a combination of the following: lower rep compensation, higher charges, or reduced variable product profitability.
In todays environment, though, it is more common that the insurer, not the sales rep, bears the greatest portion of the cost of the enhanced DCA rates.
In keeping with the view that enhanced DCA rates are essentially an additional acquisition expense, most carriers consider the enhanced DCA credits as deferrable expenses under Generally Accepted Accounting Principles. This helps soften the initial upfront expense burden in the GAAP financials.
Although the sales experience of insurers offering enhanced rate DCA accounts does vary, for some insurers, the accounts have been instrumental in boosting sales.
Furthermore, industrywide statistics show that utilization of the enhanced rate DCA accounts has ranged from 15% to 60% for new funds.
Enhanced rate DCA accounts have been given last rites more than once during their tenure over the last few years. However, it now appears the accounts will stay in the picture, and even expand their presence into variable life and immediate variable annuity contracts.
Timothy C. Pfeifer, FSA, MAAA, is a principal at Milliman USA, a Chicago actuarial consulting firm. His e-mail: email@example.com.
Reproduced from National Underwriter Life & Health/Financial Services Edition, April 8, 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.