Despite The Market, Silver Linings Exist For The VA And VL Community

Despite The Market, Silver Linings Exist For The VA And VL Community

There is no denying that the last two years have been devastating for sellers of equity-based products.

Market declines have resulted in lower asset-based fee revenue–the lifeblood of variable product management. In some cases, the declines have also resulted in increased policy surrenders and free looks. Meanwhile, the amounts at risk to insurers associated with guaranteed living benefits and guaranteed death benefits have jumped. And, not unexpectedly, new sales of equity-based products have declined.

For serious players in this market, its all bad news, right?

Not necessarily. Just as the market for equity-based insurance products was not truly as tantalizing as it appeared to be in 1998 and 1999, the market may not be as dreadful in the years 2000 to 2002 as some are implying.

One industry commentator has observed that the overreaction (in both directions) to market movements could be termed “symmetrical idiocy.” So, in an effort not to engage in symmetrical idiocy (or any other kind), lets see if there are silver linings to be drawn from the recent dark equity market clouds. I think there are. For example:

Tough markets create tougher, smarter players.

The “Law of the Survival of the Variable Product Fittest” did not operate during the bull market of the mid-to-late 1990s. Instead, all providers–the well-managed and the not-so-well-managed–seemed to make money. As variable subaccounts earned 20% to 25% per year, expense and product management mistakes by carriers could be overcome by strong fee revenue.

But today, insurers must operate smarter and more efficiently. For those that do, their market share should rise.

Positioning of variable annuity and variable life products is suited to the environment.

The insurance industry has positioned VAs and VLs as long-term financial instruments. The designs prevalent in the industry have been built around this positioning, unlike the marketing of stocks and mutual funds. In todays environment, insurance product positioning should resonate with a “stay the course” strategy, which will eventually pay off when the market cycles back again.

The guaranteed options have appeal.

Modern VAs and VLs typically provide additional flexibility and safety by integrating guaranteed benefits. These guarantees include fixed, declared interest rate subaccounts, guaranteed minimum death benefits, guaranteed minimum living benefits, and guaranteed settlement option rates. Such features are not integrated into the designs of competing financial instruments. This should give variable products a significant marketing advantage.