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.

Product reactions will show creativity.

In reaction to todays bearishness, insurers will (and some already have) begin to create designs that better protect the carrier against market downturns.

One example is to define policy charges as a percentage of premiums or benefit base, not account value. Further, charges for guaranteed minimum death or living benefits could be assessed on a per $1 of amount at risk basis; this would make charges higher when the risk is higher, as opposed to many guaranteed benefits today, which have a high charge when the risk is low, and vice versa. Also, mortality and expense and asset management charges may be tiered, based upon subaccount or policy performance.

Designs that mitigate insurers downside risks can conversely allow for features benefiting the policyholder, especially in bull markets.

Expect more realistic pricing.

The events of the last 24 months will realign some of the more aggressive pricing practices seen in the equity-based insurance markets.

Specifically, to achieve company profit goals, some products rely upon net subaccount returns well into double-digit percentages. This has sometimes manifested itself in lengthy Deferred Acquisition Cost amortization schedules underlying GAAP earnings. But, in the current environment, some acceleration of existing DAC amortization schedules has occurred, leading to GAAP earnings reductions. This trend is likely to continue for carriers with large amounts of variable products in force.

Acquisition opportunities lie ahead.

Variable markets will see some shaking out due to the downturns of the last two years. Although large variable players do not always weather a bear market well, it is generally true that insurers with scale have a greater ability to do so. Today, such carriers may be in a strong position to acquire other variable players at depressed prices, or to establish joint ventures to supply services or products which smaller players are unable to commit to right now.

Further, mid-size carriers may be able to achieve scale through strategic acquisition of other variable players.

The equity markets have indeed been challenging. However, it is in these environments that opportunistic insurers can distance themselves from the competition.

Timothy C. Pfeifer, FSA, MAAA, is a principal at Milliman USA, a Chicago actuarial consulting firm. His e-mail address is tim.pfeifer@milliman.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, August 12, 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.