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September 15, 2002 at 08:00 PM
Ready For Some New Approaches To Indexing?
With all of the stir associated with the recent equity market volatility and the decline in interest rates, it may be easy to overlook the fact that sales of indexed products, particularly equity indexed annuities, have increased strongly over the past few years.
This increase in sales has occurred in a financial environment that has not been particularly favorable for equity indexes. Specifically, low interest rates and high option volatility have increased the cost of hedging the equity linkages in the products and providing for the policy guarantees. Both factors place a drag on the products competitiveness.
The upswing in equity indexed sales suggests the products are benefiting from an economic environment that has placed high value on guarantees and recognizable equity indexes.
To date, indexed products have achieved success in a modest number (10 or so) of insurer portfolios. The indexed products of choice have been S&P 500-linked deferred annuities, or equity-indexed annuities. The chief competitors to EIAs are variable deferred annuities with living benefit guarantees, and fixed deferred annuities.
Does this mean the index product market is poised to leap to its next level of evolution, a level that may involve a broader range of insurance company participation? Very possibly. But what key drivers might be necessary for the products to achieve this new level?
First, indexed products must penetrate more product types than just deferred annuities. Although some indexed life insurance products exist, the market is quite thin.
Significant potential exists to design universal life and interest-sensitive whole life products with cash value returns and/or death benefits that are a function of an external index. Such products would offer a modest return guarantee, with the index return being added on top of the guarantee or compared to the guarantee. Secondary guarantee features could be added to the basic chassis to create a strong package.
In addition, indexing can be an ideal structure for immediate or payout annuities. Compelling cases can be made for indexing future benefits to one or more of a range of indexes, both interest and equity types, with a benefit floor. Indexed subaccounts (with underlying floor guarantees) could be appealing options in variable life and annuity contracts.
