Dont Lose Sight Of A Key VA Aspect
With all of the recent downside activity in the financial markets, it is important that sales reps, end-customers, financial analysts, and company management not lose sight of a key aspect of variable insurance products.
Namely, such products are maintained in insulated, unitized separate accounts. The assets and liabilities of an insurers separate accounts are directly associated with sales of specific insurance contracts. Each separate account carries its own set of financial statements, valued at market, as will be described later.
In nearly all states, insurers can structure their separate accounts such that the assets in these accounts are inaccessible to general creditors and cannot be used to pay for obligations arising from sources other than the policies funded through the separate accounts. It appears that such insulation has been recognized as valid in prior insurance company insolvencies.
Variable annuities and variable life insurance contracts are typically funded through unitized (i.e., daily unit values) separate accounts. This structure works well for these products in that fluctuations in the market value of the variable assets and liabilities are reflected directly in the separate accounts balance sheet, with the policyholder assuming the risk of appreciation or depreciation in asset values.
Given that the assets and liabilities of the separate account generally move in tandem with market fluctuations, the surplus of the separate account will tend to exhibit stability. By definition, then, the policyholders account value will be backed by corresponding assets in the separate account which can be structured with insulation from any other liabilities.
Some market value-adjusted annuities are also funded through a separate account (this time, a non-unitized separate account). Often, the assets and liabilities of the separate account supporting MVAs are reported at market value, providing some of the same coordinated relationship between the policyholders account value and the underlying market value of assets.