Dealing With The Current Instability In The VA Industry
By Norse N. Blazzard, and Judith A. Hasenauer
Much has been written in recent months about the current instability in the variable annuity industry. Numerous VA insurers have had their ratings downgraded and others have been sold under severe financial pressure. Still others have ceased new sales of VA products.
The reason for these problems has little to do with the basic structure of VAs themselves since in their purest form, the products cause little risk to the insurers that issue them. This is because the basic feature of a VA is the transfer of the investment risk from the insurer to the contract owner.
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Instead, the instability problems result primarily from product features that have been added on to basic VAs to make them appear more competitive or to help differentiate products among insurers. In many instances, these add-on features were not properly priced, but were offered in an attempt to maintain existing market share or to increase market share in the highly competitive VA climate.
Many of these product features were added at the insistence of marketing firms that distribute large volumes of VAs. The additions have caused a significant investment risk to be reassumed by the insurer.
Probably the single product feature that has most contributed to the instability in the annuity industry has been “enhanced” minimum death benefits. These enhanced product features have taken many forms that differ markedly from the traditional minimum death benefits that have been integral to VAs since the early 1960s.
Instead of offering a death benefit that guaranteed a return of principal if the contract owner died before the annuity starting date, these “enhanced” features provide for numerous types of step-ups in contract values on the death of the owner, regardless of market conditions.
It seems that many insurers, secure in their belief that the halcyon days of stock market expansion would continue indefinitely into the future, failed to consider the impact an extended down market could have on their product lines and on their companies.
Agents, brokers and banks that sell VAs have compounded this problem. These distributors have insisted on increasingly “sweetened” product features without corresponding increases in product prices. This attitude reflects a basic flaw in the annuity sales process–i.e., sales by people who have not analyzed the financial basis of the products they sell or who mistakenly believe that any problems are only those of the insurers offering the products.