More Agents Asking How Guarantees In VAs Are Backed
Changes in the market often affect the way financial services advisors do business by virtue of changing their clients priorities. Such a change has been noticed recently by Eric Henderson, an actuary and associate vice president, product manager, Nationwide Financial, Columbus, Ohio.
Now that the equities market run-up has been over for some time, agents are asking different questions of the providers of products to their firms, he says. Specifically, they want to know how the guarantees in variable annuities are backed.
This has become an issue for firms recently, largely because there are so many more guarantees in VAs now than there were five years ago, Henderson says. In fact, for many agents, the guarantees have become a way to make a VA sale, he adds.
“So, not only do you have the equity market thats changed a lot, but also the types of guarantees offered have changed a lot and the utilization of those guarantees has changed considerably over time, especially in the last couple of years,” Henderson says.
Simply offering a guarantee is not enough, he says. Knowing the product provider can stand behind the guarantee has become important for many agents.
Before, agents were asking, “Whats the next greatest product I can offer,” he says, but now they are more likely to ask how well the products they do offer are reinsured.
“Theyre thinking, My reputation is on the line as Im recommending these companies. I want to make sure that my firms due diligence area has really thought about this so that these companies are going to be around.”
A spokesperson with GE Financial, Richmond, Va., says good agents should always show a healthy interest in the ability of their product provider to stand by its obligations, regardless of market conditions. But, the interest should start with the insurance company, this spokesperson adds.
“We have received a number of inquiries of late from agents in response to the increased visibility of reinsurance and, as a result, we have made every effort to focus these agents on the bigger picture and assure our clients that our various life insurance entities are fully prepared to stand by all contractual obligations to customers,” the spokesperson says.
But, not every company that sells variable annuities is seeing an increase in questions by agents.
Ron Nelson, an actuary and director of product development and strategy in the annuity department at Northwestern Mutual Life, Milwaukee, Wis., says he has seen no change in the frequency of questions from the companys representatives on the guarantees in the variable annuities they sell.
He says this is likely because the companys business modelselling through a career agency forceensures that the producers know Northwestern very well, and are already familiar with its products and any guarantees therein.
Also, the company competes not by creating more features with which agents might need to familiarize themselves, but by creating “core value,” Nelson says.
“Weve stayed away from competing on features,” he says, “and done it more on keeping prices down.”
Nelson also credits the “deep relationships” Northwestern career agents have with their clients for the absence of questions on how guarantees are backed.
“They have strong relationships with their clients, so their clients arent concerned,” he says.
Henderson says agents who do need more specific information than whether or not a guarantee is reinsured should next ask whether the company is a large reinsurer with the capacity to handle all the benefits it guarantees or a smaller company that might not have the same capabilities. Also important to know is how the contract works, he says.
“If every guarantee offered is reinsured, that doesnt necessarily mean they are covered, because often the reinsurance contracts have caps and limits,” Henderson warns.
“Its important to go beyond the do you have reinsurance question to who that company is, how strong it is, and how the reinsurance contract is structured,” he says. “Does it cover everything fully or only partially?”
An agent should also know how diversified a product provider is in terms of what it writes. One should know whether the company writes solely VAs or other products as well, such as life insurance, fixed annuities and pensions, Henderson says.
If the other products it writes are impacted by market fluctuations, how that could affect the companys bottom line is something else an agent should ask, he says.
Another important question to ask is about the breadth of diversification across the types of benefits within a product providers VA line, he says. Specifically, they should find out whether the benefits are all those with a lot of risk or whether the risk is evenly spread.
“That can have a huge impact because you may have a certain risky benefit thats maybe affecting 10% of your contract,” he says. “If something goes wrong its a problem, but its a manageable problem. If its affecting 60% or 80% of your contracts, it may no longer be a manageable problem.”
Reproduced from National Underwriter Edition, February 17, 2003. Copyright 2003 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.