By Timothy C. Pfeifer
Industry observers have noted that A-share variable annuities are emerging as a topic of more serious discussion within the business lately. This is due to a number of recent market developments.
An A-share variable annuity, generally, is a VA characterized by a front-end premium load (i.e., a percentage of premium charge) and no surrender charge at the time of policy termination. Such policies can be viewed as by-products of similar designs found in the mutual fund marketplace.
The level of the front-end load in the A-share VA is typically at, or slightly below, the sales compensation and marketing expenses associated with the policy. This premium load percentage often declines as the amount of premium paid increases. For a flexible premium VA, an A-share version would charge the premium load at time of any subsequent premium payment.
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A-share VAs tend to have other elements that are similar to those found in B- or C-share VAs. Since the A-share products charge an upfront premium load, though, the other policy charges, such as ongoing mortality and expense charges, are typically lower in the A-share VA than in comparable B-share VAs. A number of analyses have been produced which show that, over a long-term period, A-share products perform better than B-share product designs.
To date, A-share VAs have represented a very small percentage of total VA sales in the United States. For example, in the years 2001 and 2002, A-shares accounted for 1.2% of total VA sales, while the comparable figure in the year 2000 was less than 1%.
Reasons for the lack of A-share volume have typically centered on policyholder negativity toward immediate premium deductions, sales rep concern over the perceived linkage of the load to their sales compensation and the difficulty in using A-share products in bonus or 1035 situations.
Design challenges in defining guaranteed living and death benefits for A-share VAs also have been mentioned. In fact, the A-share product landscape today is dominated by a small number of distributors who account for a high percentage of sales.
Despite the points mentioned above, A-share VAs have been generating increased insurer discussion and product design interest, if not actual sales.