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Life Health > Annuities > Fixed Annuities

Rocky Economy Thumps Annuity Market

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“I believe were at the bottom and that well pull out of it in the third quarter.”

Those hopeful words about the U.S. economy gave an upbeat start to the third annual annuity conference jointly sponsored by LIMRA International of Windsor, Conn., LOMA of Atlanta, and Society of Actuaries of Schaumberg, Ill.

Peter Ricchiuti, finance professor and director of research at the A.B. Freeman School of Business at Tulane University, New Orleans, said the stock market is “way undervalued” and is “about as cheap as it was in 1982.”

The nation is “poised for recovery,” he concluded after citing various indicators from his own research and that of his students.

That is important news for people everywhere, Ricchiuti said, explaining that “with the growing free market capitalism around the world, you need to have people have ownership in something, an equity stake.”

No one, he added, “has been known to wash a rented car.”

The audience laughed at the joke, but conversations and presentations later in the conference indicated many are hoping Ricchuitis prediction is correct.

The protracted stock market downturn has made for difficult times at many variable annuity companies, the executives said. Likewise, the ongoing low interest rate environment has made it difficult for some fixed annuity insurers to credit more than their policies 3% guaranteed minimum interest rate.

Congress is looking at various financial issues, noted Randy Hardock, a partner in the Washington, D.C., law firm of Davis & Harman, LLP. However, he said, “no one knows what will happen. All you can do is spot trends, and over time these will lead to results.”

One trend legislators will need to contend with is the aging nation, he said. Baby boomers are fast approaching retirement, he explained, and people are living longer in retirement. These trends are already burdening social programs like Medicare and this will continue, he said.

Today, he noted, 30% of voters are over age 50, and that number will grow in the future. Since a greater percentage of older voters than younger voters actually do vote, “boomers will become a more powerful constituency” in coming years, he predicted.

Retirement proposals have been multiplying in Congress, Hardock noted, and politicians increasingly see they will have to deal with these issues. However, doing so will take a bipartisan approach, he said, explaining that increasing partisanship has been blocking several efforts up to now.

The proposals drawing interest include legislation to facilitate retirement distribution, such as tax incentives for taking income from annuities. There is also interest in proposals aimed at helping people get good investment advice for qualified retirement plans, Hardock said.

As for defined benefit pension plans, he said the system is in crisis but that “no one has yet noticed.” Many small and medium-sized businesses are facing major funding problems with these plans, for instance, and many larger companies that are going bankrupt also have underfunded plans, he said.

Many panel discussions at the conference took a what-do-we-do-now approach to assessing annuity industry concerns about the economy. One session, for instance, dissected the various issues and opportunities that todays low interest rate environment creates for annuity insurers.

New business profitability is being constrained in this low interest rate environment, said Noel Abkemeier, a consulting actuary with Milliman USA based in Williamsburg, Va. Margins are being squeezed, and profits are being cut in half in some cases, he said, adding, “insurers must therefore be very careful.”

Opportunities can be found, however, maintained Abkemeier. For example, the new Standard Nonforfeiture for Individual Annuities model forwarded by National Association of Insurance Commissioners should help with crediting interest rates.

Product design strategies can help, too, the actuary said. For instance, to cope with lower crediting rates, he suggested that developers consider emphasizing longer guarantees (to take advantage of the sharp yield curve); bolstering crediting rates with lower commissions; and reducing capital and risk with market value adjustments. Other ideas are to soften rate depression with interest rate bonuses, he said, and to guarantee annually increasing rates over a set period.

If and when interest rates once again start to rise, steps insurers can take today should also be beneficial, said another panelist, Donald P. Abbs. Conservation strategies and hedging strategies fit this category, said Abbs, who is director of product management at Allstate Financial in Northbrook, Ill.,

Regarding hedging, “carefully consider the pros and cons,” he advised.

Todays market conditions raise a number of capital considerations for annuity companies, Abbs noted. For instance, popular annuity features, such as return of premium guarantees and high up-front bonuses, require considerable capital, he said. Yet the recent downturn, investment defaults and VA death benefit features have combined to create a situation where many insurers have lost much capital. High up-front commissions and big first-year bonuses also have taken a significant outlay, he said.

To adjust, insurers should explore several areas, Abbs continued. For instance, he asked, is it time to cut commissions? Will fixed annuities move to an L-Share approach or a levelized trail approach that is less capital intensive? Is it time to reprice or remove certain features (like return of premium)? Can reinsurance help? Is an attractive commission financing alternative available?

Abbs closed his remarks with a review of fixed annuity products and features that he believes are “winning” in todays market. These include single and flexible premium deferred annuities, market value adjusted annuities and equity indexed annuities. In the deferred annuity market, he said the winning features include: safety, simplicity, rate competitiveness and shorter interest guarantees (one to three years).

Reproduced from National Underwriter Edition, April 21, 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.


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