Can New Investment Options Energize The VA Market?
Even the most exuberant optimist has to admit that the annuity business has fallen on hard times. In this article, we will look at approaches the variable side of the business could consider as a way to energize the market.
First, heres a review of the current situation. In recent months, variable annuity sales have picked up in reaction to better stock market performance. But these sales are nowhere near where they were a few short years ago.
Moreover, fixed annuity sales have not picked up the slack. This is due, in part, to the current low interest rates causing a lack of interest among consumers.
Another factor is the new trend among insurance companies to discourage or even stop the sale of stand-alone fixed annuities. (For many of these insurers, the only fixed annuity they will offer is the fixed side of the variable annuity product.)
It is true that the equity indexed products are enjoying good sales success in the current climate, but they still account for only a small portion of the larger annuity marketplace.
Meanwhile, the private placement variable life business is enjoying greater interest. This trend has become a springboard for strategies now being considered for variable annuity enhancements.
Here is the key: Private placement variable life is growing primarily because of the products ability to access more innovative investment options than is the case with more traditional “retail” variable life products.
This trend highlights one of the primary advantages of the variable insurance product, whether variable annuity or variable life. That is, variable products have inherent flexibility in their investment options.
Unfortunately, many in the annuity business overlook this flexibility. When offering variable products, they look only to typical growth portfolios. They tend to forget that a variable annuity (or, for that matter, a variable life policy) has the ability to provide numerous investment options that can range from fixed return investments to speculative equity-based portfolios and can include real estate, hedging strategies and even commodities.
They forget this despite the fact that virtually any degree of risk tolerance can be accommodated in variable products and the fact that there is no recognition of gain when investment options are shifted.
Instead, during the past 25 years, the variable products have displayed a growing dependence on using traditional mutual fund portfolios to underlie their products.
Indeed, virtually every major mutual fund manager has an insurance-dedicated “series” mutual fund that provides most of the same investment options that are available in the mutual fund family outside of the variable insurance product. These options usually are “clones” of the managers retail mutual funds.
Unfortunately, there has been little innovation in providing nontraditional investments to variable product policy owners.
It would seem that this would be an ideal time to bring new products to market with nontraditional investments.
For instance, this should be a good time to develop a real estate product for the variable annuity. In the early 1980s, there was a real estate variable annuity available that had considerable success in the marketplace. It offered conservative, but nonvolatile investment results. It was managed by real estate professionals and was an outstanding alternative to the run-of-the-mill mutual fund-based investment. Unfortunately, the insurer that offered the product fell in the consolidation wars of the late 1980s, and the new insurer had no interest in offering real estate variable annuities.
We have long anticipated variable products with more substantial offerings of commodities other than merely stock futures. There is surely a segment of consumers who would find such a product appealing.
What about using hedge funds with retail variable annuities and variable life insurance? We often are asked about this.
Our answer: Many hedge funds are not efficient when it comes to taxes. Therefore, a hedge fund investment underlying a variable insurance product provides not only a greater potential for long-term retirement and financial planning, but avoids the inefficient tax problems that hedge funds have alone.
As currently configured, hedge funds do not lend themselves well to use with retail variable insurance products. Hedge funds, by their nature, are designed to enable avoidance of regulation under the Investment Company Act of 1940. Therefore, they are difficult, if not impossible to use with variable insurance products that are so regulated.
Nevertheless, many strategies used with hedge funds can, with a little creativity, be adapted to the retail variable insurance product. There will be regulatory issues that must be resolved before this happens, and the resolution of such issues is often time-consuming. However, the end result should be well worth the effort.
It is well known that the annuity business is competitive. A handful of insurers control much of the distribution of the product. There are only a few elements about the product that enable insurers and distributors to compete.
In the past, the competition has been directed primarily toward benefit features and price. (Administrative services have been pretty much equal among issuers, and many of the same underlying investments appear in multiple products offered by various insurers.) Now, a more competitive lineup of nontraditional investments could revolutionize competition in the variable annuity industry.
All it requires is some creative effort in designing new, innovative investments options.
Norse N. Blazzard, JD, CLU, and Judith A. Hasenauer, JD, CLU, are attorneys in the Pompano Beach, Fla., office of Blazzard, Grodd & Hasenauer, P. C. You can e-mail them at [email protected].
Reproduced from National Underwriter Life & Health/Financial Services Edition, October 3, 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.