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October 02, 2003 at 08:00 PM
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.
