New Annuity Designs Are Taking A Page From History
The sentiment behind a well-known Broadway musical, “Everything Old is New Again,” also could be applied to todays annuity business.
As insurers struggle to compete against other life carriers, the interest rate environment, equity market volatility and expense challenges, manufacturers are beginning to dust off past design concepts.
In all likelihood, the annuity market will start to see a return of some of these older structures or features. These will be the features that can improve competitive positioning. Here are a few examples:
Bailout provisions. These provisions enable fixed annuity policy owners to surrender their contracts without surrender penalties if the annuitys credited interest rates drop below a specified threshold.
Over the past few years, popular fixed annuities have offered multi-year credited interest rate guaranteeswithout bailouts. But, roughly 6 to 9 months ago, the trend shifted.
Noting that policyholders did not want to lock in relatively low market rates for several years, annuity marketers began moving back toward one-year interest rate guarantees.
The bailout feature could give these more recent designs greater competitiveness. For example, by coupling the one-year rate guarantee with a bailout provision at the initial credited rate, the insurer can strengthen the total package. The result would be a pseudo-multiple year rate guarantee, without adverse formula reserve requirements.
Bailout provisions also may be offered as a form of less expensive quasi-guaranteed living benefit on variable annuities. This would allow a policyholder the ability to surrender without penalty if future subaccount performance is poor.
Due-premium contracts. In the early days of deferred annuities, many contracts were designed as fixed premium policies. Policyholders were billed a due premium. If the premium was not paid, the contract could either lapse or lose certain benefits.
As the annuity market evolved, annuities became more single premium and flexible premium in nature. However, both single- and flexible-premium designs can generate more anti-selective interest rate, equity market or persistency risks.
By contrast, fixed, due-premium contracts can mitigate interest rate and equity market risks to the insurer. They do this by smoothing out market performance cycles and reducing tail risks under some contracts.