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March 24, 2004 at 07:00 PM
Dynamic Asset Allocation:
Its For Variable Products, Too
BY
Professional and dynamic asset allocation strategies that have been very successful in the money management business are slowly coming into insurance products. This will become a tremendous benefit for customers.
This article traces the roots of the trend and also the benefits.
First, a look back. Variable annuities saw an 11% increase in sales in 2003 compared to 2002, according to LIMRA International. That certainly makes VA providers happy for the first time this century. And, although variable universal life sales dropped by 30% compared to 2002, according to the LIMRA figures, many companies saw VUL sales increase in the 4th quarter of 2003.
Since VUL sales tend to lag the market by 6-9 months, industry VUL sales are expected to continue to increase. In fact, both VA and VUL sales should see sales increases in 2004.
However, the 2004 environment is a different marketplace than in the past few years. What has changed? Where “greed” (always a part of human nature) was synonymous with the late 1990s, now “fear” and “greed” control just about every investment decision made.
Specifically, customers now are more aware of variable risks, fee structures, mutual fund scandals, etc.but theyre once again willing to trade off some guarantees for upside potential.
But consider this: Over an 18-year period (January 1984-December 2002), the S&P 500 Index had a net average yield of 12.22% with investors only earning a paltry average net yield of 2.57%, according to the DALBAR Quantitative Analysis of Investor Behavior in July 2003. Fixed income investments would have easily beaten that 2.57%.
So, it is clear the average customer hasnt benefited from the sharp rise in the equity markets over the past couple of decades. Now that variable products are being purchased again, the insurance industry needs to make sure it addresses this problem head on.
