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March 24, 2004 at 07:00 PM
The Variable Insurance Industry
Is Feeling The Winds Of Change
BY
The variable insurance industry is definitely feeling some pressures as it recovers from 3 years of jolting market volatility and equity account losses, variable experts say. And advisors need to keep an eye on this, they add, because changes are under way.
“This is a trying time for the variable annuity industry,” says Frank Sabatini, a partner at Ernst & Youngs Insurance and Actuarial Advisory Services, Hartford, Conn. For example, many of todays VAs are being sold with living benefit guarantees, he says. Those features are popular with consumers, he allows, but the issuing companies are under pressure to implement risk managementincluding hedging programs, if they have no reinsuranceto ensure they can support those guarantees.
Analysts want to see carriers have these risk management programs, he says, but buyers and advisors will feel the impact because prices for the guarantees will increase.
A related pressure is that some insurers that do not hedge might feel they have to hedge anyway, due to the trend.
Complicating matters is the fact that “hedging is a new skill set for insurance companies, so there is a lot of uncertainty about it,” Sabatini says. The widely held view is that “hedging will mitigate the risks of offering living benefit guarantees, but it wont remove risk,” he adds. Also, “what insurers are hedging is contingent on how VA policyholders will behave in the future,” and thats unknown, he says.
“Meanwhile, state insurance regulators are looking at increasing reserve and capital requirements related to the guaranteesand then lowering them if a company hedges out the risk.”
All this means that market forces are pushing the industry toward better risk management, Sabatini says. That, in turn, may cause companies to change product features”make the designs more rational and use better pricing discipline.”
And that will affect what producers have available to sell and what they need to know, says John M. OSullivan, consulting actuary at Trinity Actuarial Consulting LLC., Birmingham, Ala.
For example, some VA insurers may look at requiring consumers to use asset allocation if they purchase the living benefits, he says. The producers will need to understand this so they can give good advice, he adds.
Furthermore, for their own sakes, producers should know that hedgingif used in VAs they sellis still new, OSullivan continues. “Thats not an agent concern, as long as the companies can do the hedging well,” but agents need to keep it in mind when selecting carriers.
What about the variable life side of the business? “The last 6 months have been a time of plateauing after a 36-month period of sharp declines,” says Gary Hirschkron, senior vice president-life practices, AXA Financial, New York.
The business has been “wizened” by that decline, he says, but “people wont forget the volatility theyve been through for quite a while.”
One of the lessons Hirschkron says came out of the difficult times is that, while “VL is an excellent funding vehicle, it needs to be set up so that funding is closer to, or greater than, target [commissionable] premium.”
Before 2000, many VLs were funded with the assumption that accounts would grow at 12% annually, he recalls. But, after the stock market crash, many VL policyholders had to pay in additional premium or risk lapsing their contracts.
“That was a hard time for everyone involved,” Hirschkron says. Now, consumers and distributors both have a sober-mindedness about the process, he says. For example, they are funding new policies with an expectation of an 8% return in a low inflation environment, he says, and they are emphasizing the long term much more than before.
The VA and VL business faces other pressures, too. Here are examples:
