The Variable Insurance Industry
Is Feeling The Winds Of Change
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:
VA riders and benefits have been proliferating.
Copyrights on the living benefits features are one reason for this, maintains Robert Goldenberg, vice president-annuity marketing at MONY Life Insurance Company, New York.
“The companies are trying to be as creative as possible, in coming up with [their own] competing features and benefits,” without violating the legal protections, he says.
As a result, there are a lot of different riders, and producers may find it difficult to advise on which is best suited for a client, Goldenberg says. Some have dealt with this by staying away from the riders, he says, and others just focus on a rider they understand or feel comfortable using. The end result is that “some are applying their own understanding of the situation,” he says.
A better approach, suggests Goldenberg, is for the industry to commit to increasing producer training and education. This includes a commitment on the part of manufacturers, Goldenberg stresses, adding they “have an obligation to work with distributors, to be sure the right amount of education is delivered at the right time.”
His own company started doing this 2 years ago, by offering online training to producers on its Web site. Producers are “encouraged but not required” to take the course, which runs a half to 1 hour and includes testing. Already, he says, “we have had a marked reduction of not-in-good-order applications.”
The riders and benefits used in variable contracts are perceived as being complicated.
These features include living benefit guarantees in VAs, asset allocation programs, multiple investment options and various moving parts.
“Producers need to understand the product structures; customers need to understand what they buy; and insurers need to be sure their products connect with consumer needs,” says OSullivan of Trinity. This will help minimize the industrys exposure to market conduct risk, which he says is a constant pressure.
“Now opportunity exists for the industry to strut its stuff,” he continues. For instance, the VA industry can become more active in helping people use VAs to deal with the longevity risk. This will strengthen the industrys image “so it will no longer be seen as a high-priced provider of mutual funds,” OSullivan contends. That also will underscore the value of having a good agent and a good insurance company, he says.
But companies need to help with that process, he insists. For example, they should make it easier for reps to explain the various guarantees correctly, he says. (Structuring the features clearly would help, he says, and so would providing charts or tables that demonstrate how the features work.)
Without suitable education, reps just dont understand the features, says J. Thomas Moore, a Gulf Shore, Ala., CFP who is an insurance consultant.
This lack of understanding can lead to “sloppy” sales presentations, he says. For example, some advisors present the 5% rollup death benefit guarantee as a 5% return on investment, not a death benefit, he says. “I think thats dangerous.”
Variable product consumers want to control volatility.
VA insurers have been trying to address consumer jitters about market performance with their newer guarantees in VAs, concedes Moore.
And, in the variable universal life market, insurers have been adding secondary guarantees–which keep coverage in force for a stated period, regardless of market performancefor the same reason, says Hirschkron of AXA. “Thats a good thing, as long as the insurers reserve the capital to support them,” he says.
But, for his part, Moore thinks the newer guarantees are not addressing the real need of variable product consumers. This is the need to minimize risk of market volatility. To do that, he says, the industry should focus on getting good educational information to consumers.
“For example, reps should point out that these are variable products. They are for the long term. They should point out that the subaccounts go up and down, but that volatility can be controlled by asset allocation, with some bonds in the mix for stability, etc.”
But what if a client does want actual guarantees? “No problem,” says Moore. “You can separate the money into piles. Use a fixed annuity for the guarantees and a VA for the growth potential–the split annuity concept. My point is, just let the variables be variable.”
By relying on the riders for controlling volatility, the industry is avoiding its biggest responsibility, Moore contends. “This is the responsibility to be there with the client, to help the person control the risk when needed. To provide advice.”
Reproduced from National Underwriter Life & Health/Financial Services Edition, March 25, 2004. Copyright 2004 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.