VA Sales Are Up, VL Sales Are Down:
Guarantees Make The Difference
As you can see from the chart on this page, the variable annuity market is definitely recovering, but the variable life insurance market is not.
What explains the difference?
Historically, VAs were sold on their tax benefits relative to competing investment vehicles, such as mutual funds. Today, they are being sold on the merits of their guarantees.
Consumers and distributors, skittish from the sustained market downturns and volatile equity markets, continue to want guarantees, in spite of the higher fees introduced by many companies in 2003 for such guarantees.
The VA market always has been very feature-driven, but recent product innovation in this market has focused primarily on guarantees, predominantly the living benefit guarantees.
The living benefits come in many forms:
the guaranteed minimum income benefit (GMIB), which guarantees a minimum level of income at annuitization;
the guaranteed minimum accumulation benefit (GMAB), which guarantees a minimum account value at some point in the future; and
the newer guaranteed minimum withdrawal benefit (GMWB), which guarantees a minimum stream of income, equal to return of the VAs principal, if withdrawn within specified limits over time.
According to a recent survey of financial advisors conducted by Morgan Stanley, nearly 80% of financial advisors surveyed consider living benefits as important or essential to current sales. Of the top 25 VA writers, all but 3 offer some form of living benefit. (Given the specialized markets in which these 3 companies operate, living benefits may be less important for them.)
So, whats happened with variable life insurance? Attractive, long-term no-lapse guarantees available on universal life insurance products, coupled with the equity market downturns and instability, have steered many distributors and consumers away from variable life. Todays ULs offer low-cost death benefit protection with long-term no-lapse guarantees, often for life. And although many predicted that premiums for those UL no-lapse guarantees would increase due to the onerous statutory reserving requirements introduced by Actuarial Guideline 38 (or Regulation XXX) and falling investment returns, premium increases have yet to materialize.
In addition, though many VL products also offer no-lapse guarantees, these guarantees tend to be less attractive as compared to the current UL offerings (i.e., the VL features come at a higher cost and are more short term in nature).
Many career agents have turned to selling low-cost term life and UL policies with long-term guarantees and whole life policies with attractive portfolio rates. In 2003, career agents accounted for 43% of new VL sales, down from 53% in 2001. By contrast, the more equity-oriented wirehouse/regional stockbroker channels increased their VL market share from 8% of new sales in 2001 to 11% in 2003, but still remain relatively untapped.
The uncertainty of estate tax reform also has played a role in VLs declining sales. Although the initial ambiguity appears to have abated, many agree the issue will resurface.
Whats the outlook for the future? The outlook for the VA market looks positive. The new tax law appears to have had little impact on VA sales to date–further support that todays sales are driven by guarantees. Recent upturns in the equity markets also have contributed to stronger sales. To the extent that consumers remain cautious about returning to the equity market, guarantees will remain a key selling point. We expect VA sales to continue to strengthen in 2004.
On the other hand, roadblocks to the VA markets success could be the on-going scrutiny of mutual fund-related scandals and improper selling practices or major market upsets.
The outlook for VL is more guarded. While the overall demand for life insurance is still present, the market is mature and overall growth has been modest over the last several years. Less attractive fixed product alternatives could help the VL market as would a more stable equity market.
Several companies have begun to look at revamping their VL no-lapse guarantee offerings. Extending living benefit guarantees to VL also may be a possibility. While demand for VL should continue, its short-term growth expectations are more modest as compared to VAs.
Nancy M. Kenneally, FSA, MAAA is a senior consultant with the Tillinghast business of Towers Perrin in New York. Her e-mail address is email@example.com.
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.