Supplemental insurance riders today have entered a different phase than in the past, one in which they serve as the “star attraction” of many of the products to which they are attached.
In the annuity world, riders have risen to a key level of importance. For variable annuities, the guaranteed benefit riders are elements that distinguish contracts against the competition.
Optional living benefit riders (guaranteed minimum income benefits, guaranteed minimum accumulation benefits and guaranteed minimum withdrawal benefits) are the engines driving the market right now. To a lesser extent, guaranteed death benefit riders drove the market in the mid- to late 1990s.
In addition, some VA contracts have been built on very flexible, modular chassis, where many of the key product provisions are structured as optional riders. These include liquidity riders, dial-a-surrender charge riders and bonus riders.
On the fixed annuity side, principal guarantees are sometimes handled via a rider structure. Equity-indexed benefits often are built on a declared-rate fixed annuity contract, with the equity-indexed option handled via a separate rider. Optional bailout provisions are available as a rider, sometimes resulting in a lower credited rate on the contract. As with VA riders, the riders for FAs are used to allow for surrender charge-free treatment for surrenders following nursing home confinement or terminal illness.
In the life insurance world, a number of carriers have added secondary death benefit guarantees to universal life and variable universal life contracts to compete in the most popular segment of the permanent market today.
Survivorship life policies historically have relied heavily on riders such as estate preservation riders, policy split options and estate tax repeal riders to focus strongly on the needs of the estate planning market. Accelerated death benefit and guaranteed insurability riders are 2 other important riders that have made individual life contracts more flexible in meeting specific customer needs.
All riders bring certain advantages and disadvantages to the table. On the plus side, riders typically afford the insurer and sales rep substantial flexibility. For the insurer, the ability to make available a number of distinct benefits via a rider allows for one base product chassis to meet the needs of a multitude of distribution channels and markets. For the sales rep, the ability to pull an attractive rider out of the briefcase for interested clients but not to have to talk about it or charge for it if a client is not interested, is a great advantage.
Further, use of riders can accommodate a quicker forms filing strategy for insurerse.g., states having concerns about a rider may still approve the base form, so sales can begin without the rider and then follow up later with the rider (once approved). In addition, if an insurer wishes to change the rider benefits in the future, it is much simpler and quicker to re-file only the rider, and not the base plan. Finally, use of a rider may allow an insurer to highlight the features of the benefits in its marketing program.
Disadvantages of riders include the fact that since most riders are optional, it is usually felt that those policyholders who voluntarily choose such a benefit will anti-select against the company. For most benefits, the reality or myth of this anti-selection in actual experience is not quantified very well. Anti-selection may necessitate a higher price than if the benefits were embodied in all base contracts. Second, not all states permit benefits to be presented in a rider if all policyholders have access to them. Finally, riders do create some additional administrative work in the form of policy assembly, forms recording and tracking, and policy reserving for more complex benefits, where reserves for the rider benefits may need to be split out separately.
What is the future of supplemental riders? Very strong, I believe. Some companies have been frequent users of riders, while others have just begun using them more liberally. Innovative, new and specialized benefits in the pipeline are well-suited to a rider framework. The evidence that suggests more use of riders starts with the increasing need in the marketplace for flexible designs and the filing efficiency of riders in general. Further, adding attractive benefits to in-force policies, sometimes for retention purposes, is easily accomplished with riders.
In the life insurance arena, expect to see more rider features that allow for liquidity, enhanced benefits based on size and persistency, equity-indexed linkages and, for VUL contracts, a number of VA-like riders such as GMWBs, GMABs and GMIBs. Return of premium-oriented riders will be added in a variety of new and old ways.
For annuities, expect a large number of modest death benefit, annuitization, disability, critical illness, and other contingent benefit features added to both FA and VA base products. These riders will give annuities a “Swiss Army Knife” capability unseen in the past. Such benefits will be added by riders in many unique ways, including multiple pockets of benefits. For payout annuities, new riders will give policyholders flexibility to commute future benefits partially, and change the payout structure after issue.
Timothy C. Pfeifer, FSA, MAAA, is a principal in the Chicago office of the Milliman USA actuarial consulting firm. His e-mail is [email protected].
Reproduced from National Underwriter Edition, June 4, 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.