The features that probably are seeing the fastest growth in life insurance product development are the new variable annuity riders–the GMDBs, GMIBs, GMWBs and similar offerings. (The acronyms almost make the business seem like a government program.)
Insurers feel obligated to offer new versions of these benefits at frequent intervals in order to stay competitive and maintain market share. Though not averse continual product improvement, we sometimes wonder whether the trend creates more of a thrown together “mulligan stew” than an “alphabet soup” that’s nourishing to those who consume it.
(Note: For your information the acronyms above stand for guaranteed minimum death benefits, guaranteed minimum income benefits and guaranteed minimum withdrawal benefits.)
As you will recall, mulligan stew was a dish popular with wandering homeless men during the Great Depression. Sometimes known as “hobos,” these wandering vagrants gathered in hobo “jungles” usually near railroad tracks where a communal pot cooked a mixture of whatever edibles the wanderers were able to contribute. The resulting mixture was known as “mulligan stew.” There was never a recipe because it consisted of whatever was available. Often inedible and also frequently dangerous, it sounds more romantic than it actually was.
Similarly, many of the benefits of the acronym-riders are very valuable to purchasers. However, we are not so sure that they always have been clearly thought out or that the necessary training is in place to make sure consumers understand what they have bought and what their reasonable expectations should be with respect to these benefits.
Properly designed, properly priced and properly positioned riders can provide consumers with a much better ability to meet retirement or other long-term financial planning goals. Products that are rushed to market to meet short-term sales goals are dangerous for insurer, agent and consumer. Likewise, products not properly explained have the real possibility of creating unreasonable expectations among buyers.
In the current period of increasing regulatory scrutiny of financial products, particular emphasis has been given to variable annuity suitability.
Moreover, during the recent stock market “readjustment,” there has been a dramatic increase in litigation against insurers, distributors, retailers and agents brought by VA buyers who apparently expected the market (and their account values) could only go up. Helped along by the plaintiff’s bar, these claims inevitably assert that the VA buyer did not understand that the VA value could decrease, or they say the buyer truly believed there was an absolute guarantee as to the contract value, regardless of stock market performance.
These claims nearly always also question the VA expenses and raise the issue that some other form of investment would have been more “suitable.”
There is one thing all should know for sure. The stock market will go up and it will go down. Many of the new “alphabet soup” riders for VAs are designed to level out the fluctuations in contract values that can result from such ups and downs.
However, if there has been a demonstrated tendency by contract owners to claim lack of understanding of VAs sold in the past, there is an even greater possibility of such claims with the new, more complex enhancements now being offered with the product.
Therefore, it is important that those who sell variable annuities having such enhancements understand the features and properly describe them, and that the point-of-sale disclosure materials are legally descriptive. In addition, lawyers who defend the inevitable litigation will be much happier if there is clear acknowledgement by contract owners that they received disclosure materials that were explained to them, and that they understood them!
If the industry is to make these valuable product features correspond to the definition of a wholesome “alphabet soup” instead of a questionable “mulligan stew,” it must also make sure the products themselves hold together. Much of the VA litigation currently taking place has as its core complaint that there was not adequate value for the costs involved. This suggests that everyone engaged in VA development and marketing must be sure the charges made for the VA can be clearly justified and that the VA holds together internally.
A court of law or an arbitration proceeding is a difficult place to demonstrate the value of products–particularly with the restraints imposed by the rules of evidence and the complete lack of understanding of insurance products by most of the litigation bar. Rest assured, the industry may have to demonstrate that the pricing of its product features was realistic, justified and properly explained.
Riders can provide valuable customer benefits and enable the products to be more competitive. However, the sword can cut both ways. An improperly constructed product that’s rushed to market and sold without the proper training can have unfortunate consequences to all concerned.
Norse N. Blazzard, JD, CLU, and Judith A. Hasenauer, JD, CLU, are attorneys in the Pompano Beach, Fla., office of Blazzard, Grodd & Hasenauer, P.C. Their e-mail address is Norse.Blazzard@bghpc.com.
A court of law or an arbitration proceeding is a difficult place to demonstrate the value of products
The industry’s variable annuity offerings are rich in acronym-rider ingredients, but do consumers find the recipe tastes like an alphabet soup or a mulligan stew?