Life insurers had better be sure that both they and their customers understand the costs and limitations of the annuity benefit guarantees they are selling.[@@]

Analysts made that argument earlier this week at a risk management seminar organized by the American Council of Life Insurers, Washington.

For the most part, the companies are doing well, and consolidation is creating larger companies that should be in a better position to cope with volatility, according to Robert Riegel, a managing director at Moody’s Investors Service, New York.

Life insurers also have a unique opportunity to sell annuities and other products that can help create steady income streams for the growing population of retirees, Riegel said.

Colin Devine, a managing director at Smith Barney Citigroup, New York, said the life insurance industry now has a $250 billion opportunity to wrap annuity living benefits guarantees around retirees’ 401(k) plan assets.

“The industry will have more business than it can afford to write,” Devine said.

But, at the same time, the current life insurance climate is fiercely competitive, Riegel said.

“There are very few areas for a company to differentiate itself in,” Riegel said.

Devine warned life insurers against letting competitive pressure and ignorance foster either internal or external confusion about annuity guarantees.

Life insurers themselves, for example, should recognize that 1035 exchanges now account for two-thirds of variable annuity sales, up from 15% in 1995, and that about 25% of purchasers of variable annuity contracts start taking withdrawals within 12 month of buying contracts, Devine said.

Selling annuity guarantee products to young customers who are still saving for retirement may be considerably safer than selling the same products to retirees who are apt to take money out immediately, Devine said.

Meanwhile, the customers themselves should have a realistic idea of how the annuity products might perform, Devine said.

In the field, some producers have sold VA contracts to customers using practices that may have been acceptable at the time of the sale but would not be acceptable today, Devine said.

For the VA industry, “it might be our time in the woodshed,” Devine said.

Devine recommended that life insurers protect themselves by sending actuaries into the field to see how annuities are really sold to consumers.

Annuity sellers also should disclose commission information, Devine said.

United Kingdom life insurers and producers already disclose commission structures, and that disclosure system has not hurt the U.K. life industry, Devine said.