VA Sales Hit $155 Billion In 2006

Why, then, does net cash flow continue to lag behind the levels of a few years ago? A few things are at work here. First, the increase in sales in 2006 was in large part fueled by the exchange of contracts sold in 2000, a huge year for total VA sales at approximately $138 billion (note that internal exchanges are included in this number, as the source of funds is irrelevant to this particular discussion). Many of these contracts came fully out of their 7-year surrender charges in 2006, and of course could be exchanged without the investor incurring a charge at the point of sale.

Given the continuous evolution of living benefits since 2000, particularly living benefits, it is reasonable to conclude that many of these contracts were exchanged in 2006 as a means of accessing the new benefit structures, often not available to existing contract owners.

L-shares, which began to be widely sold just a few years ago but also emerged from surrender in 2006 due to the shorter duration of their charge schedules, compounded this effect.

At the industry level, sales increase and net flows are unaffected when contracts emerging from surrender are exchanged for contracts offering the latest living benefit designs, or for contracts with lower expenses.

Second, the risk of running out of money in retirement and the application of variable annuity products with guaranteed living benefits as vehicles for managing this risk are well-known concepts in the retirement products industry. But the message is only now starting to get out through mass marketing efforts (think AXA’s gorilla and RiverSource ads featuring Dennis Hopper), stepped-up education for advisors and investors (for example, a higher level of wholesaler effort, in-house developed and 3rd party materials, and concept exhibits), and increasingly through the use of dynamic illustration tools.

Finally, while the demographics are moving along, we’re not quite there yet. The leading edge of the boomer generation turned 62 last year, so what is observed today in sales vis-?-vis net flow data should be interpreted as the very beginning of the substantial increase in future sales that can be driven by increased understanding and adoption of variable annuities by advisors and investors.

If the variable annuity industry can continue to build awareness, improve the purchase experience through technology initiatives such as straight through processing (STP), and, most importantly, train and support advisors through wholesalers that can help them build retirement income-focused practices and the use of dynamic, interactive illustration tools that make the concept “real” for the investor, there is no reason the industry should not see annual sales of $300 billion or more by 2009 (the year the first boomers turn 65), coupled with a substantial increase in net cash flow as IRA and 401(k) rollovers contribute substantial amounts of net new money to the industry.

Time will tell.