One word sums up the current core features of today’s variable annuities: “guarantees.”
The guarantees attach under a variety of riders: guaranteed accumulation benefits, guaranteed minimum income benefits, guaranteed minimum withdrawal benefits, and guaranteed enhanced death benefits. The guarantees also extend to a variety of special considerations such as guarantees for life and guarantees relating to joint lives, step-ups, bonuses and lock-ins.
It may seem incongruous to refer to these guarantees as core features, given that they are provided by optional riders and many may be elected after issue of the base contract.
But it’s not incongruous because the guarantees are provided by rider to give prospective purchasers the opportunity to select the type of benefit or combination of benefits that best serves their needs and concerns. In addition, once elected, the guarantees are integrated into, and adjust, the core features of the contract–be it covered lives, accumulation value, partial withdrawal rights, income options or death benefits.
These guarantees generate surprise among many constituencies, including regulators. It is not clear why they evoke surprise. The real surprise is finding that the constituencies are surprised and that they do not readily accept insurers’ providing guarantees.
But that is what insurance companies do and do best. When convergence of the various financial institutions was on everyone’s mind, it was universally noted that what insurers brought to the convergence table was risk management backing up guarantees.
That is still is what insurers bring to the table. Furthermore, in addition to bringing it to their own smorgasbord table of riders, there is an emerging focus on bringing these insurance guarantees in connection with related services or products.
Meanwhile, the investment advisor and mutual fund industry segments are marching to the same drummers–the baby boomers–that the insurers are targeting with their boomer-focused riders. Advisors and mutual funds recognize that demographics in the United States have changed the investment focus–from accumulation to distribution. For them and for insurers, the 2 controlling concepts are investment risk and guarantees.
Those are the same 2 concepts that are driving the boomer investors.
It’s no secret that the insurance, advisor, and mutual fund industry segments each are seeking ways to meld offerings in ways other than the traditional dedicated underlying funds. It’s also no secret that the filings made with the Securities and Exchange Commission providing direct or indirect guarantees–and referencing other offerings and services such as private investor accounts–have not made any progress toward effectiveness.
It’s also no surprise that the SEC has been slow in reacting to this new form of insurance contract. To date, no filing has gone effective. It seems reasonable to speculate that the SEC staff believes they have to view these proposed offerings in the context of the insurance products with which they are familiar, and the proposed offerings don’t fit.
What has happened is that insurers have taken a GMAB, GMIB or GMWB rider and turned it into the full breadth of the insurance contract. As such, should the proposed offerings be treated in the same way as those GMIBs and GMWBs? Are the proposed offerings variable annuities or some alien life or annuity form?
If the SEC staff treats the proposed offerings differently, does that require a new look at the variable annuity riders? Where and how do the proposed offerings fit within the registration process? On what form should they be filed?
The answers to these questions are best based on the opening thought of this article–that this is the business of insurance.
The guarantees are not of the referenced assets, but of the insurance feature. The insurer doesn’t guarantee that the private account or the mutual fund will achieve any particular level of performance.
The guarantees of a stream of income or death benefit referencing a private account or mutual fund accumulations are insurance guarantees. The details of the offerings and of the guarantees should provide the answers to the SEC registration and regulation issues, and the details may dictate differing treatment in the registration process.
The creativity of the insurance, advisor and mutual fund industry segments should not be limited by a search for one answer.
Joan E. Boros, Esq., is a partner in the Washington, D.C., office of the Jorden Burt LLP law firm. Her e-mail address is JEB@ jordenusa.com.