Over the past couple of years, I have gone out of my way to attend a number of product- specific seminars to listen to wholesalers pitch the value derived from offering guaranteed benefits on variable and index annuity products.
For the most part, I come away impressed with the sales opportunities these products can generate. Unfortunately, I have been equally disappointed with the failure of every promoter to answer the same question I continually ask, which is, “How can you guarantee such attractive rates for future benefits; after all, isn’t this product subject to the same market risk as any other investment?”
I finally got so tired of hearing ludicrous responses such as, “The people who worked this out are a lot smarter than any of us in this room,” or “I’m not an actuary, but I have faith in ours and am sure we wouldn’t be saying it if it wasn’t true,” and my favorite, “Look — if you’re looking for a reason not to sell it, don’t. Just don’t come crying to me when your clients buy it from someone else.”
All of these are clever retorts. Unfortunately, none are acceptable answers to a simple yet extremely important question. They do, however, beg another question, which is, “How important is it for a producer to conduct due diligence on any product they intend to market and sell?”
Without beating around the bush, I will give you a straight answer to this question – a lot. After all, in today’s world, a producer who fails to conduct proper due diligence can create an open-ended liability, which I believe is something all producers can live without.
Another thing I have noticed is that many producers seem to be under the impression that riders guaranteeing withdrawal benefits, income benefits, and accumulation benefits are something new. In fact, they are only new in relation to the products they are associated with here in America. In fact, Europe and Great Britain have been offering these benefits on variable annuities for years.
Once, after conducting my due diligence, I came across something that I have shared with a number of producers and wholesalers, something I found disquieting but that, for the most part, doesn’t seem to be problematic for many others. According to Moshe A. Milevaky Ph.D., a finance professor at the Schulich School of Business at York University and executive director of the IFID Centre in Toronto, Canada:
“Not many people in the U.S. are aware that the oldest and most prestigious insurance company in the United Kingdom, Equitable Life, had to close its doors to new business in December 2000 and was pushed to the brink of insolvency because of living benefit promises it had made decades earlier, but which they could not afford to keep as interest rates declined and longevity increased far more than expected. Over half a million British policyholders are still fighting for what they thought was guaranteed.”
Now, don’t get the wrong idea. I am not suggesting that you avoid marketing and selling these products. You do, however, need to take the time and do your homework, looking into the product and the company that backs those guaranteed benefits.
We put ourselves out there as professionals who can help protect your clients from financial pitfalls and risks they face in retirement. As such, we must take on the responsibility of knowing not only how the products we recommend work, but also the fundamental financial structure on which those products are built. Such things as the underwriting companies’ risk management philosophy, hedging and reserving strategies, asset allocation, and credit rating are issues that you should not only ask about, but to which you should insist on receiving sound, reasonable answers. Better yet, get the answers to these basic due diligence questions in writing.
This may well be the most important due diligence process you ever put yourself through. Not only are you protecting yourself, you are protecting your clients – and they deserve your best effort.