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12 Months In The Life Of The Index Product Market

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A look back at 2008 provides a stunning view of how far the index product industry has come in the past 12 months.

One of the first items to affect the index annuity (IA) market this year was the Joint Annuity Disclosure Pilot Project of American Council of Life Insurers and the Iowa Insurance Division. This project enhances disclosure on all annuity products through a standardized template disclosure form. Thus far, 16 companies are participating (7 of which offer indexed products), and more anticipate joining as administrative systems allow.

This venture was a tremendous regulatory step forward for an industry that is perceived to have inadequate disclosure requirements.

The primary focus of IA manufacturers in 2008 was the debut of guaranteed lifetime withdrawal benefits on their IA products. These GLWB riders guarantee that an annuitant can take annual withdrawals from their IA (at a specified level), regardless of whether the contract’s account value falls to zero. They provide for guaranteed lifetime income, without the “handcuffs” of annuitization.

How popular are the GLWBs? Consider: only 30 new IAs were developed in 2008, but 27 GLWBs were rolled out or revamped. That definitely speaks to the power of flexible, guaranteed lifetime income.

Carriers not only developed these benefits, but also added some innovative new enhancements such as bonuses credited to the benefit base of the GLWB and simple interest accumulation benefits. Undoubtedly, 2009 will be another year of carriers thinking outside-the-box, in an attempt to gain market share in the IA-GLWB market.

The year 2008 also saw numerous carriers stray from the norm when it came to crediting methods. They did this by spicing up their ordinary annual point-to-point and monthly averaging crediting methods by offering the methods with a “rainbow” concept. Today, at year-end, 9 insurance companies now offer crediting methods that track 3 or more indices over the crediting term, and credit a stated percentage to the best performing, next-best performing, and least best-performing indices over the crediting period.

Because of the popularity of these methods, several other carriers have made the decision to add multiple index methods which are similar, but do not perform a look-back.

Premium bonuses made a comeback in IAs in 2008, as well. The manufacturers found methods of keeping surrender charges low while using recapture charges and vesting schedules. These pricing strategies allow the insurers to offer premium bonuses, while sharing some of the risk with the consumer. Withdrawals in excess of the penalty-free amount will cause a recapture of some or all of the premium bonus, and only partial vesting occurs with any bonus using the alternative option (resulting in a loss of bonus).

As readers may recall, high premium bonuses first fell out of favor when the “10/10″ rule became a basis for products meeting broker-dealers’ “approved list” criteria in 2005. The 10/10 rule says a fixed IA should have 10-year surrender charge, starting at 10% in year one and declining to zero after year 10.

Interestingly, the new pricing strategies that came out in 2008 work around 10/10, while still providing a more generous bonus. (Noteworthy: It has now been an entire year since an additional state adopted the 10/10 desk drawer legislation.)

A 2008 review of IAs would not be complete without mention the touchy subject of Chris Hansen’s televised Dateline “expos?” on IA sales suitability in April. The NBC program reported on results of an undercover investigation of the IA industry; it was one-sided, not including commentary from pro-IA professionals such as insurance companies, insurance commissioners, etc. Instead, it painted the IA industry with a broad stroke, inferring that all products and sales are unsuitable.

That telecast has provided the IA industry with a refreshing opportunity to make certain that all are all doing their best when it comes to sales suitability.

Perhaps the most notable IA occurrence was distribution of the Securities and Exchange Commission’s proposed Rule 151A. Here, the SEC suggested that IAs are not annuities, that they are securities and should be under federal regulation. The SEC offered two comment periods on the proposal, and over 4,376 formal comments flowed in, most in opposition to the proposal. As of this writing, the SEC has not made a formal decision on whether it will adopt the proposed rule or not.

Over the course of a single year, participation rates, caps and spreads went from being depressed due to an inverted yield curve–to rebounding and increasing sales 20% in a single quarter (2Q2008). Then, the bottom dropped out of the market and carriers began pulling uncapped crediting methods (those utilizing only a participation rate or spread).

As a result of unfavorable option costs on uncapped methods, additional carriers have limited the amount of premium that consumers can allocate to such strategies, or even reduced commissions.

Late in the year, 5 carriers announced they are exiting the IA market.

On the indexed life side of the market, things have been comparatively positive in the past 12 months. Sales of indexed universal life (IUL) increased every quarter, and it doesn’t appear the momentum will stop anytime soon. Despite the fact that several carriers have announced formal decisions not to accept equity harvesting business, sales of these fixed insurance products are on the increase.

The year saw a continued focus on survivorship life in the IUL market. Two carriers rolled out new survivorship universal life (SUL) designs this year, indicating that the market is becoming much more competitive. No-lapse guarantees on SUL, in particular, have become a luxury as carriers have had to re-price due to implementation of the 2001 Commissioners Standard Ordinary tables.

Like the IA industry, IUL has been adopting rainbow crediting methods. However, carriers offering any international index as the basis for their crediting methods have been able to successfully increase market share this year.

Perhaps the most interesting development in the IUL market in 2008 had to do with the products’ minimum guarantees.

For instance, where IUL primarily offered 1%-2% guaranteed annual return minimums in years past, recent designs have offered 0% annual guarantees that true-up to a minimum of 1%-3% upon a trigger event (e.g., death, surrender, lapse). This allows carriers a higher option budget, thus resulting in more favorable caps and participation rates on the IUL product. Since 2005, the number of carriers offering these standard non-forfeiture (SNF) minimums has increased dramatically. However, a market leader was granted a patent for this SNF minimum concept in May. This patent will impact most of IUL carriers, and only time will tell how the carrier will proceed, as their competitors increase market share with this innovation.

Another example: One carrier came out with an alternative offering of a guaranteed annual floor for IULs (via a rider). The carrier, which normally offers a 0% annual floor that trues up to 2% over the life of the contract, developed a unique rider that offers consumers a 1% annual floor. Current caps, participation rates, and fixed rates are reduced to offset the costs of the annual floor.

Other developments with minimum guarantees on IUL include several carriers’ moves to 0% guarantees that never true-up with their 2001 CSO re-priced offerings.

All IUL developments in 2008 pale in comparison with the scramble to comply with the 2001 CSO. Fourteen of the 16 IULs launched in 2008 were a re-priced 1980 CSO product. One carrier has exited the market as a result of low sales, as compared to re-pricing costs. However, the market has grown significantly as IUL has established itself as a mainstream product, no longer niche.

All this activity, for IAs and IULs, should make for a very interesting sales year in 2009.


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