May historically marks the peak of new product season, when many insurance companies crank up their publicity machines to trumpet the latest enhancements and additions to their annuity line-ups. But with many insurers on shakier ground amid the ongoing financial crisis and credit crunch, this May could be unusually quiet.
“What we have seen recently is more in the way of curtailment than new product innovation” in the annuity market, says Jon Gabriel, research director for Kehrer-LIMRA, an organization that tracks the market for annuities and other insurance instruments.
Still, while the wheels of progress in variable annuity product development may have slowed with the market nosedive, they are continuing to turn. Here are a few developments that annuity experts say are worth watching.
Removing the risk
Instead of constantly leapfrogging one another with increasingly aggressive withdrawal, accumulation and income guarantee features, insurers are taking various steps to “de-risk” their living benefits. For example, says Hubert Mueller, principal at the financial consulting firm Towers Perrin, some insurers have eliminated their most attractive withdrawal benefits. Others have placed new limits on resets and bonusing features. But while the race has yielded to pricier (typically 20-50 more basis points) and less robust guarantees, insurers are responding by fortifying other aspects of those benefits, such as by dropping the minimum age at which contract holders can elect a living benefit to 45.
Prices on those guarantees aren’t likely to drop anytime soon, however. Just the opposite, says Mueller. “If the [stock] market stays this volatile for the next six to 12 months, I wouldn’t be surprised to see another round of [living benefits] price increases.”
With election rates hovering around 90 percent, living benefits have become so popular that even in the face of recent price hikes, they are approaching a point where they are standard components of the variable annuity. To counter the increased risk exposure associated with offering those guarantees to a growing segment of contract-holders, says Mueller, insurers are implementing more conservative asset allocation requirements with many of their VA products by mandating greater allocations in bond-based investments, for example.
Concerns about VA cost and complexity have prompted an influx of no-load, no-surrender-charge products from carriers such as Ameritas and Jefferson Life. “They’re targeting the consumer who maybe just wants a simplified version of the variable annuity,” explains Joe Montminy, research director at LIMRA International.
No-load VAs also represent a way for insurers to target fee-based advisors, he notes. Instead of paying commissions on the front end of a sale, advisors are compensated based on assets invested in the contract. “That compensation structure is more in line with the fee-based advisor’s business model,” he says. “And it gives them an opportunity to offer [clients] a mutual fund-type product with some type of insurance guarantee wrapped around it.”