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.”
The IRA annuity
Another relative newcomer to the VA space is the IRA annuity, such as the RetireReady product introduced in 2008 by Genworth. It combines the traditional benefits of an IRA with an annuity’s ability to provide a guaranteed income stream. The contract must be issued as (and maintained as) an IRA, Roth IRA or SEP IRA contract or within qualified accounts. The chief underlying investments in the Genworth product are well-known retail mutual funds from more than two-dozen fund managers.
Living benefits may get most of the attention among VA features, but Scott DeMonte, director of variable annuity markets at Massachusetts-based Financial Research Corp., sees a renewed emphasis on death benefit guarantees as a wealth transfer tool. One such feature is Jackson Life’s LifeGuard Freedom DB, which guarantees that the contract holder’s death benefit amount will not decrease, provided withdrawals do not exceed the guaranteed annual limit or minimum required distribution. It is available with the LifeGuard Freedom GMWB rider on Jackson’s Perspective and Retirement Latitudes VA products.
Patience pays off
DeMonte also expects insurers to bolster their annuity offerings with strong “patience bonuses,” which reward contract-holders for waiting on withdrawals. For example, with Prudential’s new HD Lifetime 7 Plus optional VA feature, investors can receive minimum income guarantees of 200 percent, 400 percent and 600 percent after 10, 20 and 25 years, respectively.
These are meaningful but relatively modest new product twists for insurers who each May are accustomed to making major splashes in the VA marketplace.
Fixed products show increased creativity
While the pace of product innovation has slowed with variable annuities, it is apparently surging in the fixed annuity market. Insurance company product development departments evidently have shifted their focus, at least in the near-term, to beefing up traditional fixed annuities and fixed-index annuities with new features, observes Hubert Mueller, principal at Towers Perrin. “The same withdrawal and income benefits [available with variable annuities] are finding their way to both [fixed] index annuities and plain-vanilla fixed annuities. The [benefit] designs are pretty much the same.”
By offering packaging guarantees with fixed contracts, he explains, “insurers now have another way to effectively compete with banks and mutual funds” for investor dollars.
They’re also targeting those dollars, he notes, by developing CD-type fixed annuity products that come with three- or five-year guarantees, plus an opportunity to roll over into a new annuity contract once that period ends, without incurring a surrender charge.