BROOKLYN, N.Y. — A year ago, a common knock against variable annuities was that they had never been tested in a severe bear market.

Thanks to the current crisis, “we have certainly been through a test,” Frederick Crawford, chief financial officer of Lincoln National Corp., Radnor, Pa., said here today at an insurance industry conference organized by Standard & Poor’s, New York.

The session covered the cost of “variable annuity exuberance.”

Speakers at earlier S&P conference sessions talked about the need for insurers to reduce exposure to variable annuity benefit guarantees by increasing prices, simplifying the terms, and eliminating or changing the riskiest features.

During session on VA exuberance, VA defenders pointed out that, so far, contract holder behavior has been somewhat better for insurers than originally expected.

At Lincoln, Crawford said, withdrawals have held steady, and managers have found that VA holders have used relatively conservative asset allocations, despite access to benefits guarantees.

Careful attention to suitability may have helped, Crawford said.

When producers sell VA income guarantees to customers who really are looking for steady income, and VA withdrawal guarantees to customers who really want the peace of mind that comes with having access to their VA assets, that increases the odds that the guarantees will perform about as well as expected, Crawford said.

Meanwhile, “life events” are forcing some VA guarantee owners to drop contracts that are “in the money,” and holders who have started to use VA withdrawal guarantees are taking out less cash than they could, according to Kenneth Mungan, a principal at Milliman Inc., Seattle.

The Future

Despite the good news about VA holder behavior, guarantee exposure risk may be forcing some players out of the market.

“Organic” forces could reduce the number of VA issuers to 8, from 24 today, over the next 24 months, Michael Wells, chief operating officer of Jackson National Life Insurance Company, Lansing, Mich., predicted.

Some insurers will buy blocks of annuities, but acquisitions of entire companies will play a minimal role in VA industry consolidation, because capital is scarce, stock deals are complicated, and books of existing business are full of toxic liabilities, Wells said.

Crawford said Lincoln National wants to avoid the temptation to jump out of the VA market simply because the economy has slumped.

“We want to continue to sell products through market cycles,” he said.

A steady approach is important, because it can protect insurer against backing too many guarantees sold when stock prices are high, and it can help an insurer maintain relationships with distributors that sell a wide variety of other products for the insurer, Crawford said.

Mungan recommended that insurers avoid the temptation to control VA risk by imposing big price hikes and benefit cuts.

If insurers sell overly conservative products, consumers may dump the products once conditions improve, Mungan warned.

But, in the long run, he said, big opportunities await life insurers that come up with sustainable retirement products.

“The financial crisis didn’t stop the baby boomers from aging,” Mungan said.

Norio Morimoto, a conference attendee from the New York office of Sumitomo Life Insurance Company, said he learned from Japan’s prolonged slump that insurers’ financial stability is critical.

When the economy is weak, consumers are more aware of the importance of protection products, but they also are more aware that insurers can fail. “The quality of the company is an important point,” Morimoto said.

In the United States, in the short run, “the pricing is very important,” Morimoto said. “I think more radical change in pricing will happen.”