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July 20, 2009 at 08:00 PM
Most variable annuity insurers believe there is no returning to the tax-deferred wrappers of over a 
decade ago. They believe demand for guarantees in the VA market is here to stay, and that the current market crisis has made the VA story of upside potential with downside protection even more powerful.
The challenge is to find an equilibrium that satisfies insurer, agent and customer.
The insurer has to be able to manage the risk associated with providing VA guarantees. Other things being equal, in turbulent times this means a significant increase in price for the guarantee.
That may be fine with customers who appreciate the value of the guarantee. But customers often have very short memories. When markets return to a more normal state, customers may not fully appreciate why the charge needs to be so “high.”
As for agents and distributors, they often do not have short memories. In turbulent times, insurers may have to pull products from the shelf until replacements can be developed, filed, and approved. That may leave agents with few or no product options, just when customers are demanding those options. This disruption in product supply clearly hampers business. It may take a long time before agents again trust the insurer.
How can VAs be made more sustainable so all parties involved can be comfortable with the product? Here are some ideas.
Setting expectations: The VA market generally features products with fees that are largely fixed for the life of the contract. Obviously, the account value depends on market performance, but the mortality and expense charge is generally fixed. The guaranteed living benefits traditionally feature a current charge and a guaranteed charge. In many cases, the current charge increases only if the customer elects to reset the guarantee (essentially restart it at the current account value).
In today’s market, expectations need to be set with both agent and customer regarding VA pricing factors.
For instance, the agent needs to expect that pricing for a particular rider will vary according to market environment. That won’t thrill agents, but it is much better than having nothing to sell. Customers need to be told to expect that the charge for the guarantee is going to vary yearly but it will never be greater than a guaranteed value.
Another approach is to use a higher charge, but set the expectation that “charge vacations” will occur in years when the cost to provide the guarantee is less than projected. Obviously, the product filing needs enough flexibility to allow for this.