Talk all you like about how such factors as the interest rate environment, equity market volatility and baby boomer product tastes are impacting the annuity marketplace. When it comes down to it, the factor that today has the biggest hand in shaping both the supply and demand sides of this $150-billion annual market is purely psychological. It’s called uncertainty.
On the demand side, a deep-seated uncertainty among investors about the adequacy and safety of their retirement nest egg is driving them to annuities to gain access to a wildly popular breed of optional feature known as the living benefit, through which they can obtain an insurance company’s guarantee of principal protection or income for life.
Uncertainty also has a grip on annuity suppliers. The escalating risk-management pressure that living benefit guarantees place on the balance sheet is prompting insurance companies to rethink their annuity product lines as well as their overall approach to the annuity market.
And in the middle of it all stand advisors like you, trying to stay plugged in to the client mindset while keeping pace with supply-side developments so you’re in position to match clients with the right type of annuity and annuity features. Read on to arm yourself with the essential annuity insight you’ll need to maintain a competitive edge amid all the uncertainty.
The supplier shuffle
An aversion to assuming additional living benefit-related risk is motivating big-name insurers like John Hancock and ING to scale back their variable annuity (VA) activity. “We have seen a lot of carriers pull out of the marketplace,” says Kevin Loffredi, vice president at Morningstar, Inc., in Chicago.
Their withdrawal leaves a void that other insurers appear poised to fill, observes Scott DeMonte, principal at VA Edge, an annuity-oriented consulting firm in Syracuse, N.Y. “I think you’re going to see new players like Midland National and mutual companies like Nationwide and Ohio National getting more involved in the [variable annuity] market. It’s a good opportunity for them, because they weren’t in the middle of the living benefits arms race, so they don’t have those liabilities on the books.”
It’s also worth noting, DeMonte says, that without such liabilities, these newcomers may be in a position to offer richer living benefits than those offered by traditional VA providers.
For some carriers, it’s a matter of reallocating resources. “Some traditional variable annuity carriers are really looking hard at the indexed annuity space,” says Loffredi, naming Pacific Life and Genworth as examples of insurers that lately have shifted focus to index annuities.
Symetra and Hartford Life are two others to recently play up their indexed annuity offerings. And according to some observers, other big VA players—perhaps even MetLife—may soon follow suit.
Discontinuing certain products and living benefits is one way for insurers to manage VA market risk. But the more popular route among carriers today is to de-risk the living benefits they continue to offer. “Their biggest issue right now is the sustainability of living benefits,” says DeMonte.
Though most of today’s living benefits are decidedly less rich than in years past, they cost almost double what they did just several years ago, he observes.
That’s apparently not deterring investors, notes Loffredi, pointing out that some form of living benefit is elected with roughly 90 percent of new VA contracts.
The continued popularity of living benefits leaves insurers with the difficult task of striking a balance between risk management and investor appeal. “The living benefits are very near and dear to these insurance carriers,” Loffredi notes, “so they’re really having to get creative.”
New hedging twists
That creativity has already begun to surface via a range of new product and feature designs and strategies geared toward managing risk—that of the insurer as well as the investor.
Much of that innovation is occurring at the sub-account level. Take, for example, the new guaranteed lifetime withdrawal benefit (GLWB) that Ohio National offers with its ONcore variable annuities. Not only does it offer an 8 percent annual accumulation rate and a highly competitive annual payout of 5.25 percent starting at age 65, it also features an advanced volatility-management strategy developed by risk-management specialist Milliman that incorporates TOPS exchange traded fund (ETF) portfolios from ValMark Advisers and futures-based equity positions into the annuity’s sub-accounts. The TOPS-Milliman hedging strategy is designed to allow investors to capture 75 percent of upside market movements while exposing them to just 25 percent participation in downside movements.
More annuity providers are constructing hedged VA sub-account portfolios around instruments such as ETFs, and then requiring investors to allocate a portion of contract funds to those hedged portfolios. Essentially, it’s a move by insurers to transfer a greater share of the risk-management responsibility associated with living benefit guarantees downstream to investors. For investors, the upside of shouldering that additional responsibility is the potential for richer benefits and lower fees on features such as a GLWB.
AXA Equitable uses a similar philosophy with its Retirement Cornerstone VA, which features a non-guaranteed, equity-invested sub-account alongside a sub-account comprised of guaranteed investments that are designed to underpin the product’s optional income and death benefit guarantees. The contract holder decides when to activate the guarantee; when they do, funds are automatically shifted into the guaranteed sub-accounts.
LBs in the FIA space