Welcome to the post-meltdown insurance market, where guarantees are golden—and priced accordingly; where volatility is a four-letter word for investors and insurers alike; where de-risking has become an imperative for many insurance companies; where investors value downside risk protection as much or more than upside potential; where insurers are tossing aside old pricing models and embracing new, more flexible schemes.
Needless to say, keeping up with the latest supply-side developments with annuities, life insurance and long-term care insurance is a major undertaking. To help you stay a step ahead, here’s a look at some of the products and features that have insurance industry observers buzzing.
Staying abreast of the many complex new features and designs insurers are rolling out as they attempt to de-risk their annuity portfolios while keeping their products relevant is no easy task. Just ask John McCarthy, Morningstar’s product manager for annuity solutions.
“I think we set a record for man-hours spent reviewing one [annuity contract] benefit,” a new long-term care option that a carrier unveiled recently with one of its annuities, says McCarthy, who is based in Chicago. “In terms of the volume of activity and complexity, it’s getting harder for advisors to keep up” with annuity product changes. The average variable annuity product prospectus, he notes, now runs 125 pages.
Much of that complexity, and many of those changes, relate to living benefits—the optional income and withdrawal guarantees that the vast majority of annuity buyers now elect to purchase with their contracts. To de-risk, insurers not only are reducing the guarantee percentages and raising the fees associated with these benefits, they’re restructuring the benefits altogether, pushing more risk down to the investor using volatility-based fee structures, ETF-based sub-accounts, dual-sleeve designs (with one sleeve consisting of lower-risk sub-account investments to underpin the living benefit and the other of higher-risk sub-account investments to underpin the base contract), and the like. The result: variable annuities now come with even more variability.
Another area where VA providers are innovating is in O-share products tailored to specific large wirehouses and brokers such as Edward Jones. Essentially, says McCarthy, it’s a move by annuity providers like John Hancock, Prudential and others to provide VAs with pricing and compensation structures better suited to fee-based money managers and RIAs. In most cases, he notes, the O-share products come with lower M&E, a broader range of investment choices and fewer living benefit options than their A-share counterparts.
A fixture in the VA space for the last decade, living benefits are fast finding a foothold in the fixed index annuity market, too. According to recent LIMRA estimates, living benefit riders are offered with about 90% of FIA products, and that when they’re available, they’re elected about 60% of the time. Guaranteed lifetime income benefits “helped sustain indexed annuity sales” in 2011, according to Jeremy Alexander, CEO of Beacon Research in Evanston, Ill., which tracks the fixed annuity market.
Income annuities are another hot annuity product, having posted an 18% sales gain in the fourth quarter of last year and a gain of nearly 7% for all of 2011, according to Beacon Research. “Income annuities generally provide the most retirement income bang for the buck,” says Alexander. “Sales results indicate that advisors and their clients are becoming aware of how these products can be used to create a personal pension.
Fueled by traditional products as well as relative newcomers, individual life insurance sales increased 4% in new annualized premium in 2011, marking the second consecutive year of growth, according to LIMRA International.
A sustained resurgence in whole life sales, driven largely by a growing consumer appetite for safer permanent products with premium and cash value guarantees, has been accompanied by stronger sales of emerging life insurance products such as indexed universal life and term universal life, observes Kathy Ho, a research actuary at LIMRA in Windsor, Conn.