This is the third in a series of articles that will be published on the annuity space.
Unlike the variable annuity market, multiple insurers entered the fixed indexed annuity (FIA) market in 2011 or are actively developing their initial FIA offering. These carriers are positioning their product in one of two ways: as a vehicle to generate attractive levels of guaranteed retirement income or as a product with more upside than a fixed annuity in this interest rate environment.
With the former, the company’s target customers are baby boomers who are anxious about retirement planning. They are seeking ways to protect their nest eggs and thinking about how they will generate income in retirement. A FIA with a guaranteed lifetime withdrawal benefit (GLWB) appears to be a match made in heaven for these target customers. The policyholder’s account value has the potential to earn returns indexed to the market, with downside protection of the nest egg. The GLWB rider provides guaranteed income for life, the level of which will increase until the policyholder elects to begin taking withdrawals under this benefit.
A company that is positioning its FIA as an alternative to a fixed annuity may either omit the GLWB rider or offer one with modest guarantees. Even without the rider, the policyholders have a chance to earn larger returns than they would with a traditional fixed annuity, but with some added risk (but less risk and less potential upside than a traditional variable annuity). Some carriers that have traditionally distributed their products through broker-dealers and banks had avoided making FIA products available due to concerns about product complexity and customer value; some companies are now re-evaluating whether a FIA product can be designed to address these concerns.
Trends we expect to see continue through 2012 and beyond:
1. New carriers will look to enter the market.
Before they commit to offering FIAs, variable annuity carriers are considering whether FIAs really are a safer way to manufacture retirement income products. FIA writers typically offer a slightly richer GLWB for a little less than variable annuity writers because the account value of the base contract isn’t as volatile.
Fixed annuity carriers are considering whether the additional complexity of offering FIA products makes sense in light of the relatively low rates they can offer on fixed annuities in this interest rate environment. FIA products may make it easier for these carriers to find a happy medium between providing attractive benefits to policyholders while maintaining acceptable product profitability.
2. GLWBs will continue to grow in prominence and complexity.
GLWBs have grown in prominence, but they have also become more complex. More than 20 companies now offer the rider with their FIAs. According to LIMRA, a GLWB was available on 87 percent of FIAs sold in 2011 and 67 percent of policyholders purchased this rider.
A new benefit design that merges the index and roll-up features recently hit the market and is believed to be less risky for insurance companies. In the first generation of GLWB riders, the typical range for the roll-up rate (i.e., the rate at which the protected amount grows until income begins) was between 5 percent and 8 percent. New products have a stacked benefit, which combines the roll-up rate and the index credit. The roll-up rate for these products is lower, between 3 percent and 5 percent, and the index credit is added to it. If the product offers a stacked benefit with a 4 percent roll-up and has a 6 percent index credit in a specific year, the protected amount would grow by 10 percent that year. If the index return dropped to zero in the following year, the protected amount would only increase by 4 percent that year.
3. Companies will search for more efficient uses of capital.
Some companies are modifying the features or limitations of GLWB riders to eliminate the large strain on reserves. Many companies have approached their state insurance department to discuss their product and request a modified reserve approach that is less capital-intensive.
Industry groups are working with the National Association of Insurance Commissioners’ Life Actuarial Task Force to investigate alternative approaches to statutory reserves that are less punitive than Actuarial Guideline XXXIII when applied to certain GLWB riders. AG33 requires that a company set a reserve for each policy equal to the greatest present value of guaranteed benefits that the policyholder may elect, regardless of the likelihood the policyholder would choose an option. The alternative approaches being discussed include reflecting the probability that policyholders will elect the GLWB rider at various points in the future or adopting a principles-based approach similar to that used for VAs today. Under a principles-based approach, companies would evaluate a range of “real world” scenarios, and calculate the reserve based on the worst 30 percent of the outcomes (e.g., CTE 70), possibly subject to a “standard scenario” floor.
Up next: CDAsBack on Track?