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Variable annuities getting more variable

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Product changes in variable annuities are coming fast and furious as carriers attempt to cope with low interest rates by raising fees and scaling back features. Advisors, meanwhile, have their work cut out for them as they analyze all the new twists and turns in product offerings.

That was one of the takeaways of a panel discussion, “Trends in Product Development and Product Allocation Tools,” held last week at the Insured Retirement Institute’s Marketing Forum.

Moderator John McCarthy, product manager, advisor software, insurance solutions, at Morningstar Inc., kicked off the discussion by noting that sales of variable annuities dipped 6.7 percent in 2012 from 2011. He further offered a synopsis of the current variable (VA) marketplace, one that has been characterized by fee hikes, benefit cutbacks, distribution pullbacks, buyback offers and companies exiting the market altogether.

The panelists then gave two differing viewpoints on all these product modifications. An executive with a broker-dealer characterized the changes as disconcerting for the advisor and client alike, while a carrier executive stated that VA providers are trying to make a product that is attractive to both consumers and shareholders in today’s challenging economic environment.

Robert Pettman, senior vice president, investment and planning solutions, for LPL Financial, said that whenever a carrier makes changes in a VA, it’s up to the advisor to assess whether he or she should still offer the product. That due diligence period consequently leads to a disruption in sales. “That takes time and that time causes the delay between the time I offer one contract and another contract,” Pettman said. With better communication, that lag time could be shortened, he said. “If you can speed up that process, you can actually take down some of that sales disruption that occurs, and get people more comfortable with the annuity environment.”

Several companies have offered buybacks to VA holders, which Pettman said creates more administrative work and supervisory oversight. Clients must be counseled so they can make the right decision, he said. “While they [buybacks] benefit the insurance company there’s a tremendous amount of work for all parties, particularly the broker-dealer, in the administration of those.”

Todd Solash, senior vice president, head of retirement savings product life cycle management, at AXA Equitable, agreed that changes in VAs have been coming at breakneck speed. Whereas changes were only instituted in May, now they are coming at all times during the year. That does, he conceded, put pressure on the distribution chain. “On the flip side, we’re trading a lot of derivatives and we’re trying to manage to deliver value and also deliver profits to shareholders,” Solash said. “There is a line at which it is no longer profitable, either short or long term, to make those things continue to happen as they were happening.”

However, both panelists stated that carriers and distribution partners are working more closely now when designing products. “Most of big distribution partners, like Rob, have been incredibly thoughtful and coming to the table with us to try to figure out the right answer for these things and how not to create a shock to the system both from a distribution and end consumer standpoint,” Solash said.

Pettman agreed, saying that one outgrowth of the current shifting marketplace is a closer working relationship between broker-dealers, manufacturers and insurance companies in the design process. “They are getting broker-dealer feedback and that’s a positive change,” Pettman said.

The problem with all the changes in VAs may be one of perception, Pettman said. The industry as a whole and advisors may be comparing today’s versions to the benefit-rich products of 2007. “They see these types of changes and it’s discouraging,” he said.

However, the average investor doesn’t have that same perspective. “They have a fundamental need and these products can still fulfill that need, particularly in this type of environment,” Pettman said.

Even within a constrained sales market, Solash said that manufacturers are producing innovative new products. Yet he noted, “The guarantees of 2006 are not going to be the guarantees of 2013.”

In terms of product design, the industry has weathered the financial crisis and now has data on withdrawals and lapse rates. Carriers have also hedged through volatile times, Solash said. All that dictates what can be offered now and at what price.

“At the end of the day, what are you giving to an investor and does the package add up? Everyone is working together to make sure these work for everyone,” Solash said. “The combination of fee and value have to add up. Distribution and manufacturer have to get better at explaining the reality of a low interest rate environment to investors. It’s a challenge. We have to do better education.”

For this year, McCarthy predicted VA sales will move up a bit as sales usually follow movement in the equity markets. “If equities are up, money flows in,” he said. However, low interest rates will continue to tamp down the creation of more attractive benefit offerings, he added.

Pettman said he foresees more instability. “We’re not done with change.”

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