Variable annuities getting more variable

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.