Major changes continue to reshape the variable annuity (VA) market, and the rate of change has intensified in recent years. With major players exiting the space, benefits being cut and fees increasing, advisors are challenged to keep up with rapidly changing product offerings and find solutions that meet client needs. The good news is that clients remain interested in VA products; therefore, advisors willing to invest the time and effort to understand the new landscape can still find opportunity and create value.
Over the last few years, major VA players – including Genworth, ING, Sun Life, The Hartford and John Hancock – exited the variable annuity business. For advisors, greater market concentration means potentially fewer products and riders to offer to clients. Given the number and rate of changes that insurers are making to the VA products, having fewer companies to keep up with may be a good thing for advisors. On the other hand, there is less competition, so advisors and clients may find themselves getting less and paying more for it.
The ongoing low interest rate environment and the high cost of hedging are leading to adjustments in benefits and fees. Benefits are decreasing, while fees are increasing. In addition, companies are managing sales volumes by refusing to accept 1035 exchanges and limiting additional premium payments.
These trends look likely to continue. As they seek to slow the growth of new contracts with living benefits, companies will restructure living benefits, particularly in the area of guaranteed lifetime withdrawal benefits (GLWBs). With GLWBs, insurers are decreasing withdrawal percentages (the amount of the income base that a contract owner can withdraw each year) and bonuses, while increasing charges or restricting investment options. Prudential and other companies have introduced new, less-competitive benefits and pulled richer ones from the market.
Insurers continue to drop aggressive investment options on their variable annuities and move clients into less volatile funds. For instance, AXA Equitable Life Insurance Co. (AXA) is dropping 26 investment options from one of its VAs and moving money to more conservative funds. Many of these replacement funds feature a volatility management strategy. Nationwide Financial is adding four new managed volatility fund options to its VAs and Prudential is adding six new asset allocation funds to its Highest Daily Lifetime Income Benefit. For advisors, these embedded portfolios offer more stability around account value for their clients, and the insurance companies are more comfortable with the guarantees, thanks to the increased fees.
No more premium payments
Prudential, MetLife and AXA are among the insurers barring contract owners from making additional premium payments on some existing contracts. Most of the affected contracts are those with a generous living benefit or death benefit. In the past, insurers rarely, if ever, exercised this contract provision.
More insurers are also offering buyouts to contract owners. The Hartford is the latest company to offer some of its contract owners the opportunity to exchange a living benefit for an increase in account value. Earlier, AXA and Transamerica offered contract owners the option to drop certain riders in exchange for an enhanced cash value. It remains to be seen if additional offers to buy out contract owners will be made or expanded to other guaranteed minimum withdrawal benefits (GMXB).
Despite these extensive product changes, consumers remain interested in VAs. In fact, today’s VA products are much more rational due to the large-scale changes that have been made to the base products and living benefits. Companies are no longer trying to gain market share, but rather aiming to balance their own needs and objectives with those of clients and advisors. For advisors, staying up to date with all the changes in the market and the characteristics of the products currently available are critical to serving the needs of clients.
The opinions expressed in this article reflect the opinions of the authors and are not necessarily those of Ernst & Young LLP.