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Variable annuity market makeover continues

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It’s almost enough to make any investor and advisor dizzy. Every month, it seems, brings another announcement of a modification to an existing variable annuity (VA) contract. In fact, in the second quarter, Morningstar charted 182 changes, up from 97 in the first quarter and 168 in the same quarter of last year.

Morningstar characterizes most of the changes as “low impact,” involving primarily fee hikes, benefit reductions and sub-account options of the lower-volatility variety.

Yet there have been some splashier revisions that have garnered headlines, such as buyback offers of guaranteed living benefit or death benefit riders and suspensions of deposits. Hartford, which has stated its intention to exit the VA business, has told owners who possess certain guarantees that they must move at least 40 percent of their money into bonds. If they remain in stock funds, they will forfeit the guarantees.

For policyholders and their advisors, these alterations can bring on confusion and questions. What do all these change mean to the contract? Is it worthwhile keeping it?

Meanwhile, the carriers counter that these revisions are an attempt to remake contracts written in more flush economic times more viable (and profitable) in today’s sustained low interest rate environment.

Todd Solash, managing director, product development, for AXA Equitable, says the impetus for these changes is (no surprise) the low interest rate environment, which make pricing more difficult. But policyholder behavior, as evidenced by low lapse rates, is reshaping the variable annuity world as well. Policyholders are holding onto the contracts longer, which also impacts pricing.

Since last year, AXA has made two buyback proposals for some of its variable annuity contacts: one for cash in exchange for forfeiting the death benefit (DB) and more recently, a buyout of the living benefit rider.

“Simply put, you can’t sell in 2013 what you sold in 2006,” Solash says. “By the same token, it’s still a very valuable benefit for consumers and we think there’s a big market for it. It’s just not the same product it was pre-crisis.”

But all those changes place a burden on investors and their advisors. Should they take the buyout offer? Is a pared-down benefit contract better than not having one at all?

For advisors, the main challenge is reassessing the potentially restructured variable annuity contract and whether it still makes sense for a particular client, says Robert Pettman, senior vice president, investment and planning solutions, for LPL Financial. He works with advisors and says their concerns revolve around getting the information they need so they and their clients can make informed decisions.

“It does place a notice on the financial advisor and the client to come together and understand what exactly is being presented and make the right decision,” Pettman says. Though he admits he may be over-generalizing, a buyback offer might work in an instance where the client’s needs have changed since when they first purchased the contract. “In those situations, having choice is certainly a good thing,” he says. “You need to make sure they don’t currently have those needs that they would essentially be forfeiting by the offer.”

John Olsen, president of Olsen Financial Group, says it’s important to distinguish between those carriers that offer existing contract holders the choice of keeping their contracts as is or taking a lump sum “buyout” of the income benefit guarantees and those few that require contract owners to consent to the new pricing and benefit changes or lose the guarantees. The first group, he says, are simply being responsible in trying to reduce their risk exposure while treating existing customers fairly. The latter, he says, “should be ashamed of themselves. They sold a product that they underpriced, and are now trying to make buyers of that product pay for that mistake. It’s a ‘bait and switch.’ ”

In either case, Olsen says these contract changes require buyers of these contracts to revisit their original purpose in purchasing the annuities and to re-assess whether they make sense now, given the new costs and benefits. “Am I trying to accumulate or am I trying to guarantee an income that will never run out? Those are two different things that require different solutions,” Olsen says.

Equipped to make a decision?

Yet are consumers and many advisors equipped to make the proper analysis? Lorry Stensrud, president and CEO of Achaean Financial, says there are currently not a lot of tools in the marketplace in terms of software or graphics that allow the consumer and advisor to analyze all the factors that need to be weighed in the decision.

Achaean has developed a remediation platform for legacy variable annuities, and, along with that product, it has crafted a series of illustrations and comparison models.

“We have developed some products that if they are added to an existing policy, someone would have to give up their current benefit in order to take the settlement option that we designed,” he says. “We’ve created a series of illustrations and comparisons to show where it works, where it doesn’t work, why it works and what the associated tradeoffs are.”

That naturally leads to the question of suitability, particularly in the case of a buyout.

“Suitability is an ongoing issue,” Olsen says. “Clearly, you have to ask, what am I getting and what am I giving up? Is that guaranteed living benefit worth the 100 basis points or more? Maybe or maybe not.”

Yet Pettman contends that these new twists in the variable annuity marketplace do not present any added suitability questions. “Any time you are providing investment recommendations you are potentially liable,” he says. “When you have added change and complexity, the risk of those sorts of things arises, but I don’t necessarily think it’s anything more than what we already experience in the very cyclical nature of the marketplace.”

Would a client approve a buyout offer without consulting their advisor? Pettman says that’s unlikely, since most advisors conduct regular and ongoing reviews with clients. So the client would be educated enough to contact their advisor to discuss their options.

Perceptions

When all these changes hit the headlines and clients receive notices in the mail, it does create a perception that certain carriers are backing away from the product line. Therefore, it’s incumbent upon the carriers to convey the whys and mechanisms of the buyout offers, not only to the public but the broker-dealer community.

For its part, AXA plans to launch a website around its most recent buyout offer and the company has opened call centers to field inquiries from representatives and clients.

Solash says those initiatives were outgrowths of the feedback it obtained when it launched the first DB buyback offer. What it’s found is that more communication, in any form – mail, online or via phone – is welcome. “I can’t recall an instance when someone told us we over-communicated and to stop,” he says. “It’s important that people understand that we are making them a voluntary offer, and they can get the information they need to make the decision.”

Pettman agrees that it’s been a “learning process” for the carriers and the broker-dealers in regards to digesting all these and buyback offers. Unlike the heady pre-2008 days, when all the changes were for the good, it’s been a rockier path when the news isn’t as positive.

“I think the carriers and broker-dealers got a lot closer in aligning how to meet the needs of the advisors and investors while also putting out products that are sustainable in today’s economic environment,” he says.

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