Annuities saw the best of times (for clients) and the worst of times (for insurers) when the safety features kicked in during 2008. Insurers convinced they sold their guarantees too cheaply have rushed to repair the damage.
They are doing this in two ways. Some are stripping back the fancy features that proliferated in the past by offering simpler, cheaper products that carry less risk for insurers. Others continue to offer fancy bells and whistles, but at a slightly higher price.
Ken Kehrer, director of research at Kehrer-LIMRA explains that there have always been two marketing approaches: Capture the business of an advisor who sells a lot of annuities or market to inconsistent sellers. “Some of the new products are aimed at the latter market, which is a tougher row to hoe,” he says. Regular sellers want the best bells and whistles. It seems their customers do too. Despite steeper costs, 84% of VA buyers in the fourth quarter of 2009 chose those with guaranteed living benefit (GLB) riders, according to LIMRA.
“Advisors continue to present the same products because they haven’t changed-it’s easier for advisors to keep their features top of mind, but also these products have represented a strong value for their clients,” Kehrer explains.
Advisors have another interest in selling more complex VAs, says Scott Hawkins, an insurance analyst at Conning Research & Consulting in Hartford, Conn. “VAs’ increasing complexity plays to advisors’ advantage-as they get more complicated, the need for an advisor is greater.” He points out that term insurance has gotten so simple people are buying it online directly.
Insurers’ have their own selfish reasons to create “simpler” annuities since the market crash. Insurers recover “deferred acquisition” costs over time from fees, mostly from commissions insurers pay to advisors. When the market crashed, calculations for how long it would take to recoup those commission costs went out the window-insurers assuming a 5% or 6% return per year suddenly faced a 50% market drop. Accounting requirements accelerated deferred acquisition costs so that insurers had to write them off up front. The Hartford, for example, had to write off $1 billion.
The fact is that VA sales have been falling for almost a decade. From the mid-1990s until the tech wreck, insurers flooded the market with then-innovative VAs, but when the bubble burst in 2001, many quit the market as annuity owners held tight to what they had, Hawkins explains. The infamous arms race between annuity providers was, in part, an effort to get holders of old annuities to move their premiums to new, more exciting products via 1035 exchanges. This strategy worked, but it also meant that recycled premiums replaced new ones as advisors scrambled to sell the attractively commissioned products.
In recent years, up to 80% of “new” premiums have come from 1035 exchanges, but that’s largely dried up because the guarantees for people in old annuities are now “in the money.” “It would be almost criminal for an advisor to switch one annuity to another when a client is reaping such a benefit,” Kehrer says. The premium drought will continue at least through 2012, Hawkins adds, causing some insurers to quit the market and forcing stragglers to reinvent the wheel. Stronger players-Prudential, Jackson National, MetLife and Lincoln-have been able to carry on largely as they did before the crash.
STRIPPED-DOWN CHASSIS
ING’s new Select Opportunities VA, launched in March, is part of the wave of new simpler VAs. It offers a death benefit, which is return of principal, and no riders, says Bill Lowe, head of distribution at ING Financial Solutions. “We used to have enhanced death benefits, income benefits, earnings multiples, roll-ups on guaranteed withdrawal benefits, but we took all that out. We had very competitive riders in every space, but when fees went up, the value proposition changed a lot.”
The new product has a built-in guaranteed benefit, an annual ratchet feature and a payout based on age and length of ownership. Lowe says that a 60-year-old drawing income on the annuity at age 65 might qualify for 4% income for life; at age 70 that customer might get 5%. “We’re selling this as guaranteed income,” Lowe says. The VA offers 11 passive investment choices, including small-cap, mid-cap and large-cap equity, international equity and fixed income.
Stripping out the flashy features has also lowered the cost of such annuities. The Select Opportunities VA charges a flat 2.25% versus 3.5% or 4% for a VA with active management. Advisors who sell the new VA make 75 basis points up front with a 75 basis-point trail.
The Hartford has also ditched its riders in favor of a more classic chassis. The firm won’t say how much it pays advisors, but the Hartford Personal Retirement Manager, which houses a single premium income annuity (SPIA) to provide retirement income, launched in October. The hybrid VA/SPIA offers 60 investment options, carries a 50 basis-point mortality and expense fee and a distribution charge of 75 basis points against the client’s premium that goes away after eight years. “Charging against premium helps us recoup distribution costs,” explains Phil Michalowski, director of product development at the Hartford. Because the fees are comparatively low, “over time, the client saves a ton of money and their assets grow more efficiently,” he says.
While SPIAs are “the most efficient way to generate income,” they tend to be inflexible-you pay your money and receive an income stream, but your assets belong to the insurer, says Michalowski. With the Personal Retirement Manager, some of the assets go into the SPIA and no longer belong to the investor. “If you have a life event where you need a lump sum, you can liquidate assets from the growth side of the contract without impacting your income from the fixed side,” Michalowski says. The SPIA pays 3%, but assets on the VA side can grow with the market to feed the SPIA. The Hartford hopes this product is distinctive enough to compete for a whole new customer base.
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