Consumers in the US are increasingly turning to variable
annuities as part of a shift towards more predictable income
streams, according to an analysis of the market undertaken by Life
Insurance International (LII)
At a time when Americans are less confident
than ever before in their ability to meet retirement goals, figures
from professional development organisation LIMRA reveal that total
2011 variable annuity (VA) sales in the US grew to $159.3bn, a 13%
increase from 2010.
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This increase comes as writers continue to
manage the risks on the living benefit riders they offer on
variable annuities, according to LIMRA.
A VA is an insurance contract, in which at the
end of the accumulation stage, the insurance company guarantees a
minimum payment.
The remaining income payments can vary
depending on the performance of the managed portfolio.
Life benefit riders
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By GlobalDataJoseph Montminy, assistant vice president of
annuity research at LIMRA, explains that guaranteed life benefit
riders are driving growth in the VA market.
“When you look at new VA sales, in 2011, 89%
of all VA products out there had a rider available, and when you
look at election, 88% were elected, with 9 out of 10 electing the
guaranteed life withdrawal benefit rider, which gives the
individual guaranteed income payments at some time, for the rest of
their life,” he says.
LIMRA’s research underlines that riders are
continuing to fuel the US markets for variable annuities as
consumers seek to cushion themselves against the volatility of the
equity markets.
Among the most popular of living benefit
riders on variable annuities is the guaranteed lifetime withdrawal
benefit (GLWB).
GLWBs are a guarantee on the promise of a
certain percentage, typically about 5%, of a guaranteed benefit
base that could be withdrawn each year for the life of the contract
holder, regardless of market performance or the actual account
balance.
The low interest rate environment in the US
has challenged insurers to manage guarantees, and has slightly
slowed the torrid pace of the first half of 2011. Fourth-quarter
2011 sales were flat year on year, and compared to the third
quarter of 2011, sales dropped 4% to $38.4bn.
Individual variable annuity
sales 2005-2011
A notable trend in the VA market is that amid
sharply erratic equity markets, some
VA writers have cut policyholder benefits to
reduce their own financial exposure.
Other insurers have begun linking fees and
rider features to changes in the markets, using asset-allocation
models that automatically switch money between stocks and bonds
when certain triggers are met, and offering volatility-managed
programmes on the separate account level to better respond to the
interest rate environment.
Bob Kerzner, president and CEO of LIMRA, says:
“In terms of product development, companies are having to rethink
guarantees, even as guarantees have become the go-to tool in
VAs.
“In 2011, sales were remarkably good, but
certainly dampened by the changes in guarantees that were an
outcome of the interest rate environment. So we see some
retrenching, but guarantees are driving the VA business and will
continue to attract investors.”
Adaptation
Some insurers are also readjusting their VA
business to better manage the interest rate environment.
In his 2011 annual report message to
shareholders, MetLife chairman, president and CEO Steven A
Kandarian, said the company has re-priced its leading variable
annuity product and plans to reduce the firm’s VA sales to roughly
$18bn in 2012.
MetLife is the leading seller of variable
annuities in the US, with 2011 sales of $28.4bn, according to
LIMRA.
The reason that providers are under pressure
is because VA carriers are guaranteeing
that an annuity will accumulate at a certain
rate.
However, with market volatility, the price of
that guarantee increases as the risk is higher.
What’s worse, because the guarantees promise a
fixed sum at a specific date in the future, the value of a future
payment is higher when rates are lower.
To ease some of the interest rate pain,
carriers are cutting back on the guarantees offered.
Late in 2011, MetLife late lowered the roll-up
on its guaranteed minimum income benefit to 5%, from 5.5%
previously.
Meanwhile, in January, SunAmerica lowered the
benefit payment rate on its Polaris variable annuities from 5.5% to
4% for singles up to the age of 64, and from 5.5% to 5% for people
over 65.
The Hartford has taken the most dramatic step
to date, placing its US individual annuity business into run-off
and pursuing a sale or other strategic alternative for its
individual life insurance and retirement plans businesses.
Market concentration
With so many firms trimming their annuities
business, the market is now more concentrated than ever: in 2007,
45% of the VA market share was held by the top five companies.
Today, LIMRA data shows that the top five hold
61%, and most of the players are different.
As of the end of 2011, MetLife, Prudential,
and Jackson National Life held the top three spots in terms of
sales. In 2007, AIG, MetLife and AXA Equitable were at the top of
the leader board, followed closely by The Hartford.
Interest rate issues aside, a study released
by AllianceBernstein and the Insured Retirement Institute (IRI) in
April 2012 found that more financial advisers are turning to Vas as
a portfolio solution because they pro- vide guaranteed income and
can help clients attain financial security in retirement.
For example, the study said 60% of sellers
have increased their recommendations for variable annuities since
the credit crisis.
Meanwhile, 42% bring up VAs in “every
conversation” with clients and see them as an important part of
financial planning solutions.
Kerzner says: “The demographics of the United
States are undeniable, and VAs are the industry’s way of capturing
the momentum.”
He adds: “Two-thirds of Americans know that
they have not saved enough for retirement, and you have this huge
bulging segment of the market, but they’re also very mindful of
what happened in 2008, so the VA is an ideal product to respond to
both emotions.”
Steve Wiesbart, vice president and chief
economist of the Life Insurance Institute, notes that the ‘greying’
of the US market is ideal for annuity sales.
“The life industry is doing a fairly good job
of repositioning itself as a financial planning business, and VAs
are a huge part of the equation,” he says.
“Dreams die hard, but consumers are realizing
that the get-rich-quick days are over and it’s time to reorient
around retirement management. Giving retirees greater options
around retirement would be a huge boon for the industry and fight a
real societal issue, one that will plague this generation more so
than any other.”
Individual variable annuity
sales forecast to 2015
Investing strategy
The most compelling finding from the study by
AllianceBernstein and the IRI is that VA success has historically
gone hand in- hand with the general success of a financial
adviser.
It said that top VA sellers appeared to be
more successful than advisers who did less VA business. Sellers
were almost twice as likely as the other two groups to have assets
under management of more than $100m.
This development comes at a time when many
advisers have been adopting a multidimensional
model, in which they and the client commit to
a long-term investing strategy tailored to the client’s financial
circumstances, risk tolerance and objectives.
Under this approach, the adviser and client
first identify the appropriate mix of stocks and bonds.
The adviser then steers the discussion to
retirement-income security, where VAs become an added dimension
within the asset-allocation decision.
The study by AllianceBernstein and IRI said:
“As our research shows, VAs play an important part in the
retirement-income dialogue.
“They’re not a silver-bullet solution, and
they’re not right for every client. But they can broaden advisors’
solution sets, giving them more tools with which to guide their
clients to better outcomes and bolster clients’ confidence in their
retirement plans.”
Innovation
Montminy says that VA producers continue to
innovate and to react to the interest rate environment, working to
smooth out some of the kinks on the upside of the investments
underlying the products.
One area to watch, he says, is the development
of VAs built on target volatility asset allocation, which seeks, in
its simplest form, to adjust equity exposures in favour of bonds or
cash during high-volatility periods and the reverse in relatively
low-volatility times.
For example, Nationwide Financial Services
recently announced that its advisers will have access to actively
managed target volatility funds for both variable life insurance
and annuity products.
Montminy says: “Carriers are managing
volatility and cost, using target volatility funds and
sophisticated asset allocation algorithms to lower some of the
fluctuations on the consumer side.
“It does have a little impact on the upside,
but protection on the downside is the key these days. The VA is
really being viewed by consumers as an insurance policy for income,
as people are using IRA rollovers through 401Ks and IRA, and
turning qualified money into guaranteed income and death
benefits.”
Variable annuities are certainly experiencing
a ‘renaissance’ in the current economic climate, but only four
years ago, LII highlighted a study showing that advisers
were reluctant to recommend annuities to their clients.
The study was conducted by Spectrem Group for
Ameritas Advisor Services, a unit of insurer Ameritas Life.
Spectrem found that even before the equity market meltdown, 70% of
advisers were concerned about locking their clients into annuities
and would prefer other long-term retirement products.
To combat that adviser resistance,
LII said some annuity providers were creating products
that charge lower fees. For example, it was noted that Ameritas
started offering a VA in 2007 without any withdrawal charges or
sales commissions
