US have endured twofold issues of late: their investment-account
balances have taken a hit, as have the financial-strength ratings
on the insurers that issued their annuities. That may explain why
advisers are more reluctant than ever to recommend annuities to
their clients, according to a study conducted by Spectrem Group for
Ameritas Advisor Services, a unit of insurer Ameritas Life.
Spectrem found that even before the equity market meltdown, 70
percent of advisers were concerned about locking their clients into
annuities and would prefer other long-term retirement products.
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VAs already faced reputational issues in the wake of highly
publicised scandals in which advisers for several firms sold
inappropriate VA contracts to elderly clients. Combine that taint
with the fallout from investment losses and VAs face quite the
uphill battle.
To combat that adviser resistance, some annuity providers have
been creating products that charge lower fees. Ameritas started
offering a VA last year that does not have any withdrawal charges
or sales commissions. Fidelity Investments launched the Fidelity
Personal Retirement Annuity, which has no surrender or annual
maintenance fees and an annual annuity charge of 0.25 percent,
versus an industry average of 1.41 percent.
With the life and annuity industries facing a significant
decline in sales due to the economic downturn, cost containment is
the new focus, according to professional services firm Deloitte’s
2008 Life Insurance Operations and Annuity Contract Expense
Benchmarking studies, released in October.
“Significant life and annuity sales growth in prior years masked
underlying inefficiency and ineffectiveness,” said Joe Guastella,
head of Deloitte’s Global Insurance practice in a statement. “The
economic downturn should prompt a reassessment of market strategies
including which products to sell, where to sell them and how to
sell them.”
For the short term, US insurers will turn defensive as they seek
to assure that their businesses maintain profitability or limit any
losses. Confidence in the industry is an essential requirement for
market success, and it is confidence that is lacking at the
moment.
Of key concern to annuity writers are issues such as hedge costs
and living benefit election rates. If the industry can confirm a
strong financial position despite financial market stresses, it
should effectively and broadly convey that message to the American
public.
This is the bright lining for annuity providers: VAs, despite
their reputational issues, are still among a handful of insurance
products that can offer attractive living benefits with asset
protection features.
Guarantees on assets, such as guaranteed living withdrawal
benefits, provide downside protection that no doubt all Americans
might wish they had over the last year, and which insurers can now
market as peace of mind.
For jittery retirement savers, the combination of safety and
tax-avoidance that annuities offer makes them attractive even after
the events of the past few weeks.
Indeed, it is just that unease that annuities were designed to
address, albeit at a price. In today’s market it’s a price many
will be willing to consider.
