Insurers tweaking fees, not products, in variable annuity world

Morningstar: Cost increases were the most popular change in 4Q

Feb 24, 2013 @ 12:01 am

By Darla Mercado

Product development was muted for variable annuity issuers in the fourth quarter, but companies were very busy making tweaks to product fees.

During the fourth quarter of 2012, life insurers filed a total of 101 product changes, down from 130 in the year-earlier period, according to data from Morningstar Inc. More than a third of the new changes — 37 — were tied to fee adjustments, making them the most common change for insurers during the fourth quarter.

“Generally, these fee hikes are for new business,” said John McCarthy, product manager for adviser software and insurance solutions at Morningstar. “Recently some firms have reserved the right to change the fees on existing business.”

Indeed, there are contracts that allow insurers to raise fees on an in-force annuity or a product rider up to a maximum amount. Mr. McCarthy, who wrote Morningstar's fourth-quarter VA report, noted that while such contract provisions aren't new, carriers appear to be hesitant to raise fees to that maximum level on existing business.

Companies that adjusted their fees during the fourth quarter include Protective Life Insurance Co., which in December raised fees by 20 basis points on its Protective Income Manager to 1.2% and to 1.3% when including its RightTime option, which allows a client to buy the annuity now and add a rider later, according to Morningstar.

Pacific Life Insurance Co. hiked fees on different versions of its CoreIncome Advantage benefits by 10 to 20 basis points. Single-life versions of the product now run at 80 basis points, up from 60, while the joint version now costs 100 basis points instead of 80. Both fees apply prior to step-ups in protected value, according to Morningstar.

The report also noted that Lincoln National Corp. hiked fees to 85 basis points, from 65, for the single-life version of its SmartSecurity Advantage and to 100 basis points, from 85, for the joint life. This feature offers clients one-year or five-year step-ups based on market growth.

Finally, Genworth Financial Inc., which exited the variable annuity business, raised fees in December on six different benefits. Those increases ranged between 15 and 50 basis points, bringing the benefits to 1.25%, according to Morningstar's report.

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