Will insurers ape Aviva and peel back benefits on fixed annuities?

On Monday, Aviva USA will roll out a series of new changes to its fixed-annuity lineup, including reductions on agents’ commissions and the discontinuation of one of its income riders. And the move could have a ripple effect on other carriers, industry watchers noted.

The carrier announced to marketing organizations that it would yank back features on its Income Preferred, Spirit and Income Select series of fixed indexed annuities.

“While our recent wave of product changes were designed to deal with a short-term low-interest-rate environment, it has become apparent that these unprecedented conditions may continue for the long term,” Aviva noted in a Nov. 12 announcement obtained by InvestmentNews.

“Aviva USA regularly reviews the economic environment and makes adjustments to its pricing and products,” said Aviva spokesman Kevin Waetke, who confirmed the information in the announcements.

Low interest rates drag down the returns insurers get from their fixed-income investments, making it less profitable for insurers to write fixed annuities.

Today is the last day to submit applications under the products’ old terms.

Specifically, Aviva will reduce premium bonuses on the Income Preferred Bonus product to 7%, from 8%, and cut down the bonus on Income Select Plus to 3%, from 5%.

Roll-ups — the percentage used to calculate the increase on a rider’s income base — are also going down. Aviva is trimming roll-ups on Income Edge Plus to 6%, from 7.2%. Income Edge Flex’s roll-up rates are also falling to 5%, from 6%. The insurer will pull the plug on its Income Edge rider, which provides a 4% guaranteed interest rate on the annuity’s account value.

Finally, Aviva is also taking the hatchet to commissions on the Income Select product, bringing them down by 1%.

Aviva’s decision to rein in features follows what has been a hot quarter for fixed indexed annuities. Third-quarter sales for such annuities hit a record high of $8.7 billion, up 16% from the year-earlier period, according to data from AnnuitySpecs.

Aviva’s moves could be good news for rivals such as Allianz Life Insurance Company of North America and American Equity Investment Life Insurance Co., observers noted.

“When companies cut compensation and upside potential, independent agents look to where else they can place the business,” said W. Andrew Unkefer, president and chief executive of Unkefer & Associates Inc., an insurance marketing organization. “It’s a short-lived opportunity.”

Short-lived, indeed. Competitors may be forced to retool their products if they start experiencing a large influx of business amid today’s low interest rates, noted Judith Alexander, director of sales and marketing with Beacon Research Publications Inc.

“Aviva is at a competitive disadvantage if its competitors keep the living benefits they way they are,” she said. “The question is: What do the other companies do? They’re also dealing with a low-rate environment.”

How carriers proceed will likely depend on how their investment portfolio will perform, Ms. Alexander noted.