Insurers target wealthy investors with VA enhancements

Declining variable annuity sales will likely lead to enhancements to and new uses for VAs as carriers look for additional ways to appeal to high-net-worth investors.
SEP 08, 2008
Declining variable annuity sales will likely lead to enhancements to and new uses for VAs as carriers look for additional ways to appeal to high-net-worth investors. VA sales fell 12% in the second quarter, to $42.2 billion, according to Limra International Inc., a Windsor, Conn. research organization. As a result, some companies are looking to revamp their products to attract wealthy individuals. For insurance carriers, that means finding new contexts for the products within wealthy clients' retirement plans — a feat for the insurers because well-off clients tend to be less likely to use annuity products, according to Lisa Plotnick, associate director at Cerulli Associates Inc. in Boston.

INVERSE RELATIONSHIP

"There's generally an inverse relationship between mutual fund and annuity usage with client wealth," she said. "The use of annuities and mutual funds decreases on a percentage basis just because the amount of products used by high-net-worth investors increases." Investment vehicles used by these individuals with at least $1 million in net worth include exchange traded funds, separate accounts and individual securities. Insurers, when developing variable annuities, will have to think about how they work with these other investment products as they target high-net-worth investors. "When looking at product development and wealth tiers, you have to consider the other products individuals have in their portfolio," Ms. Plotnick said. When looking at variable annuities, wealthy customers in search of a lifestyle investment option have been demanding fund of funds products, she said. The option has also provided a choice for investors who are nervous about getting into yet another equity product and being subjected to the market's whims. Spotting that trend, Massachusetts Mutual Life Insurance Co. of Springfield, Mass., this week added an American Funds fund of funds investment option for clients who want an investment that they don't have to constantly watch and maintain. American Funds is advised by Capital Research and Management Co. of Los Angeles. Most high-worth individuals are comfortable with a range of investments, said Steve Deschenes, senior vice president and chief marketing officer of MassMutual Retirement Income. "But the fund of funds gives them a 'set it and forget it' approach; they know the variable annuity is set and that it's being monitored." Guaranteed minimum withdrawal benefits, along with other living benefits, have also helped draw in wealthier clients, even though they may seem less inclined to use variable annuities, Ms. Plotnick said. "[It] has surprised people who thought the high-net-worth [individuals] didn't need the benefit, but an executive we interviewed told us that if you have a lot of money, you don't want lose it," she said.

GUARANTEED BENEFITS

Guaranteed benefits, the all-around propeller of VA sales, have appealed to both middle-market and high-net-worth clients. "From the middle market to the very high net worth, there's interest in the guarantees," said Lisa Kuklinski, vice president and senior actuary of MetLife Inc.'s annuity product management. This spring, the New York-based carrier added a death benefit rider and enhanced a lifetime withdrawal guarantee and a guaranteed minimum income benefit-plus rider — concepts brokers said their clients were interested in, she said. To appeal to clients' desire for income, The Hartford (Conn.) Financial Services Inc. modified its variable annuities last month to step up withdrawal amounts clients can take as they age, creating a reward for waiting to withdraw. The allotted amounts increase up until age 90, for a maximum of 8%. The draw of guaranteed income extends across all wealth tiers, said Joseph Weiss, assistant vice president and actuary of annuity product development at The Hartford. "We're introducing annuities in a way that they're not thought of, as accumulation vehicles," he said. "We're looking at how the guaranteed-income piece can be added to the ways that people can save and invest." Nevertheless, Mr. Weiss pointed out that the tax-deferred income and growth from annuities are the main point for high-net-worth clients. In the future, carriers will encourage their sales forces to find uses for fixed annuities in managed accounts or perhaps use withdrawal benefits and guarantees as part of an investment strategy, Ms. Plotnick said. Such combinations could appeal to wealthier clients, though implementation of such strategies still isn't widespread. "There's a lot of talk about taking the best of the annuity and implementing it in a unified managed account," Ms. Plotnick said. "We haven't seen many solutions out there yet, but we expect that to happen down the road." E-mail Darla Mercado at [email protected].

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