Product features and pricing becoming 'rational' amid market tumult, low rates
Life insurers haven't turned off the tap on variable annuities, but clients and advisers need to face the new realities of today's economy and its effect on the products.
As many life insurers pull back on VA living-benefit features, raise fees and step up their use of volatility management strategies at the subaccount level, advisers have wondered whether they are facing an exodus of players from that market. some companies have stopped selling new contracts altogether, including Sun Life Financial Inc. and The Hartford Financial Services Group Inc.
But a panel of executives at the Insured Retirement Institute's annual conference in San Diego Monday said that there is still plenty of supply to meet the demand of clients and advisers – provided clients and advisers are realistic about today's capital markets and low interest rates.
“In my mind, we don't have a capacity issue; there is plenty of capacity for customers, but it has to be capacity at the right price and the right product design,” said Thomas A. Swank, president and chief executive of individual savings and retirement at Transamerica Life Insurance Co.
“[The level of interest rates] is one of the many inputs that go into pricing the product, but it comes down to whether in that environment, you can price a product that will let you compete and that consumers will find attractive,” said Randy Freitag, finance chief at Lincoln Financial Group. “Looking at today's interest rates, the answers are 'yes.'”
Executives pointed to the fact that the variable annuities marketplace is significantly less frenetic than it was in 2007, when companies competed feverishly to offer more attractive benefits.
These days, roll-ups – features that build the benefit base used to calculate lifetime income – as well as the actual withdrawal percentages themselves, have come down from 7% in the market's heyday to about 5% and slightly below. As the overall offerings become less rich and as pricing changes, companies feel more confident about taking on additional business.
“We are going into a market where things are pretty rational,” said Michael Reardon, chief finance officer at Forethought Financial Group Inc. The insurer jumped into the variable annuities arena in April when it took over The Hartford's new annuity business capabilities. “It's an once-in-a-lifetime opportunity to take over a new business and add meaningful scale from Day One,” Mr. Reardon said.
The low-interest-rate environment is making annuities more attractive, he noted. For instance, fixed annuities offered in banks may be offering rates of 1% to 1.5%, but other products are offering even less. “Annuities are a slightly better alternative to competing products,” he said.
Though the carriers expect to be able to meet consumer demand, advisers should continue to expect product changes, though they will be less drastic than what has been seen.
“Could you have relatively modest tweaks going forward? Absolutely,” Mr. Freitag said. “But the large-scale changes are a thing of the past.”
