By Linda Koco
Variable annuity changes recorded by Morningstar dropped to a near-record low of 84 in the third quarter. The record was a mere 59 changes made in first quarter 2011.
This could provide meaningful information for the field. First, a little more on what happened to the products.
The third quarter decline is dramatic in comparison to first quarter, which produced a record high of 182 changes, making for a decline of almost 155 percent between quarters. The third quarter figure also came in below the 106 changes that Morningstar recorded in third quarter last year — a drop of roughly 20 percent compared to back then.
The decline invites questions about what was going on in sales in the same periods. Specifically: Do the number and type of changes in variable annuity products affect sales? They could.
According to figures from LIMRA, total variable annuity sales came to $35.9 billion in third quarter. That’s down 6 percent from the previous quarter and down 2 percent compared to third quarter last year. Morningstar, which tracks “new sales” of variable annuities, has similar numbers. It says new sales dropped 5.9 percent from the previous quarter and 3.2 percent from third quarter 2012.
The fact that product changes and product sales were both down in third quarter doesn’t mean that product change activity causes sales declines.
However, the two may be correlated. Analysis of possible relationships can provide clues to the competitive environment now in the making. It’s not a weather forecast, but an indicator.
The third quarter picture
In third quarter, many carriers were nearing the end of the extensive overhaul of variable annuity products that they had undertaken to make products suitable (i.e., “de-risked”) for sale in the low interest rate environment. They were no longer in a holding pattern, thinking about what to do. They were doing it.
These changes actually started earlier. According to John McCormick, product manager for insurance solutions at Morningstar, carriers did much of the heavy lifting in second quarter via fee increases, step-up limits and withdrawal rate reductions. (The quarter also hit a new record in product closures — 61 in all.)
But in third quarter, many carriers “triggered their option to limit inflows to earlier, more generous versions of contracts in order to control liability,” McCormick wrote in Morningstar’s new variable annuity change report.
A few carriers did bring out or slightly enhanced living benefit guarantees, and a few increased investment options, particularly in the “alternative” options.
But limits were the main story, according to McCormick.
The trending towards limits may help explain the dip in sales that occurred in third quarter. Producers were likely still digesting the avalanche of changes made in second quarter, many of which were product closures (61) and benefit closures (23).
The comparatively small number of changes in third quarter probably felt like a reprieve of sorts. But since many of the changes were of the limit-making variety, certain producers may have decided to avoid selling the contracts, or at least to put them on delay.
That is even though most advisors do like to see — and sell — new products and product revisions. The “new” gives them something fresh to talk about with customers and /or enables them to tap into a new market or address a need that had gone wanting for a solution.
But new products or revisions that impose new limits are another matter. Some producers hesitate to recommend the products if it appears that the curtailments clash with customer needs or goals. Others may not be able to sell the products if a competitor has a contract that is comparable but with somewhat richer benefits.
Still others may be receptive to the more limited designs, but they may hold back on sales all the same, preferring to wait until they’ve had time to study the products and see where they might fit.
Those factors could help explain the lag in sales during third quarter. It was the combination of the two factors — the relatively low number of product changes that spark sales activity, and the more limited nature of those changes — that popped the balloon.
Producers and distributors who noticed the slow-down in change activity and the limiting nature of the changes actually coming through would have been in a better position to advise clients, and to set strategies, than those who were clueless.
Beneath the correlation
It pays not to apply the potential for correlation in this area too literally. Consider what happened when quarterly variable annuity product changes reached their lowest point in the eight quarters that Morningstar has been tracking such changes.
The lowest point came in first quarter 2012, when changes numbered only 59. That was down by 145 percent from the previous quarter’s 130 changes.
However, total variable annuity sales up were up, not down, in the quarter, and that was by a handsome margin. Sales in the quarter rose 24 percent, to $39.8 billion, compared to the same year-earlier quarter, according to LIMRA estimates. They were also up over the previous quarter, though by a much smaller margin — up 3 percent on sales of $38.5 billion, as recorded by LIMRA.
So, in that quarter, product activity was extremely low but sales were going gangbusters. What gives?
The extremely low number of variable annuity product changes came at a time when many carriers had put product development on ice -- or at least in the fridge. They did that to buy time while figuring out how to handle their variable annuities with attractive lifetime benefit guarantees during what was fast becoming a prolonged period of low interest rates.
But producers went the other direction. They were actively selling those very same products to customers who were craving performance and predictability.
Lesson learned: It pays to evaluate product change activity and environmental factors when doing competitive analysis and setting sales strategy in the variable annuity market.
Worth noting: The top quarters for variable annuity product changes recorded by Morningstar were second quarter 2013, with 182 changes in all, followed by second quarter 2012, with 168 changes. Those are big numbers but they are to be expected, to some extent, due to the annual rush to file variable product revisions by the May deadline set by regulators.
In view of that, second quarter numbers are usually higher than in the other quarters. But the types of changes being made in the quarter still provide clues to the competitive landscape — or at least to what carriers believe will be the competitive landscape going forward.
It takes sales results to provide the deeper insight.
Linda Koco, MBA, is a contributing editor to AnnuityNews, specializing in life insurance, annuities and income planning. Linda may be reached at email@example.com.
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