Many workers who buy voluntary life insurance value it enough to continue paying for it. That perceived value should make a solid foundation upon which to build.
By Cyril Tuohy
As the nation’s most powerful annuities carriers continue to reduce their exposures to the variable annuity (VA) market, how those annuities are sold is almost as important as tweaking product features: ratchets, rollups and withdrawal payout rates.
One of the most important lessons learned by companies selling VAs is that it is better to sell them based on the types of funds that insurance companies make available within the annuity instead of pitching the guaranteed benefits.
Joel Levine, an analyst with Moody’s Investors Service, said companies also do well when they offer simple, straightforward VA guarantees that neither cost the carrier very much nor entail too much exposure to downside risk.
“For many of the companies, this is where the captive field forces prove to be of great value,” Levine said in an interview with InsuranceNewsNet.
Sales forces trained to sell in a particular way offer annuity carriers tighter control over their products, and as a result offer a “tamer product” with more “persistency,” he said.
“If you rely on external distribution, you may have to offer richer benefits to get the attention of a distributor or pay higher commissions, which will cost more ultimately,” he also said.
Carriers with “tied distributors” reduce the underwriters’ exposures to a greater extent and control product sales and performance more precisely, he added. Selling VAs through a network of captive distributors means financial advisors don’t have to “spread sheet” the gains and the costs of one VA compared to another, which would happen with independent advisors, he said.
Northwestern Mutual relies exclusively on a captive sales force. Ameriprise Financial, which used to sell variable annuities through outside financial planner channels, no longer uses outside channels, Levine said.
In addition to tweaking the VA guarantees, insurance carriers have resorted to buying out contract holders or buying back the benefit. Some carriers have even asked contract holders to redirect their investments, according to an analysis last fall by Morningstar.
The role of the distribution chain and financial advisors in reducing the risk of VAs is important as recent financial stress tests conducted by Moody’s have found that VA portfolios held by Prudential, Jackson National and MetLife remain exposed to “substantial variable annuities-linked risks.”
The three companies are among the largest VA underwriters in the country, and they mainly use non-captive distribution for the sale of VAs, Moody’s said.
Moody’s said that for in-force business, Prudential and Jackson mostly have exposure to guaranteed minimum withdrawal benefits (GMWB), while MetLife has exposure to guaranteed minimum income benefits (GMIB).
GMWBs allow contract holders to periodically withdraw between 5 percent and 7 percent of a prescribed benefits base. GMIBs allow contract holders to annuitize an accumulated account value at a guaranteed rate after a waiting period.
Of the three companies, Jackson, which has increased prices and reduced the living benefits, has the most “aggressive product,” Moody’s said.
Jackson contract holders are authorized to allocate 100 percent of their VA assets to stocks, a volatile asset class, and the lack of restrictions on policyholder investment allocations makes the Jackson VA portfolio more “challenging to hedge,” Moody’s added.
Jackson is selling “the least de-risked” product, and Moody’s maintains a financial strength rating of A1 on Jackson. Jackson has a total variable annuity account value of $106 billion.
Prudential, with a financial strength rating of A1 also, reported about $119 billion of VA account values. MetLife, with a higher financial strength rating of Aa3, had total contract account values of $138.6 billion, Moody’s said.
Even as VA underwriters have spent the past two or three years reducing guarantees and raising rates, the companies are dependent on hedging to meet the obligations of their in-force blocks of variability annuities.
But if VA portfolios have raised a few eyebrows among credit analysts, are they still a good deal for retirees and pre-retirees when bank savings accounts are paying next to nothing?
“If you buy an annuity with lifetime benefits but die the next year, it’s not a good deal because you weren’t able to use the products features,” Levine said. “But with regard to a VA with guarantees, the real risk is a huge dive by the market and outliving payments based upon your account value.”
Contracts bought in 2008 with generous guarantees would typically still be in place, he said.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at email@example.com.
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