The Rise Of The Variables, Part II

In Monday's story, we looked at the many pressures on the fixed product side of the business. In today's follow-up, we look at the impact on products.

With all the pressure on fixed products, carriers have been looking over at the variable side of the business.

The recent runaway success of registered index-linked annuities, also known as buffered or structured annuities, has inspired insurance companies to consider extending the model to other products.

Timothy Pfeifer of Pfeifer Advisory, which advises carriers on product design, said interest rates, regulations, tax policy and other factors are forcing companies to rethink their whole product lineup.

Pfeifer explored product trends with Donna Megregian, vice president, U.S. Mortality Markets, RGA, during the Life Product Update session on Monday afternoon at the virtual Life Insurance Conference from LIMRA, LOMA and LL Global.

“This is coming into play because as interest rates have come down,” Pfeifer said, “a lot of companies are starting to lower their cap on their IUL products.”

With AG 49A also cramping carriers’ ability to illustrate IULs, moving to a buffered life product seems like a natural way for companies to go, Pfeifer said.

The new product would be built on a variable life chassis, much like some of the buffered annuities were constructed on the variable annuity chassis.

Constructing the product that way allows a carrier quite a bit more flexibility. They can market with a message similar to the fixed index annuity mix of upside potential and a limited downside risk, but enjoy some benefits connected with the variable design.

“I'm not subject to the illustration reg because I put it on a variable life chassis, and variable life products are not subject to illustration rules,” Pfeifer said. “There may be some appeal, not for every company, certainly, but for companies that can do a variable life chassis to build a product like this.”

'A Bad Risk'

Regular variable universal life products are also getting a bit of a spark lately because of the long stretch of low interest rates, Pfeifer said. VUL allows companies to reduce the low-interest rate pressure and give the consumer more equity exposure.

VUL had a rough time after the 2008 crash, when fear of volatility took hold of investors. In the meantime, IUL grabbed market share in a meteoric rise, partly because of illustrations.

“The VUL was in a bad risk and reward profile position versus the IUL during those years,” Pfeifer said. “And so many companies had largely abandoned them because they were administratively heavy. You had prospectuses to do and there was just a lot of cost associated with them. So, if you weren't going to get the volume, it just didn't make sense.”

If this is the year of the VUL, it will be a slow ramp-up.

“It's not a product that every company can sell because most a lot of companies don't have the right producers who have licenses -- there's the infrastructure question,” Pfeifer said. “So, you're talking probably at most 20 companies that can really do it.”

Steven A. Morelli is a contributing editor for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers and magazines. He was also vice president of communications for an insurance agents’ association. Steve can be reached at stevenamorelli@gmail.com.

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