Annuities + Living Benefits = Unknown Future

By Linda Koco
AnnuityNews

The possibility that the very popular guaranteed living benefit (GLB) features in annuities could one day become a so-yesterday item is difficult for today’s annuity professionals to fathom.

Yet that is something that state regulators are thinking about as they put the finishing touches of a new Annuity Buyers Guide.

Regulators don’t want to describe any of today’s living benefit features as “the most common type,” said Iowa’s First Deputy Commissioner Jim Mumford during a conference call hosted by the Annuity Disclosure (A) Working Group of National Association of Insurance Commissioners (NAIC).

At the time, the group was knee-deep in discussion about which living benefits to mention in the NAIC Buyer’s Guide for Deferred Annuities that they were updating, as well as how to identify them. Identifying one of the features—the guaranteed lifetime withdrawal benefit (GLWB)—as the “most common” feature was an idea that was floated.

Mumford nixed that idea. The problem with doing that, he said, is that a certain type of GLB “may be the most (common) today but five years from now when this Buyer’s Guide is still being used, it might not be out there (available for sale) at all. So we’d like to take away that time-specific piece.”

What direction?

The point touches on an issue that has been simmering in the field and home office.  That is, where is the annuity industry going with its GLB features? 

GLB features made their debut about 15 or 16 years ago, and they became hot sellers after each of the recessions in the 2000s. Following the last recession, many carriers scaled them back, however. That is, carriers introduced longer waiting periods, deductibles or caps on rollups, investment restrictions, increased rider charges, and a host of other changes.

That was in response the prolonged low interest rate environment as well as new reserving requirements. Both trends, along with other economic factors, were threatening to pressure carrier ability to support profitably the richer guarantees of yesteryear.

Those scale-backs are making annuity specialists wonder:  Will consumers still want the features in their more modest forms? If not, what will come of the features, and what will annuities look like? Should we continue to invest our resources into this part of the market?

At the moment, it seems that one of those questions has a short-term answer. For now, or at least as of year-end 2012, it appears that consumers still love those features. That can be seen in the “election rates” that researchers are finding for the features.

In fourth quarter 2012, for example, the election rate for guaranteed living benefits (GLBs) was 84 percent among buyers of variable annuities that had the feature available, according to estimates from LIMRA.  

That’s down from 87 percent in the previous quarter, but it’s still a large majority. It’s also higher than election rates were in 2005 when the features really began to take off. (Back then, the GLB election rates in variable annuities were nearly 70 percent, according to a study from Milliman.)

The features come in four flavors—the GLWB mentioned above—and guaranteed minimum withdrawal benefit (GMWB), the guaranteed minimum income benefit (GMIB) or a guaranteed minimum accumulation benefit (GMAB).  Not all features are alike, and not all variable annuities offer all of them. A few of the newer variable annuities don’t even offer GLB features.

According to the LIMRA figures, election rates for the GLWB also fell a bit in fourth quarter—by 4 percent when compared to elections in variable annuities in third quarter. But of the four types of variable annuity GLBs tracked by LIMRA, the GLWB election rate was still fairly high, at 62 percent.

The election rates for the GMIB and GLWB had no change, between the quarters. They stood at 18 percent and 3 percent, respectively, LIMRA said. And the GMAB election rate rose by 1 percent.

That’s a lot of detail, but it makes the point: The features are still strong sellers, some more so than others, but as a group, these GLBs are still in the game.

Considering that the GLB scale-backs were widespread and tackled with de-risking vigor, one can assume that at least some of those fourth quarter elections, perhaps a half or more, were for features that were of the scale-back variety. There is no detail on that, though, so the observation is only a guestimate—not something to take to the bank.

In the indexed annuity arena, the GLWBs are the GLB features that are popular. In fact, Sheryl J. Moore, president and chief executive officer of Moore Market Intelligence, reported that GMWB elections in indexed annuities increased in the fourth quarter, with the greatest percentage of elections made by people aged 60 to 69, the age range of typical indexed annuity purchasers.

Keeping an eye on it

Annuity experts are keeping an eye on GLB features, as evidenced in comments offered by the American Academy of Actuaries during the working group conference call led by Mumford.

Laura VanderMolen, who is vice chair of the academy’s Annuity Illustration Subgroup Annuity Illustration Subgroup, made a request that the newly revised Buyer’s Guide not highlight one of the types of GLB features that some variable annuities offer. This is the GMWB.

The reason? The GMWB is “somewhat of a dying breed, at least as we understand it at the variable annuity carriers,” VanderMolen said. “It’s being far surpassed in popularity by the guaranteed lifetime withdrawal benefits—the GLWB.”

In the end, the group decided to keep the reference to the GMWB but to add a sentence mentioning the GLWB as well.

Linda Koco, MBA, is a contributing editor to AnnuityNews, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected].

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Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected].