FIAs Heat Up With Volatility Control Options

By Linda Koco

Genworth is the newest carrier to enter the increasingly crowded market for volatility controlled indices inside of fixed index annuities (FIAs).

As reported last week, Genworth has debuted an “uncapped volatility control spread index crediting strategy.” It is based on the Barclays U.S. Low Volatility II Equity ER Risk Controlled Index (Barclays U.S. Low Volatility Index), and is currently available in certain of Genworth’s SecureLiving FIA products.

As of last week, nearly 25 FIA companies were offering a volatility controlled index of some type in an interest crediting strategy, said Jack Marrion, president of Advantage Compendium, an annuity research firm based in Texas.

That’s up from just one carrier a few years ago, Marrion said.

Today, the FIA world has nearly 30 volatility controlled indices available in interest crediting strategies that policyholders can elect, according to Advantage Compendium. In addition, a dozen or so new volatility controlled indices for FIAs either have been filed with the states or are waiting to be filed, Marrion said.

Some of these indices are near clones of one another, but others feature unique differences that make generalization difficult.

Even so, all share this common thread: They are embedded in an FIA strategy that links interest crediting to changes in performance of the stated volatility controlled index. Such indices continually rebalance performance of more risky assets (such as equities) with less risky assets (essentially cash and/or bonds) to arrive at their index metric.

Inside of FIAs, the indices are used as a basis for calculating interest to credit to the annuity. FIA policyowners do not invest directly in any indices.

"FIA owners who allocate to strategies based on volatility controlled indices are typically looking for the opportunity to earn more interest than they might earn on another option that has an interest cap," Marrion said.

Why now?

With so many FIA carriers already offering strategies using volatility controlled indices, why did Genworth decide to jump in?

When the options began surfacing, Genworth was interested but decided to “wait and see what people like and dislike about the strategies,” Eric Taylor, vice president and national sales manager for annuities, said in an interview.

That study revealed some distinct preferences. One is that agents and consumers want an index option that is easier to explain and understand — “not too many options, and no exotic components,” Taylor said.

In addition, agents and consumers said they want growth potential that can be illustrated in a “straightforward and realistic” manner, “spreads that perform to expectations over time,” and an index that won’t constrain future growth potential if interest rates rise, Taylor said.

The developers decided they could design such a product, and the new “uncapped volatility control spread index crediting strategy” based on the Barclays index was born. Now embedded in Genworth SecureLiving FIAs, it shares shelf space with crediting strategies based on the S&P 500 index.

Breaking it down

The company thinks current market conditions will favor its new strategy. One reason is that the Barclays U.S. Low Volatility Index increases or decreases exposure to 50 of the lowest volatility U.S. stocks on the New York Stock Exchange and NASDAQ.

However, the index has “no bond exposure and no exotic components” that can cause a drag on performance when interest rates rise, Taylor said. The drag can occur because, when interest rates rise, bond values typically go down.

Given the many predictions that interest rates are likely to start rising from today’s very low levels fairly soon, the equity-only design may become a consideration for FIA buyers going forward.

Genworth also believes that the uncapped strategy in which the Barclays index is being used has appeal in today’s market. The fact that the volatility is controlled creates the ability to offer upside potential without a cap, Taylor explained.

Uncapped strategies are “not magically unconstrained,” Taylor pointed out. Although they have no fixed limit, or cap, on how much of the potential index gain can be used in calculating FIA credited interest, the carriers do deduct costs, such as spreads, from the performance.

Even so, the uncapped strategy offers the potential for greater growth over the longer term than capped strategies, he said. That appeals to customers who are looking for more growth potential but in a product that, via the downside guarantee, continues to protect what the person has already earned in the past, he said.

Turning to spreads, Taylor said Genworth designed its new crediting strategy to offer a more stable spread over time, “so it is consistent for an extended period.”

Related factors

Genworth is not new to the FIA market. It was an early player but then exited 12 or 13 years ago, Taylor said. Then, once it was clear that FIAs meeting required specifications would not continue to be regulated as securities, it re-entered in 2011. Today, Genworth has a portfolio of six FIAs, and ranks 23rd in year-to-date FIA sales as reported by Wink Inc. at the end of the third quarter.

According to Taylor, Genworth definitely wants to grow, “and we’re investing for that.”

The investment includes more than new product development. Just yesterday, Genworth rolled out a free electronic platform that financial professionals (including those selling the SecureLiving FIAs) can use when submitting annuity applications. It also offers The Index Institute, a virtual community for producers which the company debuted two years ago to provide index product training, market insights, presentations and related support.

Corporate-level developments are likely another factor. Earlier this year, Genworth Financial had said it was considering selling its life and annuity business but later decided against that, saying it might instead sell off blocks of life insurance business. It followed through on the latter, and by early December, Genworth closed on the sale of its lifestyle protection insurance business to AXA. In the first quarter of 2016, it expects to close on the sale of certain blocks of its term life business to Protective Life, according to Genworth’s third quarter report.

As Genworth continues restructuring, FIAs appear to be part of the plan. The timing is apropos. Third quarter FIA sales totaled $13.5 billion, up nearly 21 percent from the industry’s prior quarterly record set in second quarter 2014, according to Wink.

InsuranceNewsNet Editor-at-Large Linda Koco, MBA, specializes in life insurance, annuities and income planning. Linda can be reached at linda.koco@innfeedback.com.

Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at linda.koco@innfeedback.com.