Sales of a new type of variable annuity are running hot, but the product line isn’t without complaints.
Hybrid variable annuities, also known as structured or buffer variable annuities, protect, or buffer, contract holders from market downturns to a limited extent. In exchange, higher caps are added to interest credited to the policyholder.
As such, they these hybrid variable annuity products operate between a variable annuity and an indexed annuity.
A senior manager with the Financial Industry Regulatory Authority (FINRA) earlier this year reported more complaints related to hybrid variable annuities, which raises questions about the suitability of the products.
Andrew Stoltmann, a Chicago-based plaintiff’s attorney who has brought cases against annuities of all stripes, calls buffer variable annuities “toxic and odious.”
“They are the worst of both worlds – the worlds of the fixed annuity and the worst of the variable annuity worlds,” he said.
High fees, the illiquid nature of hybrid variable annuities and the large commissions or fees used to entice advisors to sell them ensure that buffer variable annuities remain a bad deal for contract holders, he said.
“The ones who believe in these products are the ones being richly compensated,” said Stoltmann, who has handled an estimated 200 arbitration claims and lawsuits involving annuities.
About 80 percent of hybrid variable annuities are sold through independent broker-dealers and banks.
101 Cases Served for Variable Annuities in 2017
FINRA doesn’t break down the specific types of variable annuity cases in customer arbitration, so it’s difficult to know if complaints specific to hybrid variable annuities are on the rise.
As of Sept. 30, there were 101 cases involving all variable annuities in 2017 compared with 115 variable annuity cases for all of 2016 and 104 cases for 2015, according to FINRA’s database.
In the past year, Allianz Life Insurance of North America, a major seller of hybrid variable annuities, has received nine formal complaints related to the product line out of more than 14,000 hybrid variable annuity policies sold, said Matt Gray, senior vice president of product innovation with Allianz Life.
That puts the complaint ratio for Allianz Life's hybrid variable annuities at less than .1 percent.
Axa and Brighthouse Financial also sell hybrid variable annuities and more insurers are expected to enter the market niche, which represents a bright spot in an otherwise shrinking overall U.S. variable annuity market, experts have said.
"It is important to note that we have received only one inquiry from FINRA regarding Structured Capital Strategies (SCS), our buffer annuity product, out of slightly more than 100,000 contracts sold to clients since our product was introduced in 2010," an Axa spokesman said in an email.
"In volatile markets, clients are looking for the possibility of upside potential coupled with downside protection - a need Structured Capital Strategies is specifically designed to address."
Financial advisors are drawn to hybrid variable annuities because they come with fewer investment restrictions.
Insurers like them because they require less capital to support than traditional variable annuities.
Nor do companies have to hedge hybrid variable annuity risks in the way they would the risks posed by traditional variable annuities.
Sales Rise 36 Percent in 2Q
Hybrid variable annuity sales in the second quarter rose 36 percent to $1.8 billion compared with the year-ago period, according to industry tracker LIMRA Secure Retirement Institute.
Hybrid variable annuities account for about 7 percent of the U.S. variable annuity market, a market expert said.
“The structured ones are doing very well and a few companies are driving growth,” said Todd Giesing, director, Annuity Research, with LIMRA SRI.
Overall U.S. variable annuity sales in the second quarter shrank 8 percent to $24.7 billion compared with the year-ago period.
Sales of all variable annuities in the first half dropped 8 percent to $49.1 billion compared with the year-ago period.
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected]