Insurers Launch 17 Fee-Based VAs In Two Months

In the first two months of the year, insurers have filed no fewer than 17 fee-based variable annuity contracts. This is more than the number of variable annuity contracts filed in a typical calendar-year period, according to Morningstar.

Fee-based variable annuity contracts are designed to offer advisors more sales options as the April 10 Department of Labor fiduciary rule deadline approaches.

“In this new world, there will be a push for brokers from selling commission-based variable annuities to fee-based products,” said Kevin Loffredi, senior product manager of Annuity Solutions with Morningstar in Chicago.

Insurers usually file between 10 and 15 fee-based variable annuities in any given year. But as of Feb. 21, there were 17 product contracts filed, he said. In addition, Great-West Financial opened a pair of fee-based contracts on Dec. 31.

Insurers filing to sell fee-based variable annuities over the past two months include life and annuity subsidiaries, as well as New York subsidiaries of Lincoln National, Transamerica, Jackson National, American General (AIG) and Great-West Financial, according to Morningstar.

Documents have been filed with variable annuity product families that include Core Income, American Legacy, Choice Plus and Investor Advantage from Lincoln; Polaris from American General; Elite Access and Perspective from Jackson National; and Smart-Track from Great-West, Morningstar said.

Base contract expense ratios vary from zero for variable annuities from Jackson National to 0.75 percent for Core Income from Lincoln.

The DOL fiduciary rule, which is scheduled to go into effect on April 10 but could be delayed, raises the standard for investment advice into retirement accounts.

One way to raise the standard is to push the industry toward fee-based models to reduce the conflict of interest raised by commission-based products.

The fiduciary rule doesn’t ban commission-based products, but makes them harder to sell under a best interest threshold.

Will Advisors Sell?

Registered investment advisors (RIAs) haven’t warmed to variable annuities, in part because the products were opaque, complex and difficult to understand.

For their part, insurance companies made only feeble attempts to develop fee-based variable annuities, industry consultants say.

But insurance company managers sense the landscape is changing rapidly as the differences between the fee-based and commission-based products narrow.

One of the reasons fee-based variable annuities haven’t sold well is that they've been watered down compared with their commission-based siblings, said Michael P. McCarthy, senior vice president of national sales, for Great-West Financial.

No longer.

“We've aligned ours up to be exactly the same,” he said.

The revenue mechanics of how advisors can be paid a trail through a fee structure also have changed. However, sales of fee-based variable annuities will take time as sales will involve changing the behavior of financial advisors.

“Anytime you launch something new or you are trying to change behavior it takes off more like an airplane than a rocket ship,” McCarthy said.

The decline of variable annuities with four-year surrender contracts, which offered a compensation structure popular with financial advisors, also has created an opening for insurers to recast their fee-based product lines.

Variable Annuity Sales Decline

Robust sales of fee-based variable annuities could provide the industry with a much-needed boost.

Variable annuity sales in 2016 declined 21 percent to $104.7 billion from 2015 as some insurers pulled back on sales and trimmed benefits, LIMRA Secure Retirement Institute reported.

Fourth quarter variable annuity sales were $25.3 billion, a drop of 20 percent compared with the year-ago quarter.

Morningstar estimates 2016 variable annuity sales to be around $100 billion with about $21 billion of that generated in the fourth quarter.

A $100 billion sales year would represent a drop of about 23 percent from the $130.4 billion in variable annuities sold in 2015, according to Morningstar data.

Not long ago, variable annuity market share was approaching 70 percent of all annuity sales. This marks “the first time in a long time” that variable annuities have dropped below 50 percent in annuity market share, said Todd Giesing, assistant research director of LIMRA SRI.

Last year, fixed annuity sales came to $117.4 billion while sales of their variable annuity cousins came in at $104.7 billion.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].