New Indexing Strategy Positions Buffered VA for a Market Drop

A new crediting method for buffered variable annuities is designed for a low-market-growth scenario with the possibility of a correction, a product expert with Allianz Life Insurance Co. of North America said.

The crediting method, which Allianz branded Index Precision Strategy, guarantees a rate of 7.25 percent, whether the market index remains flat or stays in positive territory, said Matthew Gray, senior vice president of product innovation at Allianz.

Market downside protection of up to 10 percent, a staple of many buffered variable annuities, is absorbed by the insurer.

“Precision (Index Strategy) is nicely positioned for what a lot of people think is a likely low-growth scenario with the possibility of a correction,” Gray said. “If that plays out, people will be happy with a 7.25 percent credit and if there’s a correction, with a 10 percent buffer.”

The Standard & Poor’s 500 index last year rose nearly 20 percent from 2016 and is up 3.51 percent so far this year. Recent surveys show many advisors to be optimistic about the markets in 2018.

But the potential for a market decline, or "correction," is a worrisome factor for many investors.

Fourth Index Strategy

Index Precision Strategy is the fourth indexing strategy offered by the Minneapolis-based insurer on its Index Advantage buffered variable annuities, a fast-growing product line within the shrinking overall variable annuity market.

Other index strategies available with the Index Advantage family of variable annuities include Index Performance Strategy, Index Protection Strategy and the Index Guard Strategy.

Indexes available with those options include the S&P 500 Index, the Russell 2000 Index, the Nasdaq-100 Index and the EURO STOXX 50 index, Alianz said.

Company product managers launched Index Precision after consulting with advisors, broker-dealers, wholesalers and people serving on product committees, Gray said.

“We were hearing from advisors and pundits about low growth and the potential for a market drop so we wanted to have an option where if the market is up only 2, 3 or 4 percent, then you get 7.25 percent, but if the market drops, there's the buffer,” Gray said.

While advisors may be optimistic about 2018, as many as 36 percent of consumers believe another recession may strike this year, according to the 9th annual New Year's Resolution Survey from Allianz released last month.

Filling a Need

Buffered, or indexed variable annuities, are designed so that the insurer absorbs, or buffers, a loss up to a threshold above which the contract holder is on the hook for the loss.

Index Precision fits with what 55-year-old or 60-year-old baby boomers transitioning into retirement are looking to accomplish, Gray said.

This demographic segment wants to come off the investing sidelines and participate in a rising stock market, but at the same time can’t afford the kind of collapse many pre-retirees suffered a decade ago in the financial crisis.

The buffered annuity as a product category is hitting a nerve with people lured by the potential of higher market returns than they can get from cash or ultra-safe bank products, yet also demanding protection from loss.

“It just further helps what this category is trying to accomplish,” Gray said.

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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