Is down the new trend in the variable annuity marketplace?

By Brandon Roberts

The Insurance Pro Blog


I don't foresee a problem big enough to deter one from placing money into a variable annuity, but those that earn the majority of their income from variable annuity sales might be in for frustrating times in the not too distant future.

It seems as though the days of excitedly meeting with the variable annuity wholesaler to learn about what innovations the company has recently cooked up have long since passed. In the interest of full disclosure, I'll admit that I got sort of bored with these products and bounced (for pretty much all intents and purposes) a few years ago. But I can still remember when we used to nitpick the details of who was offering the highest step-up/roll-up/whatever they are called these days, who had the most attractive age bands and who had allowed it all in the most accommodating (i.e. liberal) way.

I also remember sitting through countless NAIFA meetings where it seemed like every month we had someone from some other company there to pitch his or her wares in what seemed like just another iteration in a slightly different combination compared to the last guy or gal.

My office was in no short supply of a colorful array of various variable annuity kits. Kits that needed to be swapped out almost once a month because the company made a slight change and now all those former kits they sent us were no good. Oh, the Good Old Days. Now, however, it seems as though the old days of who can roll out the next big thing to one-up everyone else has turned into a game of "who sucks the least?"

It started with the gradual decline in the step-up. We saw companies drop from between 7 percent and 10 percent annual bumps down to 4 percent to 5 percent. Then we saw the cost for the riders move sharply upwards.

Instead of a call from the wholesaler to talk about what next new innovation was headed down the pipeline, I began to receive phone calls from defeated individuals who were trying to put lipstick on a pig. Unfortunately, it turns out not even insurance companies can sustain 7 percent plus investment growth year over year and not loose their shirt (or at least their A+ from AM Best).

But is anyone really all that surprised? In 2008, I made an observation to my general agent. We were looking at a Vital Signs analysis for a few companies for a competitive situation that had nothing to do with variable annuities. It was at that time that I asked a completely off topic question: "If the average investment return for the industry is around 6 percent over the last five years, how on earth are these companies guaranteeing GMWBs beyond that number?" He didn't have an answer, so I decided to pursue this further.
I asked other people, agents who were deeply in the VA game. The best answer I got had something to do with hedging, but I'm pretty sure he didn't really know what he was talking about. I pushed further and asked the wholesalers/RVPs. There was a source of great comedy.

Turns out, something I've always held to be true still holds true for the annuity industry: Subtract a larger number from a smaller number, and you end up with something below zero. In other words, it's hard to guarantee a 7 percent return on someone's money when you yourself can only earn 6 percent.

I've always found it somewhat odd that someone would decide to back an equity-focused product with a bond portfolio (speaks loudly to the power of bonds). In fact, over the past 20 years, 20-year treasuries have held their own against the S&P with far less volatility.

While the logic seems sounds, we can make up the difference between where they are and where we promised they'd be with our cash on hand, it just seems like the pieces to the puzzle don't quite fit together as neatly as everyone had hoped.

I can't help but feel that the variable annuity bonanza was fueled by a desire to be the guy or gal with the super solution. Let me show you how to have your cake and eat it, too. I've discovered that brokers/advisors don't like having hard conversations with their clients. Conversations like, "Hey, you haven't saved nearly enough so it's either time to forgo the luxury European car or else you're going to have to develop a penchant for cat food."

Instead, the industry gravitated towards a mindset that left "increase your risk exposure" as a third option to fixing undersaving, and variable annuities made the pill go down a little less apprehensively.
Before I became licensed (but had still been working in or around the industry for a while) I had a conversation with an old friend of mine who commented that he was going to increase the aggressiveness of his annuity. My immediate reaction was, "Isn't that an inherent contradiction?"

He was a former career agent from the 1980s through the early 2000s (i.e. he came of age in a time when increase your risk became another option; in fact, the option in a lot of cases) and didn't appear to understand my point.

You see, my view of annuities has always been that they are synonymous with safety. Unfortunately we attempted to alter that reality and the reward for such innovation has been uneasiness.

The top three individual annuity carriers (according to National Underwriter) have all made disappointing announcements about their variable annuity products this year. The fact that they pulled back wasn't huge news. How they've gone about doing it, on the other hand, is newsworthy.

Most of us are used to product changes; they happen frequently. But we're used to changes that have a transition period. In fact, most announcements have a section dedicated to the "transition rules." That hasn't been the case recently. Both Prudential and Jackson National Life's recent announcements have come with little more than a week's advance notice, and both occurred around holidays.

Whether the holiday timing was planned or purely bad coincidence is up for debate; what isn't up for debate is the notion that when a company pulls a product in a here-today-gone-tomorrow fashion, it's not indicative of confidence.

How big is the problem? We're most likely not talking about solvency issues, or anything of that magnitude. But something has these companies moving quickly to avoid a continued offer of these old promises to new money and/or new clients. Perhaps it's nothing more than wishing to avoid the fire sale that would most likely ensue if they allowed for more time before the change took effect.

Many of these companies (Prudential definitely comes to mind) didn't appear all that worried about sacrificing their credit ratings a bit a few years ago in the face of declining markets and rich product benefits — maybe they've reached their limit.

I don't foresee a problem big enough to deter one from placing money into a variable annuity — again, I don't think this is a solvency for meeting promises issue. I think the losers behind this will be the agents who have decided to focus on the annuity business. Those that earn the majority of their income from variable annuity sales might be in for frustrating times in the not-too-distant future.