Wednesday, November 26, 2008

New wave of Variable Annuity Products on the Horizon

In light of the current market environment, a number of the annuity providers are redesigning or repricing their guarantees. The bottom line is that due to increased market volatility, it is a lot more expense for insurers to offer market guarantees - up to 80% more expensive than a year ago.

That really only leaves the insurers with 3 choices:
1) take the hit on profits
2) pass on the higher costs to the consumer
3) redesign the products to bring the price down in the current market environment.

Up till now, insurers have been stuck with option number one by default - hence the historically low stock prices of market players. However, as it is vitially important that insurance companies stay profitable over the long run so they can make good on their insurance obligations, change is inevitably in order. That is why all the major players are looking to modify their guarantees. He's some early publicly available information:

AXA: Redesign GMIB. They used to offer two rollup rates - a 6% & 6.5% to increase the guarantee base. Now they are taking away the 6.5% option. In addition, they will be raising the rider cost by 15 basis points. Also, they will allow the GMIB policyholder an additional option to switch to a Guaranteed Lifetime Withdrawal Benefit at age 85.

ING: Retooling asset allocation restrictions. By reducing the amount of volatility in the policyholder's portfolio (i.e. percent equity holdings), they are able to reduce the cost of offering the guarantee.

Others that are looking into redesign but haven't publicly given details include John Hancock & the Hartford. And look for more to make announcements soon.

The va market is turning an a corner by bringing an end to the "arms race" of competing on richer and richer guarantees, which just wasn't viable over the long run. In the future we will continue to see several trends including:
1) less carriers promoting GMIBs
2) a reduction in rollup features
3) increase focus on ratchets

These redesigns are just a product of our economy. Just as when the price of filling up your gas tank increases as a response to higher oil prices, annuity guarantees are effected by the same market forces. In the case of va's, the raw ingredients are the the hedging instruments in the derivatives market. But fortunately in these hard times, the insurance companies can turn out their "fuel efficient" models much quicker.

However, those who are considering buying a variable annuity with a guaranteed rider can still get some good deals on the existing products if they act soon. Just be sure to look at the ratings on the insurance carrier before purchasing a va.