In 2001 and 2002, insurance companies began introducing the guaranteed withdrawal benefit, giving VA owners a guaranteed income stream. The current bear market is forcing insurance companies to cut benefits and to increase costs. (Some VA products will be discontinued.) Read VA prospectuses carefully when they begin arriving in the first week of May.
Indeed, advisors we spoke to who use VAs are already scrambling to get acquainted with the new products and are ramping up due diligence to greet a new era in the “living benefit” product space.
“In May and on into the summer, we will see companies come out with benefit structures that are more manageable from a risk standpoint [for them], but hopefully come back with something still compelling for the investor,” says Frank O’Connor, director, Insurance Solutions at Morningstar.
Insurance companies started tweaking VAs in their new product filings with the SEC this past fall, as the cost to hedge products tied to equity markets increased with the market’s nosedive. It seems the living benefit arms race is officially over, as insurance companies say they are withdrawing benefits to better align their products with the current economic environment; they are doing so they can pay on current and future guaranteed benefits to policy holders.
Insurance companies have learned from past mistakes. In 2004, insurance companies had to pay $2.8 billion in death benefits to beneficiaries of VAs—from their own coffers. The $2.8 billion gap was caused by losses incurred in the bear market of 2001 to 2003.
Lisa Plotnick, associate director of Cerulli Associates, says product developers are being more cautious with their offerings—so a living benefit that offered a guaranteed withdrawal benefit of 7 percent has been replaced with a 5.5 percent or 6 percent version. In fact, according to Cerulli’s recent insurance survey, 90 percent of providers say they expect the fees charged for guaranteed lifetime withdrawal benefit to increase either significantly or somewhat. Plotnick says the fee range for these riders averages between 20 bps up to 100 bps, on top of a base insurance charge of between 140 bps to 160 bps.
For example, MetLife, a leader in the guaranteed minimum income benefit (GMIB) space, changed its pricing on its GMIB in February from 80 basis points to 1 percent, and the limited withdrawal guarantee rose from 65 bps to 125 bps—with additional changes to withdrawal guarantees scheduled for May. Other companies have also changed pricing; AXA’s GMIB product went from offering a 6.5 percent income benefit to 6 percent in November and then to 5 percent in February.
Scott DeMonte, of FRC, an industry research group, says insurance companies, like most other financial institutions, had no idea the market downturn was going to be this severe, adding, “Clearly [companies were surprised] when you have AXA—which is a great company—launching a 6.5 percent GMIB in June or July just before all this blew up on us,” says DeMonte, “In May you’ll see how nervous firms are about the market conditions.” Furthermore DeMonte says he expects advisors to be open to switching insurance companies for new business, since there will be so much change to their current favorite firms’ offerings.
O’Connor says, “If product designs come out that are just entirely too restrictive, I think that will not open up the field and get advisors who have historically not sold VAs to embrace the product, and that I think has always been the industry’s challenge.”