Annuity Products That Will Sell

At LIMRA's 2010 Retirement Industry Conference, consultant Timothy Pfeifer identified the deferred and immediate products that he thinks are ideal for insurers, distributors and investors today.

If a life insurance company could start with a clean whiteboard and map out the ideal annuity product mix for the future, what would that map look like? What would the products be, and what features would they have?

Timothy Pfeifer, an actuary and president of Libertyville, Illinois-based Pfeifer Advisory LLC, challenged himself to provide specific answers to those fuzzy questions in a presentation at LIMRA’s annual Retirement Industry Conference here yesterday.

For an industry that’s still dazed from the Financial Crisis and said to be sitting on a lot of underemployed cash, the topic was timely. And Pfeifer, a former Milliman and Tillinghast actuary, had clearly done a lot of homework.

To achieve reasonable profitability in the annuity business, Pfeifer said, an insurance company should have “tentacles in both the fixed and variable world, have something to sell no matter what the market environment, shouldn’t create undue litigation risk” and use their life insurance and annuity businesses to hedge each other if possible.

Tim PfeiferPfeifer defined “reasonable profitability” as about 10% a year. “If you think you can manage to 20% returns, you’ll be disappointed,” he said at LIMRA’s conference. An estimated 350 insurance professionals attended the conference.

An ideal manufacturing strategy going forward would be to put 75% of the time and effort into deferred annuities and 25% into immediate annuities, he said. The lead product on the deferred side, not surprisingly, was variable annuities with living benefits.

On the variable side
Although he conceded that owner behavior is still largely unknown, Pfeifer believed that owners of VAs with guaranteed lifetime withdrawal benefit will use the income guarantee as a safety net that allows them to buy and hold equities without fear, rather than as a market-timing tool to be triggered at the bottom of the market. If that’s true, it would allow issuers to bring prices down.

The 10-year guaranteed minimum accumulation benefit, which guarantees principal, still “resonates with some customers,” he said, while noting that the guaranteed minimum income benefit—which involves annuitization, and which was the first living benefit some 12 years ago—won’t be worth investing time in.

As for investment choices and pricing, he suggested that issuers offer fewer subaccounts and fewer managers, with no more than 20 or 30 fund options and an emphasis on indexing.

He described the death benefit as a “distraction,” and suggested a shift to a quasi-A share design where the M&E starts relatively large and falls over time, so that the benefits gains value for the consumer.

Regarding age bands and withdrawal rates, he suggested a withdrawal rate that rises by, for instance, 10 basis points a year rather than remains fixed. Issuers could save money, and probably not lose sales, if they limited withdrawals to once a year or once a quarter or on contract anniversary dates.

Pfeifer suggested that companies get a stand-alone living benefit (SALB) business going if they haven’t already. “The marketplace is crying out for wraps around those assets,” he said—referring to the huge amounts of unprotected savings in managed accounts and elsewhere.

“Sales today are low but they should grow,” he said. “SALBs will open up new distribution opportunities and access to new asset managers. They will be critical to our marketplace and getting started now is a good idea.” But don’t try it unless you have expertise in the necessary hedging programs, he warned.

Picks and Pans, Courtesy of Pfeifer Advisory
High-Priority Annuities Low-Priority Annuities
Variable deferred annuities with living benefits (GLWB or GMAB) Variable immediate annuities
Multi-year guaranteed rate fixed deferred annuities with a market value adjustment Longevity insurance (Advanced life deferred annuities)
Inflation-indexed single premium immediate annuities (SPIAs) Long-term care riders on annuities (unless you already sell LTC insurance)
Simple indexed deferred annuities Complex indexed deferred annuities
Equity-indexed SPIAS Conventional one-year guarantee fixed deferred annuities
One-year guarantee fixed deferred indexed to an interest rate Variable deferred annuities with guaranteed minimum income benefits
Stand-alone living benefits  
Data Source: Pfeifer Advisory LLC, 2010.

On the fixed side
The most successful design for fixed deferred annuities is likely to be the multi-year guaranteed (MYGA) product with a market value adjustment, which puts the interest rate risk associated with early withdrawals on the owner rather than the issuer. The MVA adds 10 to 25 basis points to the credited rate of MYGA products.

The MVA should be tied to the same interest index as the securities that the issuer invests in, he added, the return of premium guarantee should be dropped, and the minimum investment should be set at $25,000. He also recommended that products without a rate guarantee be indexed to interest rates. “This is a ‘Trust Me Lite’ strategy,” he said.

A SPIA was also part of the balanced product offering that Pfeifer imagined for the insurer that wants to build a durable foundation. It should include enough liquidity to satisfy the investors’ psychological need for flexibility, as well as some assurance that income would keep up with inflation. That could mean indexing the payouts to the Consumer Price Index or to the S&P 500.

SPIA “must have at least token liquidity that gives the perception of access,” he said. That might take the form of access to cash every five years or when emergencies arise. “Perception is as important as anything.” At the same time, people want some growth. “Only a minority will be satisfied with $1,000 a month,” he said. An index to the S&P500 would offer upside potential.

As for indexed annuities, Pfeifer had cautionary words. Issuers have been facing a lot of litigation, he said, from contract owners who saw “3% gains in a 40% year” in 2009. “Customers should be able to share in the home runs.” 

© 2010 RIJ Publishing. All rights reserved.