Evaluating Your Variable Annuity Product Line
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1 Cerulli Special Report: Evaluating Your Variable Annuity Product Line Overview The variable annuity (VA) industry is at a pivotal point in its history, as years of reactionary product development are beginning to give way to a new era of stabilization and rationalization. Key challenges in this new era include optimizing individual components of the VA, implementing lessons learned from the market crisis with regard to risk management, and revisiting the role of wholesaling. In this Special Report, readers will learn how to critically assess their current VA product line. This includes analyses of benefit levels, investment options, expenses, and new industry trends. Central to the report is its examination of the influence of key VA features on sales success. This report answers the following questions: How will product development evolve, and which elements are most critical? How should insurers structure their product lineup and benefits? How much are contract holders willing to pay for high-quality asset management? How will product development wars impact future design and positioning? What are the prospects for simplified annuities? With 55 pages and 40 exhibits, this report contains the following sections: About Cerulli Special Reports: Throughout the year, Cerulli analysts release timely research on current topics. The flexible nature of Special Reports, shorter than our Thematic Reports, provides firms with Cerulli s analysis, assessment, and opinions on the industry s most urgent topics and trends. KEY FINDINGS: The most comprehensive benefit designs are not necessarily the most effective in generating assets. There is little evidence that comprehensive living benefits help curb exchanges to a significant degree. Going back to basics is a viable strategy, especially when analyzing death benefits, bonus features, lifetime withdrawal benefits, and number of underlying subaccounts. Investment options will remain critical components of VA product design, but insurers should consider hedgeability and net performance as more valuable then cost alone. Product line rationalization must extend to the wholesaling function. Advisors are still reluctant to offer annuity guarantees to reduce risk in clients portfolios. SAMPLE EXHIBIT: Variable Annuity Product-Level Sales by Rising Floor Death Benefit Percentage, 3Q 2009 YTD ($ millions) A 5% rising floor tends to result in the greatest sales levels, yet a 4% rate can also be effective for insurers. $3,500 $2,500 $1,500 $500 Report Cost: 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% Executive Summary Chapter 1: Product Development Wars Revisited Chapter 2: Evaluating Variable Annuity Product Lines Chapter 3: Living Benefits Lessons Learned Prognosis Faxable order form on reverse. For more information, please contact: Marketing & Business Development CAmarketing@cerulli.com Sources: Morningstar Direct, Cerulli Associates
2 EXHIBIT 2: VARIABLE ANNUITY PRODUCT WARS TAKE A TOLL The product development was in overdrive for many years as insurance jockeyed for assets in the highly competitive VA industry. Source: Cerulli Associates Company E Company A Product Innovation Company D lion in This occurred in tandem with a major turning point for the VA industry the introduction and widespread acceptance of the modern GMWB and its follow-up, the guaranteed lifetime withdrawal benefit (GLWB). The introduction of guaranteed withdrawal benefits was the culmination of a period during which the VA industry focused on adding flexibility to its product offerings. It was during this time that L-share and unbundled VAs were common, successfully challenging the one-product-fits-all mindset of earlier years. Continuing this trend, The Hartford, in 2003, dusted off a preliminary GMWB that was once offered by Fortis, a company it had recently acquired, and made it more userfriendly by allowing the benefit to continue, albeit adjusted downward, if an excess withdrawal was made. Flexible product designs that incorporated asset preservation and retirement income now became the crux of the VA industry, a far better positioning for the future than simply the tax-advantaged properties that were promoted in the past. Ironically, laying the groundwork for VA product design also laid the groundwork for a situation that hampered strong growth Company B Company C Increased complexity of products Rampant use of 1035 exchanges Stagnant sales growth AND Detracts from development of product positioning strategies product development wars, or one-upmanship. As product innovations took hold, insurer after insurer built upon the successes of a competing insurer, modifying the original benefit to such a degree that the pioneering company was forced to do the same. This cycle, depicted in Exhibit 2, led to increased complexity of products that already had a large number of moving parts, and also drove contract holders to exchange existing VAs for newer models from other companies. This situation continued to gain traction in 2004, with the birth of the GLWB. Reactionary Product Development The VA industry experienced a profound shift starting in late 2004, when extensive copycatting of features started taking a toll on industry-wide inflows. CA refers to the period between 2004 and 2009 as one of Reactionary Product Development. During this time, there was little in the way of significant new product development; rather, insurers often added benefits and features in response to market demands and the actions of competitors both in good times and in bad. Cerulli Special Report Evaluating Your Variable Annuity Product Line 11 What s My Line? We begin with the most basic questions what is an optimal number of distinct VA products a company should market at one time, and in what forms? There are many factors that go into this determination. Most firms create a separate product for each share class for example, Jackson National Life, which ranked fourth in industry sales through third quarter 2009, offers Perspective L (an L-share), Perspective II (a B-share), Perspective Advisors II, (a C-share) and Perspective Rewards (a bonus, or X-share). A handful of firms bundle the share classes into a single product for example, MetLife s Preference Plus Select VA and offer each share class as a separate choice that comes with its own surrender charge schedule and expense structure. Still, insurers might develop products geared toward separate distribution channels. John Hancock, for instance, got a tremendous amount of attention in June 2009 when it launched a simplified VA that targeted the registered investment advisor (RIA) population. Many firms offer private-labeled VA products specifically for the bank channel. A handful of others serve as wrap providers for VAs sold through mutual funds while still offering a separate line under its own name, such as Lincoln Financial s arrangement with American Funds. Additionally, variations of the same product are often offered in different jurisdictions in accordance with state insurance law. For this analysis, we combine state variations of products and consider the combined total when determining the sales thresholds described above. Number of Offerings An insurer has a number of considerations when determining the optimal number of products to offer. Many executives with whom we spoke cited the cost EXHIBIT 6: VARIABLE ANNUITY COMPANY-LEVEL SALES BY NUMBER OF CONTRACT OFFERINGS, 2009 ($ MILLIONS) Even netting out the effect of multi-share class chassis, insurers can be successful with fewer than five distinct variable annuity product offerings. $9,000 $8,000 $7,000 $5, Note: Firms that primarily offer multiple share classes in one chassis are indicated in red. State variations are not counted separately. Excludes companies with less than $300 million in sales year-to-date 3Q EXHIBIT 15: VARIABLE ANNUITY PRODUCT-LEVEL SALES BY NUMBER OF OPTIONAL GUARANTEED MINIMUM DEATH BENEFIT RIDERS, 3Q 2009 YTD ($ MILLIONS) There is a positive correlation between the number of GMDB types offered and the level of sales of the VA product. $3,500 $2,500 $1,500 $ Note: Excludes contracts with less than $100 million in sales year-to-date 3Q This is not to say that the MAV was sweetener to a simpler GMDB as it lacks a selected in every case yet offering this step-up, and is relatively inexpensive version of the GMDB reflects well on the (average charge of 33 basis points per insurer s sales results. Morningstar). The MAV benefit is also the clear The EEB is generally priced by favorite among firms that offer just one contract holder age, with age 70 a typical GMDB style representing 75% of sales. breakpoint. The majority of insurers offer The EEB is a good choice for firms that an EEB equal to 40% of earnings, although wish to offer two or three GMDB structures, yet is not ideal as a standalone 50% benefit. CA notes that a 50% benefit some have pushed the envelope with a GMDB option. This benefit is more of a does not necessarily lead to higher sales, EXHIBIT 16: DISTRIBUTION OF VARIABLE ANNUITY PRODUCT-LEVEL SALES BY TYPES OF OPTIONAL GUARANTEED MINIMUM DEATH BENEFIT RIDERS, 3Q 2009 YTD The maximum anniversary value (MAV) death benefit is a staple of the industry; enhanced earnings benefits often serve as sweeteners. Sales by Types of Optional GMDB Riders Offered Sales Breakout of Contracts That Offer Sales Breakout of Contracts That Offer Two GMDB Types One GMDB Type MAV and RF-only EEB-only 5.9% RF-only RF-only EEB-only MAV and RF-only 4.0% 20.9% 4.1% 0.8% 21.1% MAV and EEB-only MAV, RF, 21.9% EEB 52.6% MAV-only MAV and EEB-only 14.7% 78.9% MAV-only 75.1% Note: Excludes contracts with less than $100 million in sales year-to-date 3Q EXHIBIT 40: WHOLESALERS VS. ADVISORS: CONSIDERATION OF WHOLESALER RELATIONSHIP AS A KEY CRITERION IN SELECTING AN ANNUITY PROVIDER 2009 Advisors from the regional channels are most inclined to value insurance-company wholesalers as integral to their annuity vetting process, yet still fall significantly short of wholesalers self-assessments. Regional Wirehouse Insurance IBD Bank Dually registered RIA All advisors Wholesalers 7% 17% selection of an annuity company to their relationship with the advisor, greatly overemphasizing the role they provide. Reversing the bad rap often attributed to VA wholesalers will be among the insurance industry s challenges, yet it is not insurmountable. Research conducted by CA and other groups over the years has shown that product pitches are ineffective in winning over advisors. More troubling, as per CA research, is the tendency for wholesalers to stay within their comfort zones and discuss the VA in isolation, much of which emanates from the insurance company itself. Insurers have a fundamental gap in the way they approach the distribution model, stated one financial services executive with whom CA spoke. He suggested that VA wholesalers take a lesson from mutual fund wholesalers, who typically begin a conversation with the merits of a mutual fund as an investment 27% 32% 33% 33% 32% 0% 10% 20% 30% 40% 50% 60% 70% 80% Sources: Cerulli Associates, in partnerships with the Financial Planning Association and the Investment Management Consultants Association 48% for clients before launching into the benefits of a specific fund. The first two minutes should be consistent among all VA wholesalers why a VA should be part of your client s portfolio, he concluded. CA analysts contend that revamping the wholesaling process to incorporate the positioning of VAs within a retirement portfolio will reap long-term benefits for the industry. First, it will help attract advisors who have been reluctant to use annuities in the past, largely due to product misperceptions and uncertainties as to how it would enhance a financial plan. Second, this approach may move wholesalers (and insurers) out of their comfort zones and expand the broker/dealers on whom they call. This will also go a long way in adding value to the role of the wholesaler from the advisor perspective. Cerulli Special Report Evaluating Your Variable Annuity Product Line 51 75% Cerulli Special Report: Evaluating Your Variable Annuity Product Line Report Cost: Included with purchase: Five copies of report Online access Exhibits in Excel format Key findings in PDF format To purchase this report, fill out this form and fax to or visit our website at Name: Firm: Address: Phone: Please contact Marketing & Business Development to learn more about pricing CAmarketing@cerulli.com Special Feature: To view thumbnails of the contents of this report, please visit our website at Go to Order/Info, then Thematics, and click on look inside next to the report title. Cerulli Associates 699 Boylston Street Boston MA Tel: Maxwell Road Singapore Tel: Page Cerulli Special Report Evaluating Your Variable Annuity Product Line 28 Cerulli Special Report Evaluating Your Variable Annuity Product Line Page 18 Page 28 Page Betterton Street London WC2H 9BP File: Eblast C e r u l l i A s s o c i a t e s
3 TABLE OF CONTENTS EXECUTIVE SUMMARY PRODUCT DEVELOPMENT WARS REVISITED That Was Then: Growth and One-Upmanship This is Now: Stabilization and Rationalization Key Recommendations EVALUATING VARIABLE ANNUITY PRODUCT LINES What s My Line? Guaranteed Living Benefits Guaranteed Minimum Death Benefits Investment Options Fees and Expenses Simplified Annuities Opportunity or Oxymoron? Key Recommendations LIVING BENEFITS LESSONS LEARNED Living Benefits and Insurance Company Risk Management Asset Management Impact Wholesaling Impact Key Recommendations PROGNOSIS METHODOLOGY Quantitative Data Qualitative Interviews Cerulli Special Report Evaluating Your Variable Annuity Product Line
4 INDEX OF EXHIBITS EXECUTIVE SUMMARY From VA Product Development to Sales Success, PRODUCT DEVELOPMENT WARS REVISITED Exhibit 1 Milestones in Variable Annuity Product Development, Exhibit 2 Variable Annuity Product Wars Take a Toll Exhibit 3 Variable Annuity Industry Assets and Growth, Q Exhibit 4 Variable Annuity Total Sales and Net Sales, Q Exhibit 5 Factors Influencing Variable Annuity and Life Insurance Product Development, EVALUATING VARIABLE ANNUITY PRODUCT LINES Exhibit 6 Variable Annuity Company-Level Sales by Number of Contract Offerings, Exhibit 7 Average Holding Periods for Fixed and Variable Annuities by Product Structure, 2009 (years) Exhibit 8 Average Variable Annuity Bonus Percentage and Sales Share by Bonus Structure, 3Q Exhibit 9 Variable Annuity Product-Level Sales by Maximum Bonus Percentage, 3Q 2009 YTD Exhibit 10 Importance of Factors in Advisor s Selection of a Variable Annuity Provider, Exhibit 11 Importance of Living Benefits in Advisor Selection of VA Providers, Exhibit 12 Advisor Recommendation of Variable Annuity Strategies to Provide Retirement Income, Nonqualified Assets, Exhibit 13 Advisor Recommendation of Variable Annuity Strategies to Provide Retirement Income, Qualified Assets, Exhibit 14 Hybrid Insurance Product Growth Opportunities, Exhibit 15 Variable Annuity Product-Level Sales by Number of Optional Guaranteed Minimum Death Benefit Riders, 3Q 2009 YTD Exhibit 16 Distribution of Variable Annuity Product-Level Sales by Types of Optional Guaranteed Minimum Death Benefit Riders, 3Q 2009 YTD Exhibit 17 Variable Annuity Product-Level Sales by Earnings Enhanced Death Benefit Percentage, Younger Ages, 3Q 2009 YTD Exhibit 18 Variable Annuity Product-Level Sales by Earnings Enhanced Death Benefit Percentage, Older Ages, 3Q 2009 YTD Exhibit 19 Variable Annuity Product-Level Sales by Rising Floor Death Benefit Percentage, 3Q 2009 YTD Exhibit 20 Key Variable Annuity Fund Management Metrics, Q Exhibit 21 Variable Annuity Product-Level Sales by Number of Investment Options, 3Q 2009 YTD Exhibit 22 Variable Annuity Fund Styles Expected to Experience Greatest Growth Next 1-3 Years, Exhibit 23 Variable Annuity Product-Level Sales by Base Insurance Expenses, 3Q 2009 YTD Exhibit 24 Variable Annuity Product-Level Sales by Asset Management Expenses, 3Q 2009 YTD Exhibit 25 Variable Annuity Product-Level Sales by Sum of Base Insurance and Asset Management Expenses, 3Q 2009 YTD Exhibit 26 Average Annual Variable Annuity Policy Fee, Q Exhibit 27 Summary: From VA Product Development to Sales Success, LIVING BENEFITS LESSONS LEARNED Exhibit 28 Products that are More Effective in Providing Retirement Income Than Five Years Ago, 2Q Exhibit 29 Methods Used by Insurers to Manage Risks Associated with Guarantees, Exhibit 30 Involvement of Product Development Actuaries in Subaccount Selection Process, Insurer Experience, Cerulli Special Report Evaluating Your Variable Annuity Product Line 3
5 Exhibit 31 Distribution of Variable Annuity Company-Level Sales by A.M. Best Financial Strength Rating, 3Q 2009 YTD Exhibit 32 Asset Managers Level of Concern with Insurance Company Solvency Exhibit 33 Importance of Financial-Strength Rating in Advisor s Selection of Variable Annuity Provider, Exhibit 34 Percentage of Variable Annuity Contracts that Impose Investment Restrictions by Rider, 2006 vs Exhibit 35 Anticipated Required Offerings of New Asset Allocation Funds of Funds or Models, Insurer Perspective, Exhibit 36 Effectiveness of Using Index Funds to Mitigate Benefit Guarantee Risks, Insurer Perspective, Exhibit 37 Advisor Attitudes Toward Active and Passive Management, Exhibit 38 Changes to Retirement Income Strategies Based on Market Conditions, Exhibit 39 Advisor Opinion of Most Important Factors in Retirement Income Plans, Exhibit 40 Wholesalers vs. Advisors: Consideration of Wholesaler Relationship as a Key Criterion in Selecting an Annuity Provider Cerulli Special Report Evaluating Your Variable Annuity Product Line
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