Guaranteed for Life Income Benefit Riders

*Note: the initial response (below) to this forum topic was generously provided by Ryan Hinchey. Ryan is an industry consultant and he publishes a blog titled Annuity Riders (www.annuityriders.com).

Timely Question. I believe there are two aspects to consider: 1) Is there, and will there be demand for these products, and 2) do insurers see these products as adding shareholder value going forward?

Question 1) I think the answer is yes - there is a huge portion of our population that is at or on the verge of retiring, and would benefit from these products. But at the same time, investors are a little shell shocked at the moment. We've seen demand of variable products decrease in this past year in favor of fixed products. This substitution effect is not unprecedented in response to down markets. I would anticipate that as the markets recuperate and investors get their confidence back, they will see va guarantees as a valuable component to their retirement portfolio. These people will want to be on board to participate in the market rebound, but they also have those painful memories of 35% losses fresh in their mind. These products are an ideal solution for investor with such a mindset.

Question 2) I would keep in mind that these lifetime guarantees have not been around for all that long, and 2008 has really been the first major test for insurers' risk management capabilities. In some aspects their hedging programs have worked as expected and saved them billions of dollars. However, there are certainly lessons to be learned which insurers can and will improve upon (which is worthy of its own topic altogether). Some insurers are willing to stay in the market, confident that they have learned from the issues that were exposed, while others lost too much and will need more time to heal their wounds.

As the smoke has cleared and we look at the competitive landscape today, the marketplace has obviously shifted. De-risking is the phrase echoed throughout the industry – however each company has a different interpretation. There are those who who have scaled down their benefits to keep price increases modest. Then there are those who have made some minor product tweaks, but are willing to continue to sell those richer guarantees, albeit at higher prices. Then a third group is emerging. Those who have yet to sell these types of products, but they smell opportunity, and are now ready to enter the market.

As the next generation of products are released beginning this month, we'll see companies competing by trying to find that perfect balance between guarantee features and price (of course each company's risk threshold and capital requirements will have a heavy influence in their product design). But while companies differentiate themselves at the moment, it will ultimately be the consumers who determine what that ideal product is for this environment. From there, insurers will likely react – by changing their product to be more like what the consumers are demanding, or perhaps make that decision not to compete as the shareholder value proposition does not make sense to them.

So while we don't know all the answers, I believe that these products will survive. They will look a bit different than the “arms race” of the recent past. The number of players competing in the industry will likely get smaller. But at the end of the day, these products offer an important value proposition for those building their retirement portfolio, and I believe there will continue to be insurers that can strike that balance between keeping their shareholders and policyholders happy.
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Ryan Hinchey FSA MAAA
Variable Annuity Consultant