Time For New Look At A-Share VAs?

One reason for this is the fact that A-share designs can lessen the GAAP accounting risks that have plagued variable insurers of late. On B-share contracts, upfront costs are usually deferred and amortized for GAAP accounting purposes over a defined period of time based upon projected future profits.

To the extent that actual fund performance is lower than projected in the GAAP amortization schedule, or if actual terminations are higher than projected, a carrier may be forced to write off the unamortized deferred acquisition costs more rapidly than anticipated. This would lead to lower GAAP earnings or losses. For an A-share product, this is less of an issue, since the upfront costs are largely balanced by an upfront policy charge.

Another reason for the heightened interest in A-share VAs is the favorable policy performance for those policyholders who remain with the policy for a long period of time. This phenomenon is a function of the fact that most B-share products are designed so early terminations are at least partly subsidized by remaining policyholders.

Opportunities exist for creative and competitive VA designs built on an A-share platform. The biggest challenge will revolve around the willingness of distribution forces and customers to accept the notion of an initial premium haircut.

The A-share concept already exists in the immediate annuity product, although the nature of that product and the ways its loads are applied make it less obvious to the policyholder and sales rep.

Limited pay variable life contracts could also consider the A-share design, presumably with the same potential for improved long-term performance that VAs have.

Perhaps the time has come for A-share products to emerge more heavily as one of the viable VA product design options of the future.

Timothy C. Pfeifer, FSA, MAAA, is a principal in the Chicago office of the Milliman USA actuarial consulting firm. His e-mail is [email protected].

Reproduced from National Underwriter Edition, April 7, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.