Should Fixed Index Annuities With MVAs Be Sold By Prospectus?

Currently MVAs are standard features on many annuities. This includes FIAs. However, companies selling FIAs rarely offer clear incentives for the customer to accept the MVA, comparable to those found in MYGAs.

This is because the FIA typically has some relatively low minimum guaranteed ending value, plus the potential of excess interest related to an index that may or may not be comparable to the known ending value associated with the typical guaranteed credited rate MYGA.

True, the MVA feature is disclosed in the FIA policy form and marketing materials. However, it is difficult for the customer to understand index price volatility and its impact without the details offered in a prospectus.

In an FIA, the price of the equity index option purchased in the general account can vary over time. Its value is not directly related to interest rate fluctuations. Therefore, the customer doesn't know what its worth would be (versus book value) if it had to be liquidated before maturity. Further, what would be the effect of option price on the MVA, if any?

Unlike MYGAs, where an acceptable maturity value is known in advance, the FIA's final value, with or without an MVA, is unknown, except for a minimum guaranteed value at maturity. This maturity value in some contracts may be barely above the original deposit, regardless of how the index may have performed, because it is dependent on the type of index crediting method selected.

In fact, an MVA may actually add to volatility if there are liquidity needs prior to maturity.

Of course, most FIA materials carry the following statement that goes something like this: "This product has upside index interest potential with no downside risk to principal if held to maturity." However, that may mislead some FIA buyers whose product has an MVA–because that statement talks about simple principal protection, not about the details of the risk associated with earning excess interest and the potential cost to interest or principal if liquidity or liquidation is needed during the life of the annuity contract versus minimum guaranteed maturity value.

To add further complexity, most FIAs have one or more moving parts: interest rate cap, participation rate, spread/margin/asset fee, etc. These moving parts can be adjusted as often as annually, even if the MVA period extends for a number of years, and may impact the MVA if the FIA has to be liquidated before maturity.

In 1994 when a general account modified guaranteed deferred annuity contract was defined, including MVA and specified guarantee periods, equity index option pricing concerns and FIA moving parts were probably not under consideration.

For the above reasons, I believe that customers having FIAs with MVAs share greater liquidity risks with the insurance company versus customers who own MYGAs. Again, this is due to additional variables in FIAs of index option pricing, uncertain annuity values, one or more index moving parts, plus the MVA.

In my view, a prospectus would better clarify the risks for the customer entailed with owning FIAs that have an MVA feature.

James P. Pedigo, CLU, ChFC, CASL, is executive vice president of Financial Rate Watcher$, Inc., Longwood, Fla. His email address is .