VA Sales Soared 14.7% In First 9 Months

As of this writing, 2007 VA sales are expected to reach or exceed $180 billion, an approximately 15.6% increase over 2006 sales of $157.3 billion and a staggering 56.5% higher than VA sales 5 years ago, when 2002 full year sales totaled $115 billion.

Throughout those years, various sources, some statistical, some anecdotal, have attributed 50% or more of variable annuity sales to exchanges of existing variable annuities for new contracts, with some studies putting exchange volume as high as 85% of total sales. While a comprehensive, authoritative study of exchange levels over time has not, to date, been conducted, in large part due to the difficulty obtaining complete and accurate data, postulating an industry-wide exchange rate of 40% is not unreasonable.

Exchanges are an area of particular interest to the Financial Industry Regulatory Authority (FINRA), and as such are subject to particularly stringent review requirements under the new Variable Annuity Suitability Rule, NASD 2821, which becomes effective May 5, 2008. Principal review of annuity exchanges must consider not only the efficacy of the exchange on an objective, "is this good for the client" basis, but must also consider recent prior exchanges, and more generally must monitor associates based on the rate of exchanges they are performing.

It is reasonable to expect a reduction in the volume of exchanges as a result of this new regulation, but the unanswered question concerns the impact on VA sales. Will sales plummet, fueling the rhetoric that the variable annuity industry has been largely recycling old business for years? Will new money in the form of boomer qualified plan rollover dollars continue to flow into variable annuity living benefits, offsetting the effects of a significant reduction exchanges? Or will everything go on substantially as before in spite of the new regulation?

NASD 2821 will certainly make it more difficult to transact VA business, and will add additional challenges to the a crucial dilemma facing this industry, namely how to get advisors working with retirees and near-retirees who don't sell the product today to give it another look as the needs of their older client shift. In that respect NASD 2821 may be a blessing in disguise, forcing the industry to focus more attention on educating advisors and investors about the product, and continuing to invest in tools and support for advisors.

Wholesaler support–not just product positioning and promotion but pointed advice on growing and sustaining a practice through the appropriate use of variable annuities–will be crucial in this new environment, as will conceptual educational materials, illustration tools and product evaluation software.

Frank O'Connor is product manager, VARDS, at Morningstar, Inc. He can be reached via email at .