A look back at 2008 provides a stunning view of how far the index product industry has come in the past 12 months.
One of the first items to affect the index annuity (IA) market this year was the Joint Annuity Disclosure Pilot Project of American Council of Life Insurers and the Iowa Insurance Division. This project enhances disclosure on all annuity products through a standardized template disclosure form. Thus far, 16 companies are participating (7 of which offer indexed products), and more anticipate joining as administrative systems allow.
This venture was a tremendous regulatory step forward for an industry that is perceived to have inadequate disclosure requirements.
The primary focus of IA manufacturers in 2008 was the debut of guaranteed lifetime withdrawal benefits on their IA products. These GLWB riders guarantee that an annuitant can take annual withdrawals from their IA (at a specified level), regardless of whether the contract's account value falls to zero. They provide for guaranteed lifetime income, without the "handcuffs" of annuitization.
How popular are the GLWBs? Consider: only 30 new IAs were developed in 2008, but 27 GLWBs were rolled out or revamped. That definitely speaks to the power of flexible, guaranteed lifetime income.
Carriers not only developed these benefits, but also added some innovative new enhancements such as bonuses credited to the benefit base of the GLWB and simple interest accumulation benefits. Undoubtedly, 2009 will be another year of carriers thinking outside-the-box, in an attempt to gain market share in the IA-GLWB market.
The year 2008 also saw numerous carriers stray from the norm when it came to crediting methods. They did this by spicing up their ordinary annual point-to-point and monthly averaging crediting methods by offering the methods with a "rainbow" concept. Today, at year-end, 9 insurance companies now offer crediting methods that track 3 or more indices over the crediting term, and credit a stated percentage to the best performing, next-best performing, and least best-performing indices over the crediting period.
Because of the popularity of these methods, several other carriers have made the decision to add multiple index methods which are similar, but do not perform a look-back.
Premium bonuses made a comeback in IAs in 2008, as well. The manufacturers found methods of keeping surrender charges low while using recapture charges and vesting schedules. These pricing strategies allow the insurers to offer premium bonuses, while sharing some of the risk with the consumer. Withdrawals in excess of the penalty-free amount will cause a recapture of some or all of the premium bonus, and only partial vesting occurs with any bonus using the alternative option (resulting in a loss of bonus).
As readers may recall, high premium bonuses first fell out of favor when the "10/10″ rule became a basis for products meeting broker-dealers' "approved list" criteria in 2005. The 10/10 rule says a fixed IA should have 10-year surrender charge, starting at 10% in year one and declining to zero after year 10.
Interestingly, the new pricing strategies that came out in 2008 work around 10/10, while still providing a more generous bonus. (Noteworthy: It has now been an entire year since an additional state adopted the 10/10 desk drawer legislation.)
A 2008 review of IAs would not be complete without mention the touchy subject of Chris Hansen's televised Dateline "expos?" on IA sales suitability in April. The NBC program reported on results of an undercover investigation of the IA industry; it was one-sided, not including commentary from pro-IA professionals such as insurance companies, insurance commissioners, etc. Instead, it painted the IA industry with a broad stroke, inferring that all products and sales are unsuitable.
That telecast has provided the IA industry with a refreshing opportunity to make certain that all are all doing their best when it comes to sales suitability.
