Tough Times for Annuity Providers

You can look at alternative asset classes, but with alternative asset classes, there's a risk-reward trade-off so you need to be careful with that. There is no easy solution. There is no magic bullet, because you still need to sell product. The customer still needs product. The customer buys guarantees because they need guarantees. You just have to be razor sharp in managing those guarantees going forward.

If we go back a couple of years, and we were sitting in this same low interest rate environment you could convince yourself, "I'm going to be alright if interest rates go up." That's what everybody said, "Well, interest rates will go up. I've got some short-term pain, but interest rates will go up and things will be fine." Well, here we are today. We know interest rates aren't going up anytime soon. It's a different challenge. You have to face reality; you have to be careful with your balance sheet.

All types of annuities have issues in today's low interest rate environment. Can you address the problems variable annuities face in particular?

The variable annuities that people want to buy have options and guarantees embedded in them, whether they're guaranteed death benefits or guaranteed income benefits or guaranteed withdrawal benefits. Hedging those risks becomes pretty expensive in a volatile economic environment, mostly because of the equity markets and where the equity markets are moving. You've seen in the past couple of years, there has been some pretty dramatic swings in the equity markets, not only day to day, month to month, but quarter to quarter. Also, if you're going to give somebody a variable annuity with a 5 percent rollup guarantee, are you going to make 5 percent in the equity market for the next 20 years? Maybe five to six years ago you'd convince yourself over time you would. I'm not sure you would today. A lot of these contracts that were sold years ago are in the money.

What can variable providers do?

I don't think you've seen the end of the shakeout of who's staying and who's going. I think variable players are de-risking their products. I think they are putting risk-management features inside their products. They are reducing the guarantees they offer the customer and you will see [carriers] ration product. I think they will sell a certain amount of product in a year and when they hit that amount, they are not going to sell anymore. They, in effect, are going to take themselves out of the market. You just can't take unlimited risks in today's environment. It's too choppy, it's too risky.

Maria Wood is the annuity channel editor for LifeHealthPro.com and managing editor of Senior Market Advisor.