Have trouble comparing VA, FIA riders? Test drive this tool

With so many annuities on the market, each offering a myriad of riders and moving parts, it can be difficult to compare products and riders.

Product evaluation tools are available for this purpose, but demonstrating their economic benefit, notably in respect to variable or fixed indexed annuities, can be challenging.

Among the reasons:

1. Variable annuities and fixed indexed annuities with benefit riders, being essentially "structured products," are not easily understood.
2. Illustrations are based on separate assumptions and rules for each annuity carrier, thus making it hard to compare products' projected performance over time.
3. A comparison of fees and benefit rates may not accurately reflect the value to a specific client when selecting a product.

One company, Toronto-based Cannex Financial Exchanges Ltd., a provider of tools for evaluating income annuities as part of retirement income plan (among other services), says it now has a tool that addresses those hurdles. To be rolled out in the first quarter of 2017, Cannex's new service for evaluating variable and fixed index annuities with living benefits uses a proprietary valuation methodology that's been more than a decade in development.

To learn about the new tool, LifeHealthPro interviewed Gary Baker, president of Cannex's U.S. division. The following are excerpts:

LHP: How would you describe Cannex's portfolio of solutions? What's unique about them?

Baker: Our actuarial and quants team offers expertise in providing independent, "apples-to-apples" calculations and comparisons of annuity pricing and income guarantees. Our evaluation and comparison services can be deployed to support a variety of processes at the firm either through a Cannex interface or through a web service to feed other applications or tools.

Subscribers to our service — major broker-dealers, wirehouses and independent marketing organizations in the U.S. — can come one location, our site, to compare product and feature pricing. As we manage our algorithms and formulas, we're also able to feed into various planning tools, including benchmarks and indices.

LHP: Tell me about Cannex's new offering. How does it work?

Baker: For annuity income providers, we're now extending our capabilities to transactional comparisons for variable and fixed indexed annuities offering both income and death benefit guarantees. We're able to offer this capability thanks to our purchase of QWeMA Inc. in September 2013 from Moshe Milevsky [a finance professor at the Schulich School of Business at York University in Toronto], who now serves on Cannex's board.

We can show not only values for the base guarantees of these riders and benefits, but also their comparative performance in dynamic markets. Consistent with our operations, we work directly with carriers to incorporate their product formulas. We can, on a real-time basis, feed their updated rates and parameters into our platform's calculations.

In many cases, a product with higher fees may provide the highest economic benefit to the client, says Cannex's Gary Baker. (Photo: Thinkstock)

Delving into the mechanics

LHP: Can you elaborate on the platform's deferred annuity valuation methodology?

The methodology takes into account the three ways you can exit a product. In respect to a variable annuity with guaranteed withdrawal and death benefits, the annuity holder can:

1. Liquidate or surrender the contract.
2. Trigger the death benefit rider by passing away.
3. Trigger the income benefit rider.

We then tally actuarial present values for each of these components, giving them a combined economic value. These values also come with a standard deviation or variance. Just as riskier investments offering a potentially higher return have a wider deviation than less risky assets, some income riders have a greater standard deviation in dynamic markets than others.

To wrap up, we've been testing and prototyping this methodology for the last two years with specific clients. What we're rolling out now is a simplified version of the tool that will allow advisors to make simple comparison at the point of sale.

LHP: Have you gleaned any insights into products as a result of your own comparisons?

Baker: Yes. Just because a particular product may have higher fees than another doesn't mean it's a bad choice. In many cases, a product with higher fees may provide the highest economic benefit to the client.

Conversely, just because one product has a higher [guaranteed compound or simple interest] roll-up rate than another, doesn't mean it's better. The roll-up rate doesn't necessarily correspond with the performance of riders in a dynamic market.

Our most important finding is this: The same base contract and rider combination or combinations — the product and associated riders — will perform differently for different people. Depending on their age, gender and how far they defer income, for example, the product will perform differently for different client profiles.

LHP: There are other annuity product comparison tools on the market. How do see Cannex's platform positioned relative to the others?

Baker: Other tools lets advisor can compare fees, roll-up rates, and other features on a quantitative basis. What we're providing is additional quantitative and qualitative layers of due diligence.

This is important, for example, to satisfy FINRA Rule 2330, which obligates the advisor or advisory firm to make an assessment as the economic suitability of a variable annuity transaction. We've also received an ERISA opinion letter from Wagner Law, which has validated our process and methodology.

So we can support a fiduciary advisor's obligations in making a recommendation of a specific VA or a fixed index annuity. We're in the process of operationalizing our methodology and are planning to go live with it sometime in the first quarter 2017, before the DOL fiduciary rule becomes effective in April.

Cannex's clients include large independent broker-dealers, wirehouses, independent marketing organizations and banks. (Photo: Thinkstock)

The team, clients and strategy

LHP: Who all on your team was involved in developing the tool's methodology?

Baker: The team is currently headed by Faisal Habib, president of Cannex's QWeMA division. He's leading our research and development efforts in the fields of retirement income planning and investment analytics.

But our methodology for evaluating option-based and embedded guarantees, which goes back 10 years, is the product of Moshe Milevksy's research. Some of his white papers can be found on our website under the "Thought Leadership" page.

Through our Quant Group— which was incubated and founded by the Fields Institute for Research in Mathematical Science in Toronto, one of the top mathematical institutes in the world — we also provide product allocation support for proprietary tools that help optimize portfolios between investments, annuities and life insurance. That optimization is based on our valuation method.

LHP: Who do you count among Cannex's clients now?

Baker: I can't name specific clients, but they include large independent broker-dealers, wirehouses, independent marketing organizations and banks. These clients have asked Cannex to extend its capabilities respecting income annuities — hence the new service we're offering. On the carrier side, we have relationships with some 30 companies that offer annuity guarantees.

LHP: Can you speak about pricing and revenue for the new service?

Baker: We're still finalizing pricing. Fees will be assessed on a per transaction basis. So what you pay will depend on how many times you run calculations using the tool. The service will, we expect, be affordable for both small and large broker-dealers and IMOs.

LHP: How do envision going to market with the product evaluation tool?

Baker: We're focused on a very specific capability: doing transactional math. We're the "Intel Inside," if you will.

As such, we can make our platform available to other software companies to integrate into their retirement income planning tools. And, in fact, we do a lot of business to support companies own processes for product allocation, planning and sales.

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