The benefits of variable annuities come at a priceone that industry executives expect to increase in the near future as benefits become more comprehensive. According to a 2008 CA survey, 20% of executives from insurance companies and variable product asset managers expect basemortality and expense (M&E) risk charges to rise in the next three years.Additionally, the majority of executives anticipate increases in thecharges for guaranteed withdrawal riders65% for the lifetime withdrawalbenefit, and 55% for the traditional withdrawal benefit.
Complicating matters further is that a growing number of insurers areoffering VAs that bundle these features into the base contract most oftenavailable through extra-cost riders. This not only results in higher baseM&E fees, but also requires advisors to look deeper into the figures whencomparing the costs of VA contracts under consideration. Moreover, inaddition to expectations that benefits under the GMWB and GLWB will becomemore comprehensive, both benefits are relatively untested over long periodsof time and therefore pose more of a pricing challenge to actuaries.
Yet, the costs of living benefits, which average nearly 70 basis points forthe GLWB, do not necessarily deter advisors who currently use VAs as partof their clients’ investment portfolios. Living benefits are a highlyimportant criterion for advisors when selecting a VA provider, as indicatedby 67% of advisors surveyed by Cerulli in fourth quarter 2007, up from 62%the prior year. The challenge to insurance companies is to effectivelycommunicate to advisors and investors the value of the benefitseven themost basic. Otherwise, the longtime positioning of VAs for theirtax-deferral qualitiesfor which no portion of the expenses applywill bedetrimental to an industry that is now ready to promote safety and income.