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Getting Away With Insane VA Guarantees Does Not Make Them Right

by Lee

The big news today was that The Treasury Department has decided to extend TARP funds to a number of insurance companies. Whether you feel that government intervention is necessary or not, my primary concern is that companies won't be forced to learn from their mistakes. One of the main reasons that many of the insurance companies have gotten into trouble is by providing overly-aggressive guarantees in their variable annuity businesses.

Back in March of 2008, insurers were already struggling to maintain profitability when volatility hit a five-year high and the 10-Year Treasury Rate was around 4%. With volatility at significantly higher levels, and 10-Year T-Bills at less than 3%, radical change is necessary. While some insurers have suspended or scaled back their VA guarantees over the past few months, I am worried that many firms will take today's news as a signal to reintroduce outlandish guarantees as a means of attracting assets. I caution firms against this and encourage them to rethink their product development efforts.

While guarantees are attractive to the ordinary investor (particularly in this market), advisors are rightfully concerned. A recent survey found that more than 70% of Merrill Lynch advisers were worried about the risks that insurers have taken on with guaranteed-minimum VAs - and nearly a third said they doubted the insurers themselves understood those risks.

Industry wide, LIMRA reports that VA sales dropped 15% in 2008 and 30% in the last three months of the year. The key to turning this trend around is not higher guarantees, but rather a rethinking of the product - from product development to sales to marketing.