Asset managers in the US are concerned about sales dominance by a few insurers, which is seen as the greatest challenge for the development of their variable annuity (VA) sub-advisory business, according to new research from Cerulli Associates, a global analytics company.
SRP spoke to Chris Nadai, senior analyst at Cerulli, about the challenges VA providers face and how providers are addressing the consolidation of the market.
What are the main issues affecting the VA and defined contributions market?
After the financial crisis, several insurers exited the variable annuity (VA) marketplace as low interest rates caused their hedging costs and reserve requirements to soar. The net result has been a concentration of market share among the top tiers of the variable annuity industry.
Has the lack of large strategic allocations affected the dynamics in the VA market?
As a result of the lack of large allocations, providers need to invest more in joint sales and product development to win business. Smaller sub-advisory firms need to approach analysts at broker/dealers, record-keepers or insurers. Success requires examining company profiles more carefully and identifying where they can make an entry given their limited resources to establish new relationships. Ideally, they will find companies with a strong centralised research team that recognises unique funds.
Is the concentration of the market limiting investor choice?
We don’t have data to confirm that point. What is interesting, with the de-risking of living benefits on VAs, is the increased complexity and choices facing the adviser, given that insurers need to control hedging costs if interest rates remain low. There have been numerous new product introductions in the VA space, particularly IOVAs (investor only variable annuities). For example, Jackson National’s (the national leader in VA sales) IOVA, Elite Access has 100 managed investment options and 19 models for advisers to choose from.
What are the differentiating factors among those firms driving the VA market?
Key differentiating factors include the breadth and depth of product lines, competitiveness of VA living benefits, such as GMAB (guaranteed minimum accumulation benefit), a GLWB (guaranteed lifetime withdrawal benefit) and an IOVA. Having a large sales force with good compensation that thoroughly covers wirehouses, regional and independent brokers and RIAs is a critical factor. It is also becoming more important to have a website that makes it easy for the adviser to see the annuity not just as a product or fund but as a key tool in executing a client’s investment management platform.
What other trends you see today in the annuities sector?
Insurers are using traditional equity positions and creative fund designs, including ETFs (exchange-traded finds) and alternative strategies to develop and broaden the appeal of simplified and fee-based VAs. Due to a stubbornly low interest rate environment that caused VA hedging costs and reserve requirements to soar, there has been a significant increase in the percentage of VA contracts that impose investment restrictions by rider.
Continued growth of O-share and I-shares, which appeal to fee-based advisers for the RIA channel, however, are not enough to reverse the trend of VAs losing market share to fixed annuities. Fixed-annuity sales rebounded in 2013 from a four-year slump as baby boomers search for guaranteed income that is better than bank certificates of deposit (CDs). Product innovation that reduced cost and increased transparency and the decrease in the supply of variable annuities with rich living benefits shifted demand to fixed annuities. Banks and regional broker/dealers appear particularly attuned to this opportunity.
Are sub-advisory firms facing any other problems when accessing VAs?
Sub-advisers need to be aware that when they work with both large and small insurers through their brokers that they must get them to concentrate on their product story and make sure they understand it. In light of the capital constraints they are currently working under, there is a new focus with the wholesalers of major insurers. They must understand and believe in the risk profile of the asset manager’s funds to effectively recommend them. Asset managers must provide services that are valued in key account general management. Firms must also hold on to the business they have, given the fragmentation of the sub-adviser space.