As life insurers continue to de-risk their volatile variable annuity businesses, some insurers are offering policyholders cash to give up certain living benefits in which the companies guarantee them an income in retirement. But these variable annuity buybacks could disrupt relationships with broker-dealers — a primary sales channel for these stock-market-linked retirement-income products.
A variable annuity buyback is an offer by the insurer to increase the owner's account value, or cash value, of their variable annuity if they are willing to give up their guaranteed lifetime withdrawal benefit or guaranteed death benefit,
The long-term financial benefit is reduction of the amount of guaranteed payments that insurers have to pay to contract owners or their heirs, Alexander said. These assets may be invested in older contracts that don't have a company's current hedging strategies or expense/fee structure and whose benefits and payouts are more generous than their current offerings, Alexander said.
Variable annuity writers must set aside reserves to cover these guaranteed future payments — but reserves negatively impact profitability, Alexander said. "This is especially the case in a low interest-rate environment."
Companies doing these buybacks have taken some criticism from distributors — mainly broker-dealers,
"At a minimum, these offers mean extra work for advisers, who’ll be getting calls from clients wondering whether or not to accept," Alexander added. "Advisers may feel the carrier has gone over their heads when the letter goes directly to the contract owner, especially if they received no prior warning," he said. Broker-dealers may not like the additional suitability reviews on these buybacks.
"As the agent of record, we always have to evaluate the existing policy, but the buybacks put us in the position of having to make a recommendation about a future event that will occur on an unknown date," Stolz said. And that recommendation "will potentially be second guessed down the road." Buybacks probably make sense for up to just 15% of policyholders, Stolz said.
Living benefits are the riskiest to insurers "because they are on the hook for giving a check for as long as you live — and they don't know how long that's going to be," Stolz said. The companies offering the buybacks have decided it's better for them to pay the money today than to "have this liability out there in the future."
Over the past year or so, companies making buyback offers include
"We've seen a few carriers employ buyback programs to selected VA contract holders as a means to reduce exposure to 'in the money' contracts," said Edelsberg. These programs essentially offer customers "immediate liquidity at an enhanced level." In early 2013,
Axa is buying out the death benefit, but the policyholder isn't required to surrender the contract, Stolz said. For example, an Axa contract might have a
Buybacks could be an emerging trend. Other companies are watching to determine if it makes sense for them, Stolz said. At a recent investor day, an executive with
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