Could Variable Annuities be too cheap?

[saluki9]

Intersting article from professor Moshe Milevsky about the currect state of variable annuities sold with living benefits.

I have always though that the these companies might be selling these living benefits much too cheaply considering what it would cost to do the same thing using exchange traded options. I feel better now that somebody with much more credibility than I agrees with me

http://www.researchmag.com/cms/research/Templates/website/PrinterFriendly.aspx?{B19066B3-34BD-46E0-A897-C5B2976B3A15}

 

[brewer12345]

They have sold VA options too cheap for years, depending on sub-optimal exercise by consumers to make up the difference. The smarter companies have incorporated product features that reduce the value of the option or go out and hedge. But there will be pain in the next downturn.

 

[FinanceDude]

I read that too. Milevsky has a lot of credibility, having "called out" the VA folks about their heavy M&E a few years back.

However, I would like to point out that:

1)I don't "feel sorry" for the VA providers, they have enough money to pay for good actuaries.

2)Since they still are collecting on average 1.00-1.25 a year in M&E, their risk is covered more than is suggested.

3)Most people never annuitize or use the living benefits anyways, and the longer that statistic holds, the bigger the "risk pool" of money the insurer has to pay claims............they are already starting to increase living rider benefit charges slowly the past 3 years..........they're no dummies..............

 

[FinanceDude]

Funny how no one other than us finance types are commenting on this..............maybe we need a thread on triangular currency arbitrage or discuss Elliot Wave theory to get them jumping..............

 

[saluki9]

...or discuss Elliot Wave theory to get them jumping..............

SWEET!

 

[haha]

Funny how no one other than us finance types are commenting on this..............maybe we need a thread on triangular currency arbitrage or discuss Elliot Wave theory to get them jumping..............

You flatter yourself. You are a salesman.

Ha

 

[FinanceDude]

You flatter yourself. You are a salesman.

Ha

Why are we always fighting??

 

[saluki9]

Why are we always fighting??

Because there just isn't enough love here

 

[Alex]

You flatter yourself. You are a salesman.

Ha

you've got that backwards. You've actually flattered him by calling him a salesman. Nothing happens in this world until a sale is made, nothing. In fact, salespeople are the life blood of the entire world economy! I am proud to be a professional salesperson.

 

[haha]

Why are we always fighting??

The exact reason that I sniped at you was your snide comment:

Funny how no one other than us finance types are commenting on this..............maybe we need a thread on triangular currency arbitrage or discuss Elliot Wave theory to get them jumping..............

Who are the "them"? Who is the "us"?

I'm sure you are a skilled actuary, MPT optimizer, et. - but really how much time do you have for these true loves when the sexy tarts of commissions and fees are so willingly available?

Ha

 

[bongo2]

There is an interesting subtext in this report that I had never considered. If an annuity is priced too high, then it is a bad investment. Surprisingly, if it is priced cheaply, then the insurance company solvency is threatened, and it may still be a bad investment. That's a tough one.

The paper mentions guaranteed minimum withdrawal benefits costing only 30-50 basis points. Where can I buy a policy like that? Everything that I've seen has fees much much higher. Vanguard, which can generally be counted on for low fees, charges 32 bps for their annual step up death benefit.

 

[FinanceDude]

The exact reason that I sniped at you was your snide comment:

Who are the "them"? Who is the "us"?

I'm sure you are a skilled actuary, MPT optimizer, et. - but really how much time do you have for these true loves when the sexy tarts of commissions and fees are so willingly available?

Well............I don't run a commission business. I was being facetious about the fact that noone had a comment on the VA critic article that saluki posted. This guy is brilliant, and makes a great case in the article how he doesn't believe that insurers are adequately charging for a benefit, versus overcharging for a lesser benefit. He is not a friend to the VA industry..............

I appreciate your input on here, as I do with many others. To answer the larger question, I am a student of finance, not just as an advisor. I find intriguing the way markets work, how hedging and arbitrage are done, etc. This has little to do with my advisor business, and a lot to do with personal interest.............

 

[brewer12345]

I can tell you from my personal experience: most of the largest players in the VA business do not underwrite the insurance risks they take on, they do not charge enough to cover the cost of the hedges, and they do (at best) partial hedging of these guarantees. When the next downturn happens, there will be more Allmericas.

In the bad old days of early 2003, a very senior executive of a large European life insurer told me that he had a pretty good idea which competitors would be insolvent at each level of the European market indexes.

PS If I am ever bored with life after retring, one of the things I will do is track down Prof. Milevsky and/or his proteges for a chat or just to sit in on a few lectures.

 

[saluki9]

The paper mentions guaranteed minimum withdrawal benefits costing only 30-50 basis points. Where can I buy a policy like that? Everything that I've seen has fees much much higher. Vanguard, which can generally be counted on for low fees, charges 32 bps for their annual step up death benefit.

Just found an ING product sheet on the web. Minimum 7% return with ratchet costs 50bps. If I didn't have to pay the M&E of 140bps I would do that in a second.

Think about it, buy that option and load it up with EM and small cap. The worst you could do would be 7% compounded.

 

[brewer12345]

Think about it, buy that option and load it up with EM and small cap. The worst you could do would be 7% compounded.

Will they let you do that? I know that at least the companies I think of as better run in the VA biz don't allow such things.

 

[saluki9]

Will they let you do that? I know that at least the companies I think of as better run in the VA biz don't allow such things.

You bet. I know somebody who wholesales for them who said that is what he does with his own contract.

 

[justin]

Think about it, buy that option and load it up with EM and small cap. The worst you could do would be 7% compounded.

Wouldn't you want to concentrate a single VA as much as possible and have multiple VA contracts with a different product in each instead of mixing EM and small cap in one VA?

In other words, put 50% in an EM VA, then 50% in a small cap VA. You're guaranteed a min of 7% on EACH portfolio component, plus anything over 7% that either portfolio does.

I know almost zero about these products, but is the 7% minimum return expressed net of the M&E expenses?

 

[saluki9]

I know almost zero about these products, but is the 7% minimum return expressed net of the M&E expenses?

I don't think so, but even if not just think about it. You get all the upside from risky asset classes and at the WORST you wind up with the return on a 30 year treasury (7% - 175bps)

 

[brewer12345]

You bet. I know somebody who wholesales for them who said that is what he does with his own contract.

Spooky. Amazing how quickly people who should know better forget the lessons of the last downturn.

 

[Nords]

PS If I am ever bored with life after retring, one of the things I will do is track down Prof. Milevsky and/or his proteges for a chat or just to sit in on a few lectures.

You'll find yourself saying "Well, I'm doing it as soon as these kids are out of the nest, and this time I really mean it!"