Product design is out with variable annuities, replaced by pricing and their security as a retirement vehicle, according to the author of a study on the variable annuity market.

Peter Sun

“After a period of intensely focusing on product design in the interest of winning new business, companies are instead looking at their pricing and benefit richness and returning to the original variable annuity value proposition, which holds that VAs offer a floor upon which people can build their retirement security,” said Peter Sun of Milliman Inc., a global consulting and actuarial firm, that performed a study on the variable annuity market.

Among the findings is that hedging variable annuity guarantees proved highly effective between November and March, as life insurers used the approach more to secure their capital base.

“The success of hedging programs has caused companies to look more closely at their unhedged risk and to determine how to use hedging to better manage those risks,” said Ken Mungan, who heads Milliman’s financial risk management practice, in a statement.

He said many companies have explored and implemented refinement and expansion to their financial risk management programs based on the success of the hedges in place and also based on companies’ experience in the last year with their unhedged business.

Realizing market dynamics, variable annuity providers have also disengaged from the product “arms race” that predominated until the last quarter of last year, giving way to fees and benefit richness, Milliman reported.

Sun said 29 of the 33 companies that modified their variable annuity products through May 16 planned a fee increase and 19 of them planned to scale back product designs.