Friday, March 29, 2024

When A GLWB Is Open To Confusion

A deferred annuity with a guaranteed lifetime withdrawal benefit (GLWB) offers the certainty of a stable income for as long as one lives, while preserving access to the remaining cash value. A GLWB eliminates the major objection in purchasing an immediate life annuity, which is the fear that the annuity carrier can keep your money if you die. And unlike investment-based withdrawal schemes, the GLWB is guaranteed not to go down but to last a lifetime. GLWBs are a unique and valuable addition to retirement planning, but they are not all the same.

Issue 1: Most GLWBs charge a rider fee designed to cover the longevity risk the annuity carrier assumes in continuing to pay the income even if the cash value is used up. A typical charge is 0.9 percent per year. For the minority of annuity GLWBs that base withdrawals and the fee on the accumulated cash account value, the dollar charge equals the rider percentage – the fee subtracted is always equal to 0.9 percent of the accumulated cash account. However, the majority of GLWBs base withdrawals and the rider charge on the value of an income account. This can cause the actual fee to be higher than might be expected.

Let’s say with a $100,000 premium the GLWB income account value is growing at six percent compounded and the 0.9 percent rider fee is based on the income account value. Let’s also say that the actual cash accumulated value is growing at three percent compounded per year. If the rider fee was based on actual cash accumulated value the fee would be $1,043 for year five —reflecting 0.9 percent on the cash value of $115,927, and $1,210 for year 10—reflecting 0.9 percent on the cash value of $134,392. But since the fee here is based on the income account the dollar cost is higher.

At a six percent income account growth rate the income account in year five is $133,823 and in year 10 it is $179,085. Applying a 0.9 percent charge results in rider costs of $1,204 and $1,612 respectively, or the equivalent of 1.0 percent in year five and 1.2 percent in year 10. Granted, these percentages are not dramatically above the 0.9 percent stated fee, but if the consumer didn’t understand where the rider fee is based, they might be upset.

Issue 2: Most fixed deferred annuities offering guaranteed lifetime withdrawal benefits base withdrawals on the value of an income account and not on the accumulated cash value (unless the cash value is higher). Most also guarantee a percentage rate of growth for the income account for a number of years. A growing trend is to have the percentage rate based only on the original principal (often with any premium bonus added) and not on the compounded value of the account. It is simple interest versus compound interest. The reason carriers do this is because they can show a higher percentage when using simple interest than they could if they compounded values. In and of itself, simple interest is fine. Indeed, there are times, especially in the early years, when most simple interest arrangements result in higher values than one can find in other GLWBs using compounding. However, it is important that the consumer understands what they are getting.

Of course, after one year there is no difference between the two, but even after six years the growth caused by, say, a seven percent simple rate would be beaten by the gains of a six percent compound rate thereafter. There is nothing wrong in using simple interest for income account growth, or basing the GLWB rider fee on the income account and not the cash value, as long as the consumer understands what this means. 

Veteran’s Day

My Dad told me about a parade he witnessed as a boy when he lived in Florida in the ‘20s. Leading the parade were old, old men some wearing blue uniforms and some wearing gray. He said his father explained that these were some of the last Civil War veterans—native-born sons of the south in the gray, and Yankee transplants from the north in the blue. All were walking together.

When I was a very young boy I remember accompanying my mother to a large older home. My mother visited with the silver haired lady of the house and I was shuffled off to stay with the woman’s father in the den. I saw an exceedingly old man sitting in a wheelchair who beckoned me towards him. He was deeply wrinkled, had that old man smell, and he held in his lap a small fabric covered box. He opened the box and showed me a medal. He said he received it from Teddy Roosevelt himself for heroism in the Spanish-American War. He then pointed to the sword on the wall. I didn’t know who Teddy Roosevelt was nor what the Spanish-American War was, but was very impressed by the long and tarnished sword suspended on the wall behind the man. He said maybe someday he’d let me hold it. A few months later my mother and I again visited the silver haired lady and I asked her about the old man. She said he had died. I never did get to hold that sword.

My Dad was named for his Uncle Jack who served on a Navy destroyer in World War I. Great-Uncle Jack told me once about a convoy they were guarding that was attacked by U-boats with two merchant ships torpedoed and sunk. He talked about the fear of being the next to be attacked and hearing the screams of men before they slipped beneath the waves. At the time Uncle Jack was in a Veterans hospital dying of non-war related cancer, but he still remembered the screams of 40 years before.

I remember barbecues in the ‘60s where my Dad and other men would talk about the good times they’d had serving in World War II, but never the bad. They used to kid my Uncle Dick that since he only served in Korea he never was in a real war, although Uncle Dick used to awaken at night screaming about the attack that killed two men out of five in his platoon. As the day went on the men drank more beer, boasted and teased as men do with other men, and as darkness approached their conversation always grew quieter as they remembered past buddies that were no longer around.

In my nineteenth year my draft number was 119, which included me in the current wave of draftees for that year’s Vietnam War lottery, but then they ended the draft—for which I am personally grateful. I had a close friend that volunteered and went over and said he’d collect enough medals for both of us, but he didn’t make it back.

Last year we celebrated my nephew’s safe return from his third tour in Afghanistan. This time he was only blown up once, but this was the fifth time he’d avoided death or injury from a roadside bomb. During his tour my sister-in-law had her house decorated in red, white and blue and prayed for his safe return. It must have worked.

This is how I remember Veteran’s Day.

Sears

A recent article in Fortune talked about the fall of Sears. As recently as 1991 it was the nation’s #1 retailer. As I write this Sears is trying to emerge from bankruptcy. Many things went wrong.

The all-encompassing reason was a failure to see that the world had changed. The Sears model was built on an increasingly affluent middle class moving to the suburbs and desiring value at a reasonable price. However, a century of this progress faltered in the 1970’s and consumers split between those that wanted or needed the lowest price possible (and would do without pretty stores and knowledgeable clerks), and slightly more affluent consumers that wanted to move upscale. Why did Sears miss this?

Top management was insular. The executives Sears kept promoting into top positions were men that had spent their entire lives at Sears. They all had the same experiences, the same corporate view and the same solutions.

Acting on what management wanted and not what consumers wanted. Sears had been successful for so long they believed consumers should listen to them instead of listening to the consumer. If consumers were buying from other sources, it was because they were wrong and would soon recognize their error and return to Sears.

Bad accounting controls. It seems hard to believe, but Sears didn’t know what were their most profitable products, departments or even stores because they simply lumped it all together. For a long while the profits were so high, the extra costs and mistakes didn’t matter—such as building the Sears Tower. Eventually it caught up with them.

Missing the Internet. The irony in this is profound. Sears became a success by offering a home based shopping system (catalog) where consumers could easily compare multiple products and then choose to have merchandise delivered to their home or they could pick up the items in a nearby store. The problem was that the Sears catalog was becoming too expensive to print and mail. In 1993 they quit the catalog and put their customer list in a drawer.

At the same time the internet was rapidly becoming an electronic catalog. With its broad network of stores making customer pick up a breeze, and its list of long-time loyal customers, Sears was well positioned to become an internet superstore. They finally did figure this out, but it had taken too long and the belated attempt never reached sufficient mass.

The threats facing Sears killed many retailers and competitive forces have placed many others on the ropes. Indeed, competitive forces, demographics, new technology and regulations are causing stress in a number of other industries from taxis to banks to insurance. The key takeaway here is to recognize the world is always changing and the methods—and people—that worked in the past may not work well today.

There are things one can do. Everyone can figure out which are their most profitable products, marketing methods, agents/customers and concentrate their efforts on these. Everyone can take a hard look at their expenses and see which ones can be eliminated or at least lowered. This is all low hanging fruit. The more difficult part is where to go from here. It’s unlikely those that successfully built the business have the best answer, because they have been molded by experiences that produce a backward-looking vision.

Are Annuities Diet Cola?

The ingredients list for Diet Coke® is carbonated water, caramel color, aspartame, phosphoric acid, potassium benzoate, natural flavors, citric acid, and caffeine. The ingredients list for Coke Zero® contains these same things. It seems blind taste tests find the majority of people can’t tell the difference. So why did Coke give essentially the same product two different names?

One possible reason is the word “diet” resonates with women and not men. Men consider anything called diet to be weak and do not want to associate with weakness. On the other hand “zero” has manly connotations, as in “zero tolerance.” And it worked; Coke Zero® has 20 percent more men drinking it than drank Diet Coke®. Soft drinks aren’t the only place where language gender has a huge impact.

Did the last financial article you read talk about knitting together a stock portfolio that you then tended and watched grow? Probably not, it is more likely to have talked about building a portfolio to beat the market so that you could make a killing. The reason for the language is that investing was largely a man’s domain for many years and the imagery and metaphors came from activities in that male world such as construction (building), competition (beat) and war (killing). So when a financial pundit urges caution he will tell readers to “keep your powder dry” (battle) because in tough times…as no financial pundit ever said…Cash is Queen!

A study* looked at the language used on financial websites and financial articles and found it overwhelmingly to be masculine. Two-thirds of the investing metaphors referred to war, competitive sports or extreme physical activity, all of which test as masculine. However, when neutral words are used in investment studies women have the same risk tolerance as men, yet fewer women invest in equities. The researchers wonder whether frequent usage of overly masculine imagery is keeping more women from investing.

Are Annuities Diet Cola?
Let’s look at the imagery associated with a fixed annuity. A fixed annuity will protect you from the harm of market downturns (nurture), grow (passive), and provide a lifetime income that you can count on (dependable) for a healthy retirement (wellbeing). A glance at a half dozen fixed annuity customer brochures shows consistent talk about peace of mind, providing for children/heirs, cannot be taken away, protect your savings, steady growth and predictable. The imagery generated by these words is perceived to be feminine. Feminine metaphors refer to health, caring, protection, understanding and are often passive. This imagery may be why multiple studies find women are more attracted to the concept of annuities than men.

This is not to suggest that fixed annuity companies start writing brochure prose suggesting that “our fixed annuity gives you the weapons to kill and gut any stock market bear,” but it might be a good idea to attempt to also create materials with more gender neutral language. Imagery from nature is gender neutral—“the financial tides move your annuity forward at all times”; “a steady stream of retirement income”; “removes the chill from a stock market winter” and so on.

Language creates perceptions and people respond to those perceptions. The investment world might gain more women investors if after the next market dip the pundits said the market bounced back (neutral) instead of fought its way back (masculine). The fixed annuity world might gain if it mentioned that the annuity gave your financial ship safe harbor during storms and still mentioned that your money was protected.

Reference:
*Prast, H., Sanders, J. & Leonhard, O. (2018). Can Words Breed or Kill Investment? Metaphors, Imagery, Affect and Investor Behaviour. (DP; Vol. 2018-014). CentER, Center for Economic Research.

Data Science And Accelerated Underwriting

The phone rings. “Hello, John Smith here.”

“Hello, Mr. Smith, this is the insurance company. We regret to inform you that your application for life insurance has been declined.”

“But why? My physician says I’m in perfect health, my body fat percentage is 18 percent, I work out every day, both of my parents lived to be 108, I work as a librarian, and my hobby is knitting. How can you possibly decline me?”

“Well, Mr. Smith, our data mining discovered you keep photos of orchids on your smartphone and our algorithm says orchid viewers have a higher mortality rate. Sorry. Have a nice day.”

Data science is present in pretty much every industry and, as you can see on UnderstandingData, it’s usually used to help businesses adapt and grow their business, using data to their advantage. It can also be extremely useful for anyone wanting to get their business out of a slump because they can use the data gathered to make positive changes that will bring them more customers. But this isn’t the only way it’s being used.

Lest anyone think the previous exchange is fanciful or seems a bit paranoid, it is already happening. It is known as using accelerated underwriting using external data and over two dozen U.S. insurers are currently using it. What data is being used to decide your insurance fate? The underwriting decision is not only based on your health, but on the products you buy, which selfies appear on your smartphone, the people you have lunch with and even the magazines you read. A recent article in Best’s Review predicts every insurer will be doing this type of accelerated underwriting within a couple of years.1

The credit industry has been using these external data algorithms for quite some time. It’s the reason you receive fraud alert messages. However, it doesn’t always work properly. After having a purchase blocked by one of my credit card issuers due to possible fraudulent activity, I had to spend time on the phone explaining that just because a person from St. Louis was now buying gas in Des Moines didn’t mean the card was stolen.

Another problem with an over-reliance on algorithms is it can override the human factor. In recent years I have had to jump through numerous hoops to open bank accounts because the credit bureaus all have my post office box sometimes listed as my residential address, and this flags my account as suspicious and an automatic turndown from their computer model. I can usually get this corrected by getting in touch with a real person that eventually passes me along to their supervisor’s supervisor, whom apparently is the only one with the power to override the software.

One side effect of this machine data gathering for insurers will be less of a need for underwriters. After all, if your computers can do all of the underwriting by mining data from a smartphone, you don’t need a human underwriter to make the call.

Both regulators and academics say that safeguards are necessary. First and foremost is the insurer must still be responsible for the underwriting decision and they must designate actual humans that can override the algorithm’s decision. A consumer must be able to say they don’t want to share certain personal data and the insurer cannot decline them solely for this. In addition, if a consumer opts out of participating in this type of underwriting the insurer’s pricing must not be punitive or extreme. And, of course, the data must be protected from theft.2

Should this type of underwriting be allowed? The regulators could stop it, but even the New York insurance department approved the use of accelerated underwriting using external data. Consumers could stop it, but many consumers already give complete access of their personal data to almost anyone that asks for it. A consumer could opt out, but then they would likely pay a far higher premium.

The industry sees this as a win because fraud will be reduced as well as claims in general, insurer payrolls can be cut, and many consumers will pay less for insurance. Whether it is a win for consumers is for you to determine.

Footnotes:

  1. J. Roberts. A revolution in underwriting. Best’s Review. May 2019. pages 44-48.
  2. H. Albrecher et al. 2018. Insurance: Models, Digitalization, and Data Science. SFI Research Paper 19-26.

Deconstructing Surveys

As one can tell from the deluge of data, surveys are easy to do. In the financial world it seems not a week goes by without the release of some survey results. Most of these contribute nothing unexpected, because they simply parrot the questions of other surveys—which is not always bad—but sometimes the results may not be what they seem.

Representativeness refers to how well the survey sample represents the larger audience. For example, a survey stating “98 percent of Americans say the St. Louis Cardinals are the best baseball team ever” may not represent America if the survey sample was taken in a two mile circle around Busch Stadium. A good sample can be difficult to obtain in financial surveys for several reasons. One is that surveys usually rely on self-reporting and people tend to embellish their income and assets. Another problem is people reporting what they think they should report or intentionally misstating their answers. All of these issues are why multiple surveys covering similar ground can be a good thing—if different groups provide similar answers the results are more likely to be accurate.

Intentionally biased questions and responses are more often found in non-financial areas. These are the ones where the headline is “People surveyed agree that…” and the only answer choices were: Completely agree, agree, and partially agree. More often are cases of poorly defined questions that can be interpreted in different ways. For example, the question might ask whether a person feels there will be enough income in retirement to cover their needs. The problem is that one might respond thinking of needs being food and shelter and another may feel they need tropical vacations and five star dining. Although the survey answer may be helpful from a psychological perspective, it isn’t very good if you’re trying to pin down a dollar answer for a group.

Even when you have representative, well-written surveys another issue is understanding what the results really mean. Say that a survey finds that 30 percent of people say they feel they won’t have enough money to cover food and shelter in retirement. Let’s say the statement is correct and the consensus is that this is an unacceptably high percentage. Before solutions can be proposed we need to understand the why behind the number and this requires more questions. If further questioning reveals those surveyed feel this way because they don’t know how to save, then financial education might be the solution. If the answer is they won’t have enough money because every time they get a few dollars in their 401(k) plan they withdraw and spend it, then all of the “nudging” ideas—where people have to opt out to avoid contributions—will prove useless. For this group mandatory, untouchable retirement accounts may be the only answer. All too often survey results are used as proof of a problem or solution that the survey never proved.

There are certain red flags to look out for. The confidence interval should be at least 95 percent and the margin of error around three percent—this means the sample reflects the population and the actual result will be plus or minus three percent from the percentage given. Another is the sample itself; a sample consisting of millennials will generally produce different results than one of retirees; the sample group should mirror the population you’re looking at. Open internet surveys—the kind where anyone can answer—generally attract those that feel strongly and this tends to distort the results. However, targeted internet surveys sent to a known population are okay.

Better data is obtained through observation—watching what people really do and what they say. The problem is that these studies are far more expensive than doing a survey. In the meantime, we’ll keep seeing survey results, both the good and the bad.

Yes, There Is Such A Thing As A Dumb Idea

A company I once worked for had regular meetings that were intended to generate new marketing ideas. A recurring problem was anytime a new idea was proposed one person would always pipe up with, “Let me play devil’s advocate,” and proceed to kill the idea. After hearing this for a few meetings, the next time I heard “Let me play devil’s advocate,” I stood up and said, “No. Why don’t we create a rule where you can only criticize an idea if you have a better one to propose?” The new rule was adopted, the devil’s advocate never opened their mouth again, and several good marketing ideas resulted.

Ideas are fragile things. They need to be nurtured. With luck, they will mature into plans that create actions that get results. The naysayers, trolls, and devil’s advocates never have ideas, so they try to make themselves feel better by making others look bad. By muting this negative energy it allows creativity to take hold.

However, contrary to what is said at the beginning of most “brainstorming” sessions, there are, in fact, dumb ideas. This is not justification for someone to play devil’s advocate, but a plea for one minute of critical thought by the originator of the idea before it is voiced. For instance, it should take less than sixty seconds to determine that “We can use drones to deliver insurance policies to clients and save on mailing costs” is an idea that should not be voiced at this time. Sound-bites are not ideas. As an example, saying, “Let’s increase sales 20 percent in 2020,” is not an idea, it’s an election slogan. If the originator can’t see the difference then the meeting leader needs to humanely kill the obviously bad ones by saying something like, “Good input, who is next?”

Dumb ideas are produced during brainstorming sessions. We’ve all been there and one of two things happen: The less likely outcome is attendees start shouting out ideas, hurriedly written down on the wall, and the ideas get zanier and more unworkable as the list lengthens. When it’s all over, nothing worthwhile has been produced. More often, the strongest personality in the room proposes an idea and the group tries to push that one idea forward without determining whether it is a good idea…and it often isn’t.

How do we best use meetings to create fresh ideas? First, stop holding meetings. Meetings that produce real creativity are generally ineffective for the reasons mentioned, and the larger the number of attendees the more ineffective they become. Meeting dynamics predict that a couple of people will dominate the meeting and the others won’t even bother to participate. Does this remind you of any conference calls? People that might have good ideas often don’t speak up for fear they may get criticized. The best brainstorming meeting is the one never held.

The leader needs to frame the issue so that it can be identified, and this may mean breaking it down into separate issues. “How can we increase sales?” is so broad it’s meaningless. “How can we increase sales by using social media?” is a little better. “How can we increase annuity sales to millennials by using Facebook?” is better still. The more information that is provided, the easier it is for the mind to concentrate and create. If the issue is producing a new brochure, it’ll generate more creative feedback if you ask, “Should this new brochure show yet another picture of a smiling gray-haired couple on the beach, or is there a better way to get across the idea that this annuity provides stable income on retirement?”

Present the issue to the person and not to the group. This means going around the office talking to people one-on-one or one-on-two-or-three. If the group members are in multiple locations, this means sending out individual appeals. There’s more likely to be involvement when this comes across as, “Mary, I need your help,” rather than, “Group, we need ideas.”

Meetings are not going to go away. To maximize the potential of success in using them to gain fresh ideas: Limit the number of participants, quickly shut-down the devil’s advocate and meeting’s self-chosen orator, politely acknowledge and then quickly move passed the dumb ideas, and nurture any good ideas that result.

Major Financial Panics

1819 Panic
Caused by the deflation that followed the end of the Napoleonic Wars. Wages and prices in the U.S. dropped by 50 percent. This panic was neither helped nor hindered by U.S. government action. The economy had recovered by 1823.

1837 Panic
Two events caused it. Crop failures in England caused reduced demand and the price of our major export, cotton, tumbled. The Bank of the United States had been ended by President Jackson resulting in a shortage of money in circulation. The U.S. Government then made the problem worse by demanding that land mortgages owed to the U.S. Government be paid in gold rather than paper money. The economy had barely recovered by 1845.

1874 Panic
This one was homegrown. Wall Street’s speculative investments in railroads came crashing down when it became known that profits were overstated (and some tracks and trains imaginary). One fifth of all railroad tracks were sold under bankruptcy laws. The U.S. government contributed to the panic by changing from a silver and gold standard to solely a gold standard which reduced the availability of credit. The economy recovered by 1879.

1893 Panic
The underlying cause was the U.S. government no longer agreeing to buy silver at an inflated price, which caused commodity prices to drop and many farms to fall into foreclosure. This resulted in the failure of over 600 banks and a lack of confidence in the U.S., causing foreign investors to demand payment in gold for their dollars. The U.S. government lessened the panic by borrowing to buy more gold to make available for redemption. The economy recovered by 1897. Of historical note, William Jennings Bryan ran for president in 1896 using a “cross of gold” speech that would have required the government to go back to buying silver at a highly inflated price-eventually causing hyperinflation that might have left the dollar worthless; he lost the election.

1907 Panic
Another Wall Street created panic caused by leverage and market manipulation. When the market dropped the investors couldn’t pay back the banks, banks failed, and lending stopped. The economy had mostly recovered by 1909. The U.S. government was impotent; banker John P. Morgan stopped the panic.

1930s Panic
This one started with irrational exuberance due to low margin requirements and a case of projection bias that made everyone positive the market could only go up. The 1929 Crash cratered consumer confidence bringing an end to the buying spree that was putting a car in every driveway and a fridge in every kitchen. The government made things worse by cutting spending and raising tariffs. France even had a significant role in deepening the depression by demanding the U.S. pay for everything with gold. Although the economy had recovered to a large extent by 1936, the country didn’t fully recover until the Second World War.

2008 (Almost) Panic
The groundwork for this almost panic was created by the U.S. government going overboard on deregulation. The beginning was a real estate bubble largely caused by lenders ignoring whether borrowers were qualified to borrow, because the investors buying the mortgages didn’t seem to care, because the mortgages were guaranteed by entities, but the entities didn’t have sufficient assets to back the potential loss. The panic situation arose when the U.S. government allowed Lehman Brothers to fail. This caused a crisis of confidence leading to a liquidity crunch. Panic was avoided when the government bailed out stressed entities and assured the financial community they would continue to do so if needed. Fortunately, the mortgage industry has taken steps to safeguard finances since 2008 which is why tools similar to USAA VA loan mortgage calculator have an important role to play.

The Next Panic
There may not be one for a very long time. If current financial laws and regulatory agencies are allowed to perform as intended, a true panic caused by the U.S. can be avoided. Although, just to be on the safe side it might be worth learning how to short Bitcoin and other investing techniques that act as damage control in a market crash. This is in spite of a rash of new, largely unregulated, opaque financial instruments developed in the last decade or so that may likely crash and burn if we have a deep enough stock market crash and recession. The greater threat is a global panic that drags in the U.S. due to a collapse of China’s economy; however, although there will be some rocky times ahead, China should avoid a meltdown.

Incorrect Fact Reported? Call Them On It!

Last year I saw an anti-annuity article in a newspaper, written by a lawyer, saying that some annuities had surrender charges as high as 50 percent. I wrote the editor and said that, with over thirty years in working with annuities, I had never found a surrender charge remotely that high and could they please ask the lawyer to provide the name of the annuity. I never did get an answer, but I’ve also never seen another annuity article by this lawyer appear in that newspaper.

A local columnist had a story with some advisor saying that a 90 year old client had just purchased a deferred annuity, from someone else, where she couldn’t touch a penny of the money in the annuity for ten years. I pointed out that I’d never seen a deferred annuity that would not allow any money to be withdrawn for a decade, much less when the annuity buyer was over age 90. In this instance the columnist shared the response from the advisor that admitted the client was 80, not 90, and that yes, the policy allowed for 10 percent free yearly withdrawals and could be cashed in at anytime, but there’d be a surrender charge! The columnist grasped there was a big difference between “can’t touch” and “can touch with a penalty for early withdrawals” and has never cited the advisor since (or mentioned annuities at all, for that matter).

A third one from the last few months appeared in a newspaper’s financial pages with the columnist saying the problem with annuities is they locked away your money until you are 105. I wrote and pointed out she was confused about the meaning of “annuity maturity date”—which is the longest the annuity owner can force the carrier to keep the money in the annuity, not the other way around – and told her I’d be happy to proof any of her future columns for errors. She hasn’t written about annuities since.

There are articles written by people saying they don’t like annuities and they are entitled to their opinion. However, when they distort the facts they need to be challenged. I only challenge when the item stated appears to be completely false and not simply slanting. I never rant; I politely state that I have never seen what they are claiming, thus please provide the proof. In over twenty challenges no one has ever provided proof, nor has anyone ever publicly admitted the error (one memorable response was from a columnist that said he couldn’t say he’d been wrong because then his readers would know he made mistakes). My goal is to encourage the writer to make sure anything they write about annuities is completely factual or not say anything at all—most apparently choose the latter.

The reason I call the media on these errors is because I make a living from this industry and because I’m pretty bulletproof from any retaliation. I understand why carriers don’t generally get involved in asking for corrections, since they could get singled out by a reporter with a grudge. However, an agent located where the false facts have been reported has a lot of power because they are a part of the community. The media source knows the agent can influence local opinion, and possibly ad dollars, and will be more likely to take corrective action. The local media may even offer a forum where the agent can tell the truth about annuities to provide balance.

It may not seem like it, but the number of negative articles about annuities has been declining over the years. Calling out those that write incorrect facts about annuities will help the truth be told. 

Life And Annuity Carrier Systemic Risk

Systemic risk is the concern that the actions of the one, or the actions of the many doing one thing, could cause the collapse of the whole system. An excellent example of this is what happened a decade ago to banks and shadow banks (financial entities that do some banking functions but are not commercial banks). The big problem was mortgages were turned into investment securities and treated as top investment grade, even though they were not. When this was discovered it created a sea of sellers trying to dump mortgage securities without any buyers to be found. This crisis in confidence caused a lack of liquidity that spread to other investments. The final result was over 300 banks failed from 2008 to 2010, Lehman Brothers collapsed, and only the injection of capital, government loans and government guarantees saved us from a global depression. This was an illustration of the creation and execution of a systemic risk.

By contrast, a life and annuity carrier doing its core activities of underwriting and investing premiums will not create systemic risk. Unlike a bank – where there is a constant liquidity mismatch between short-term deposits and long-term loans – annuity carriers tend to do a pretty good job of matching up bond maturities and policy obligations. Although there can be a run on the carrier if a number of policyowners try to cash in their annuities, surrender charges both act as a deterrent and a way to offset part or all of the cost of providing the liquidity. Finally, every state has a guaranty association that will create a fund to eventually cover at least $250,000 of fixed annuity or life insurance cash value ($100,000 in Nevada, New Jersey and Pennsylvania) if the carrier does fail. The failure of one or more life or annuity carriers has not and will not create systemic risk.1 This does not mean annuity carriers are unaffected by outside risks. Insurance companies are the largest single investor in corporate bonds and one of the largest investors in mortgage bonds.2 The securitized mortgage fiasco a decade ago caused the value of the mortgage bonds to drop, and panic caused the values of even good bonds to fall. This loss of value reduced the amount of assets covering the policy guarantees and generated a need for more surplus. However, the people that could contribute surplus also got whammed by the same market forces. State insurance regulators prudently reacted to this crisis by temporarily lowering surplus requirements (surplus relief) and stepped up their monitoring of carrier financials. The result was the life and annuity industry weathered the storm.

There is a “nuclear” option available to life and annuity carriers that helps ensure their survival even in dire times. Most annuity policies can contractually delay honoring cash withdrawal requests for an extended period of time, and if net capital dips below minimum levels the state can place the insurer under receivership and restrict access to customer cash values. This gives the carrier time to recover or, more often, the state time to find other carriers that will buy the existing policies.

During the last financial crisis only three annuity carriers went into receivership. One, Golden State Mutual, had been losing money for years and was failing anyway. Standard Life of Indiana and Shenandoah Life had preexisting surplus issues that were amplified by the lack of available investor money caused by the crisis fears. In all cases, the existing annuities were purchased by a new healthy carrier, no annuity customer lost money, and life went on.

References:
1. J. D. Cummin & M. Weiss. 2014 Systemic Risk & the U.S. Insurance Sector https://doi.org/10.1111/jori.12039
2. V. Acharya M. Richardson. 2014. Is the Insurance Industry Systemically Risky? https://doi.org/10.1002/9781118766798.ch9

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