As sales of variable annuities increase, many advisors are concerned that companies will not be able to hedge the products. According to “Surge in VA sales leads to capacity questions” by Darla Mercado of Investment News, advisors worry that companies won’t be able to keep up with the sales increase and are looking deeper into the variable annuities they sell. LIMRA says that $140.5 billion of variable annuities were sold last year, an increase of 10% from the year before. Companies are trying to balance offering transparency to their advisors so that they can see how the risk is managed without divulging too much of their strategy. It can be tough to find out exactly what insurers are doing to manage their risk, but companies like Prudential and MetLife are working with advisors and wholesalers to satisfy the issue of transparency in their variable annuities.
The president of Silverman Financial, Inc. actually flew to Prudential to uncover some answers for himself. After taking the contracts apart to study them and putting everything back together, he determined that the company had nothing to hide from advisors. Insurance companies do provide literature to advisors communicating their risk strategy; it’s just that some do it better than others. For those looking to compare equity linked CDs, annuities and other investments and see how companies manage the risk associated with them, you usually just have to ask for the information.
MetLife started an open communication with advisors during the financial crisis, and although they stopped quarterly conference calls, they still offer information on their hedging and revenue sources through literature. Jackson National offers advisors a question and answer paper that deals with hedging, interest rate swaps, and more. Prudential not only offers continuing education on hedging, but they publish a white paper dealing with many different aspects of annuities. Some companies offer up more information than others, but since the previous three companies account for 40% of the sales of variable annuities, you can see that it is possible to get information to advisors who then pass it on to clients. It is still important that insurance companies sell more than just variable annuities because you never want to put all of your eggs in one basket.