Variable annuities enjoyed only marginal success in most of Asia before the global financial crisis, and will only return if products are changed to meet customers’ long-term retirement savings needs, says David Fried, head of HSBC Insurance for Asia-Pacific.
HSBC was one of only two providers of variable annuities in Hong Kong (along with Manulife), but withdrew from the business in 2008. This reflected customers’ flight from tumbling equity markets and the inability of insurance companies to profitably structure the guarantees in these products.
Fried does not see this as a bad thing. First of all, outside of Japan and Korea, VA has never been a large business in Asia.
Secondly, and more importantly, he argues that the original version of these products was too focused on helping insurance companies to compete, rather than providing a useful means of helping customers to achieve security in retirement.
Very few variable annuities, for example, were structured to actually pay out an annuity; they were lump-sum products.
“VA needs to shift from being just used to accumulate assets, to also include ‘decumulating’ assets or providing income streams,” Fried says.
He notes that HSBC and other insurers are still working out ways to make such options work. Should pay-outs be done over a period of years instead of all at once? Or should pay-outs be tied to the underlying mutual funds? Or should they convert to a life-time income stream?
“The demographic reality of an aging society and the lack of sufficient savings for retirement suggests there should be a need for variable annuities that includes such options,” Fried says.
The challenge is to develop these products so that the risks of a guarantee or an income stream can be managed. Currently, few Asian markets offer sufficiently deep capital markets or hedging tools to make true VA a reality.
Similarly, customers today buy VAs because of the underlying fund, rather than because they are really thinking about retirement. The industry needs to better educate retail investors about what the structure of a true VA can mean.
What it boils down to, though, is simple: The industry needs to put the ‘annuity’ back into VA.