Assessing Suitability of Variable Annuity Contracts

The Situation

A number of major insurers are involved in litigation alleging that certain types of annuity contracts were not suitable investment vehicles for specific investors. Suitability has been a particular issue for tax-qualified plans such as employer-sponsored pension plans.

NERA's Role

The insurers engaged NERA to analyze issues of variable annuity designs, costs, and benefits of variable annuities; the competitiveness of the variable annuity industry; and whether variable annuity fees are, in effect, an implicit and noncompetitive payment for tax deferral. NERA experts assessed the product characteristics of variable annuities, in particular the combination of insurance-based living benefits and death benefits, and compared them to alternative investments such as mutual funds sold outside variable annuities.

The Result

NERA’s analyses showed that variable annuities represent a differentiated type of investment offering unique features that can be beneficial for investors. The analysis also showed that variable annuities impose significant costs and risks for insurers. NERA’s analyses of competition, based on widely-accepted metrics from antitrust analysis, indicated a high degree of competition in the variable annuity market. In studies based on disclosures and market analysis, NERA found no support for the theory that variable annuity fees represent implicit payments for tax deferral.