LIMRA 2017 Retirement Industry Conference Session 1.4 – Product Development: Navigating the Fiduciary Fog Timothy C. Pfeifer, FSA, MAAA Pfeifer Advisory LLC April 26, 2017

The New Environment (Regardless of Fiduciary Outcome) Slower pace of product development Lower and/or flatter sales compensation patterns Significant consideration of whether non-qualified and qualified sales should be designed differently Stakes have risen as to the importance of high value ancillary benefits Increased sophistication of sales tools which analytically support value of insured retirement products

Variable Annuity Design – the most seriously impacted to date Move to Fee-Based VAs Key Areas Administration (Life Insurers) Advisory Fee (Tiered around 100 bps) Source of Fees (Try to avoid pulling fees from VA; dedicated account) M+E charge around 30 bps with 5 to 10 bps Admin Fee No Surrender Charge Average # of subaccounts is 75 While richness of GLWBs is declining, role after Fiduciary Rule growing Opportunities to enhance legacy benefits Structured VAs w/o GLBs may shine in this environment

The VA Landscape After Fiduciary Rule Will lead to more insurers in Structured VA space Search for structures that provide favorable tax treatment (i.e., capital gains treatment) Some mild reduction in VA suppliers Will not lead to new writers into the VA space Composition of VA sales will move to 70% non-qualified

Fixed Indexed Annuities Unlike VAs, FIAs have enjoyed a general surge in sales over the past five to ten years FIA writers will continue to battle for PTE 84-24 treatment of FIAs A handful of life insurers have designed fee-only FIAs, but sales to date have been slow Short-term, FIA sales will hit bumps regardless of DOL outcome, but not as severely as VAs

Fixed Indexed Annuities Design Directions Surrender charges still needed, unlike VAs, in order to enable life insurers to invest long Fixed account still included, and modest number of indexed accounts Ancillary benefits, specifically GLWBs and enhanced death benefits, help distinguish the FIA High minimum premium and market value adjustment common features to juice products

Declared Rate Fixed Annuities (DRFAs) Heightened level of design activity — Why? Avoidance of many of the challenges faced by VA/FIA regarding BICE Most products are MYGAs, 3, 5, 7, and 10-year MYGAs with Market Value Adjustments and coterminous surrender charges Front-end heaped commissions still payable Most important, many more DRFAs being designed with GLWBs, GMABs, and other ancillary benefits More FIA writers pursuing DRFAs

Other Product Implications Deferred Income Annuities and SPIAs will see boost in sales, both qualified and non-qualified, particularly if interest rates rise. Rising interest in Single Premium Life Insurance products, sold with accelerated underwriting and higher commissions—such products are targeted to customers who want a legacy benefit, not an income benefit. Contingent Deferred Annuities—outlook unclear, a product oriented to planner/RIA market, so future could be bright.

Timothy C. Pfeifer, FSA, MAAA Thank You Timothy C. Pfeifer, FSA, MAAA Pfeifer Advisory LLC www.pfeiferadvisory.com