There were a number of recent articles indicating that insurance companies are exiting the GMWB business. The latest in the past week were MSN Canada’s “Insurers back away from “income for life” products”, Benefit Canada’s “Say goodbye to GMWB as you knew it” and WSJ’s “Hartford says goodbye to annuities”. According to these articles (and references therein) Desjardin, Standard Life, Industrial Alliance, Canada Life, Transamerica, ManuLife have suspended sale of new policies and or increased premiums and/or reduced percentage guaranteed payouts on new/existing policies.
In MSN Money (Canada) EverydayMoney’s “Insurers back away from “income for life” products” Gordon Powers writes that “The insurance industry has struggled to keep up with the long haul commitments associated with these products, as interest rates have remained at historic lows and stock markets have simply proven too volatile. At the same time, regulators have increased the amount of capital insurers must keep on their books, further limiting their ability to take on risk and driving down their stock prices as a result.”
So as suspected the GMWBs turned out to be toxic not just for investors/retirees who bought them but also for the insurance companies which sold them. The product all-in cost had at least two main components: very high cost mutual (segregated) funds 2-3%/year fees plus about 1-1.5% annual insurance premium for the age dependent guaranteed of minimum lifetime payout of about 5% of contributed amount (ratcheted up if remaining assets after withdrawals and costs, increased relative to original contribution).
Given the very high all-in cost structure of most GMWBs, it meant that the investors’ hoped upside, was just that, the triumph of hope over reality. As it turned out, due to a combination of the stock market crash and low-interest environment, the insurance premiums were insufficient to meet regulatory reserve requirements (and probably lifetime income promises).
Who will miss these products? Probably only those who were collecting very high sales commissions. GMWBs are a perfect example of complex/opaque/expensive financial industry products designed to be sold not bought. As with food, the more “processed or productized” they are, the lower their nutritional value!
You can read my recent blogs (which also refer to earlier blogs) on GMWBs at GMWB III – Q & A: Are GMWBs more desirable investments in “post-2008” context of low interest rates? and Vanguard GLWB vs. other decumulation strategies . Based on the products I have seen, Vanguard’s GMWB product was the only one I found worth considering, but this is only available in the U.S..