WSJ: Advisors Concerned About Risks Insurers Have From Annuities

image Reverse mortgages often get compared to annuities, they were even called reverse mortgage annuities back in the day.  Both a HECM and an annuity are often considered safe ways for people to supplement their income during retirement, but what if the company backing the products go under? 

The fourth annual survey of Merrill Lynch advisers found that more than 70% of advisors said they were concerned about the risks insurers have taken on with guaranteed -minimum variable annuities — and nearly a third said they doubted the insurers themselves understood those risks.

The annuity frenzy started about five years ago and continued even as the market got worse last year. The most basic ones promise that investors won’t lose their original investment, while the more-generous ones promise annual increases of 7% or more in the guaranteed amount. 

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The Merrill survey suggests an increasing wariness among advisers about "the risk profile" of the insurers creating the products, according to the survey authors, Edward Spehar and Roman Leal.

  • 71% said they thought the insurers had taken on greater risk with recent versions, up from 68% the year before.
  • 32% agreed that insurers "do not adequately understand the risks that they are assuming in the variable-annuity business," up from 17%.

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What I found most interesting from the chart above is that the amount brokers who feel insurers adequately understand the risks from these products continues to shrink.  It makes me think about our own industry and the debate about whether HUD’s insurance premiums are too high.

As the markets have tumbled a lot of people I talk to have realized that the HECM product is aggressive in terms of how much it offers borrowers and makes us wonder… are the insurance premiums enough?

Brokers Fear Many Insurers Are Ignorant of Annuity Risks (Wall Street Journal)

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  • I am pleased that Admin chose to publish this article. There is a very disproportionate fascination with and curiosity about annuities in the RM industry. It is clearly unwarranted.

    Many cross-sellers among us tout the benefits of annuities. Some overwhelmed a NRMLA session on annuities and their comparability to HECM tenure payouts in November 2007. Per some of the attendees the speakers eventually began proclaiming the benefits of obtaining commissions on selling both annuities and RMs. Unfortunately at least two of those making these claims were allegedly based in California where such activities have substantial restrictions and those restrictions were not discussed even though the presentation was made in San Diego to primarily California originators. I found it an interesting serendipity that within weeks of that session, Senator McCaskill attacked the sale of annuities with RMs in her December 2007 hearing on RMs.

    The fundamental issue that needs discussion is not the benefits of more than one commission source to the originator but rather the overall net benefits to RM borrowers from utilizing RM proceeds to purchase annuities. Of course one must then stratify the annuity market by types of annuities and their features including any penalty provisions. If legitimately discussed, subjects such as 1) longevity risk, 2) annuity provider risk, 3) costs, 4) mitigating risks and their associated costs, 5) income tax liabilities and benefits, 6) fixed term payouts and reduction of benefits, 7) penalty provisions, 8.) impact on Medicaid and other government programs, and 9) net cash flow to the borrower, need to be covered in some depth.

    As part of the annuity discussion, the prohibition against requiring the purchase of other products including annuities as mandated by NHA Section 255(o) (the National Housing Act, PL 84-345) when originating HECMs should be fully analyzed. Section 255(o) was added by HERA (the Housing and Economic Recovery Act of 2008, PL 110-289) Section 2122(a)(9) and became fully enforceable on date of enactment, July 30, 2008. Many in the industry incorrectly confuse the firewall and safeguard requirements of NHA Section 255(n)(1)(B) with the prohibition against cross-selling in NHA Section 255(o). Mortgagee Letter 2008-24 only deals with the new requirements on originators as described in NHA Section 255(n) and codified as 12 USC 1715z-20(n.) NHA Section 255(n) has no impact on the prohibition against cross-selling as defined in NHA Section 255(o) and codified as 12 USC 1715z 20(o).

  • In response to the last paragraph regarding ” are the insurance premiums enough” ? I posted that concern last week when I read Peter Bells comment regarding the upcoming conference in Chicago. He stated one of the topics will be:

    ” HUD’s financial analysis of the HECM program and the impact that might have on future mortgage insurance premiums or principal limit factors ”

    This could be the final nail in the Reverse Mortgage coffin. I could not imagine selling a Reverse Mortgage with increased premiums or lower LTV’s. If they increase the MIP what will closing costs be at that point $30,000.00?

    The way it has been going lately nothing will suprise me. Unfortunately due to family commitments I can not attend but I would love to hear an update from anyone attending.

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