Asset-based pricing is a small corner of the insurance world now, but it represents a growing trend in the manner some products are sold to non-retail customers, according to its proponents.

Changes in the manner intermediaries sell insurance-oriented investment products and improvements in technology are prompting an increase in sales based on asset-based fees rather than traditional sales charges, according to insurance company executives. The demand for asset-based pricing is coming primarily in institutional sales channels where insurance companies sell corporate-owned life insurance to corporations and variable annuities through registered investment advisors, according to insurance executives.

Asset-based pricing will gain market share in institutional distribution channels as increased competition comes to the insurance industry, according to executives. Some executives predict that the pricing options for insurance products eventually will resemble the alternatives that exist now for mutual funds, with no-load and front-end, back-end and level-load sales charges widely available. Customers ultimately will be able to choose whether they want to pay for advice and, if so, how they pay for it, executives said.

"The market is changing," said Gary Warren, vice president of Allmerica Financial of Worcester, Mass. "Things are becoming unbundled."

Warren, who is responsible for marketing and distribution of Allmerica's corporate-owned life insurance or COLI product, said the chief financial officers at companies that buy COLIs and the consultants who advise CFOs on COLI purchases are pressing for asset-based charges rather than traditional sales charges.

COLIs are insurance policies used to fund special retirement plans for top corporate executives. They allow top executives to invest more for retirement than the $10,500 limit executives now face on 401(k) plans. CFOs, often with the assistance of consultants, in most cases evaluate and select COLI plans.

CFOs and the consultants who advise them are wary of sales charges, some of which run 20 percent or more, Warren said. In some instances, CFOs would rather pay a fee that resembles a mutual fund trailer, with charges of perhaps 0.15 to 0.20 percent of assets paid over the life of the insurance, Warren said. The demand from corporate customers is forcing intermediaries who sell COLIs to drop front-end sales charges and accept trailers, Warren said.

"We're seeing a lot of pressure on the way brokers are being compensated," Warren said. "We're seeing much more of a trend toward asset-based fees."

That same pressure on front-end pricing is coming to a corner of the variable annuity industry, according to insurance executives and variable annuity distributors. While the overwhelming majority of variable annuity distribution remains through products that have a traditional sales charge, several firms are reporting growth from sales of no-load variable annuities through registered investment advisors.

The registered investment advisors include no-load, low-cost variable annuities as part of financial plans they establish for customers. The advisors then charge an advisory fee based on assets in the plan rather than receiving a sales charge for buying or selling a particular variable annuity, stock or mutual fund, executives said.

Registered representatives who leave wirehouses to establish their own advisory firms are driving demand for variable annuities sold without traditional sales charges, said Matt Gilhuly, director of registered investment advisor products for American Skandia of Shelton, Conn. When those advisors leave their broker/dealers, the advisors look for a low-cost variable annuity to replace the one they sold through their former firm, Gilhuly said.

"There is pent up demand for this product type," Gilhuly said.

There is no market data that tracks sales of no-load variable annuities sold through advisors. But, some industry executives estimated that sales of these products through advisors represent less than five percent of annual variable annuity sales.

Charles Schwab & Co. of San Francisco is having a similar experience as American Skandia with registered representatives who leave broker/dealers looking for low-cost annuities, said Barry Streit, vice president of annuities and life insurance for Schwab. Registered investment advisors have helped produce increases in assets for Schwab's no-load annuity from $491 million as of Dec. 31, 1998 to nearly $1 billion in March of this year.

The changes taking place in sales charges for variable annuities are similar to changes in mutual fund pricing, Streit said.

"The VA business seems to be going along the same path as the mutual fund business 15 years ago," Streit said. "You're seeing the same type of evolution."

Several variable annuity sponsors, in fact, recently announced plans to offer A-share variable annuities, a departure in pricing for the product. (AMN 10/99)

Change in variable annuity pricing will come, but it is unlikely to arrive for the insurance industry as quickly as it did for mutual funds because of an absence of demand from retail customers, said Burton Greenwald, president of B.J. Greenwald Associates of Philadelphia, a financial services consulting firm. Variable annuity companies usually pay brokers' sales charges up front and recoup the cost of those charges through annual expenses passed along in the variable annuities, an arrangement similar to class B shares in mutual funds.

Because of the structure, the existence of the traditional variable annuity sales charge essentially is invisible to purchasers, Greenwald said.

"There is no awareness in most cases" of the sales charge, Greenwald said.

There is little investor demand to remove the charge because it is not prominent, Greenwald said. Without demand from retail customers, changes in sales charges for insurance products are more likely to come as a result of pressure from intermediaries who are moving from transaction-based to asset-based fees, Greenwald said.

"The curve of acceptance is going to be a lot slower than it was on the mutual fund side," Greenwald said.

Intermediary demand for no-load variable annuities may increase now in part because changes in technology have made it easier to include low-cost variable annuities in financial plans, said Michael Lane, president of Advisor Resources of Louisville, Ky., a unit of the Aegon Group of San Francisco. The Pershing Division of Donaldson Lufkin Jenrette Securities of Jersey City, N.J. has made changes to its clearing system that readily enables advisors to include no-load variable annuities as part of the managed accounts that advisors provide for customers. Limitations in technology previously made it difficult to administer variable annuities in those accounts, Lane and other executives said. Improvements will make it easier for more registered investment advisors to use no-load variable annuities as part of financial plans, executives said.

"A lot of this rests on technology solutions effectively doing what was done for mutual funds in the 1980s," said American Skandia's Gilhuly.

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