As if falling variable annuity sales volumes alone aren’t enough, insurance companies may end up losing money on new business, according to a new report by Moody’s Investors Service.

"Moody’s believes that it is highly likely that most VAs with underlying equity-based fund investments that were marketed in the last few years will never meet original profitability expectations of their insurance company sponsors," reads the study.

Ghost of Bubbles Past: Equity Markets Haunt Variable Annuities describes scenarios in which carriers put themselves in the red by offering higher commissions to brokers, more incentives to customers, or charging too little for attractive riders. The depression of account values reduces income to the carrier, at the same time they anticipate an increase of revenue in their internal pricing assumptions.

Despite the dire news, the report does offer one suggestion: that the increase in asset-based commission has the potential to enhance the credit profile of the VA business. When compensating the distributor through an up-front commission, the carrier assumes all the risk; asset-based compensation helps ameliorate that risk but is dependent on persistency for ultimate profitability.

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