Insurers are closely scrutinizing how variable annuities contribute to profitability, capital reserves and risk profile in the current low interest rate environment.

Insurers can push or pull three main levers when adjusting variable annuity risk exposure: fees, withdrawal percentages and step-ups. Over the past year, carriers have increasingly created a sliding scale for these three elements, often tied to an external measure like interest rates or volatility metrics, adding more variability to variable annuities. In addition to ongoing tweaking of the insurance components of living benefits, more developments like this at the underlying fund level are expected throughout the year. Overall, variable annuity sales look likely to have ended lower in 2012 after three years of growth. Through the third quarter of 2012, total new sales of $109.4 billion were down 6.3% from the same period in the previous year. With third-quarter year-to-date sales at 71.1% of the previous full year, it seems likely that 2012 finished with sales of about $145 billion - down about 6% from the 2011 total of $153.7 billion.

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