Back in 2011-2012, we first started seeing volatility-controlled indexes on FIA products. Carriers smartly started adding these to the strategy mix on FIAs because they had more attractive crediting rates (higher participation rates, lower spreads and better caps) than traditional strategies. The options that support these strategies were far cheaper for the insurance company to purchase than non-volatility-controlled options. These options are cheaper because the volatility index only allocates some of the client’s money into the actual index component. The other portion goes into a T-bill account with low interest.
A nice example might be that carrier A had an annual point to point cap of 2.50% on the S&P 500, and carrier B might have had a 6% cap on an annual point to point on a volatility index. Naturally, the 6% cap looks better. During this time period, when we learned about the “new normal” from Ben Bernanke, these volatility-controlled indices truly were the smart way to go inside an FIA. Today, however, interest rates are rising – and it is worth taking a look at non-volatility-controlled indices as well.
Here is a great example of the power of using a non-volatility controlled, traditional index in today’s rate environment … Let’s say we are using an S&P 500 annual point to point strategy with no cap, no spread and a 55% participation rate. Sure, it doesn’t sound as enticing as a 100% or 140% participation rate – but let’s check some stats.
If we look back at the actual S&P 500 over the last ten years, on its own, it returned 5.14% from 2007 – 2017. During that same time period, the 55% participation rate on an annual point to point strategy would have netted 5.29%! How about the best ten-year history, when the S&P returned 9.19%? With the 55% participation rate, and no risk of loss, we still net a highly respectable 8.68%.
We can contrast that with a popular volatility-controlled index, with no cap, no spread and a 100% participation rate. Even with almost doubling the “perceived” participation rate, the annualized hypothetical return here is 5.31%. Just a smidge better than the real, historical return of 5.29% that the S&P actuallyreturned over the last ten years with a 55%. Which would you choose, with full information?
Certainly, we sell a ton of FIAs with volatility-controlled strategies. These are still really viable and can net really great results! However, many clients like to see how an index actually fared over a ten year plus historical period. Most volatility indexes were created within the last five years, so for most illustrative quotes, we can only hypothetically say what the index could havedone.
Many times, for me, the simple approach often works best: show them a good rate on a household index that has actual history – and you can take away much of the “complexity” of the FIA sale.