Annuity Lapses Can Hurt Insurers, Consultant Warns.

Insurers writing fixed and variable annuities face a growing problem as most of the money for buying new annuity products comes from old annuity products, said Jeffrey Oster, president of Client Preservation & Marketing, a New York-based firm.

In 1990, about 92% of money flowing into fixed and variable annuities was new to the insurance industry. Ten years later, only 35% of money was new, he said. Oster's company works with insurers to help them conserve their annuity business; about $2 trillion is invested in fixed and variable annuities.

Variable-annuity sales growth has been spectacular in recent years, with more than $130 billion in new sales last year. But now many companies are experiencing "shock lapses" of 50% to 90% of their business when the surrender period ends, Oster said.

William Healy, Oster's partner at Client Preservation and Marketing, said 35% to 50% of an insurer's profit on annuity business comes after the surrender period and that actuaries often price the product as though it would be in force for 15 to 20 years. He said that under today's conditions, if he were an investor in an insurer whose main business was in annuities, he would short the stock. He said that most objections to actively trying to conserve annuity policyholders come from a company's chief marketing officer, and that the primary responsibility to correct the situation lies with the company's chief executive officer.

"That's a serious thing you're saying, that the book value is not real," said Eric Berg, managing director of Lehman Bros. "What questions should we ask?" Healy's reply was to ask about deferred acquisition costs.