An Interview with Wharton Professor David Babbel - Part One

This is the first part of an interview with Wharton Professor David Babbel.

Professor Babbel led the fixed indexed annuity study that is discussed in several previous posts on Annuity Digest.  
These posts can be accessed by clicking here.

Part 2 of this interview will be posted later this week.  Annuity Digest would like to thank Professor Babbel for spending
time with us for the interview.

Annuity Digest: If you had a friend who knew very little about annuities or investing, how would you communicate the
gist of this study and its results to that person?  In other words, the study was presumably developed for an industry
and academic audience.  What would you want or expect a consumer audience to take from the study?  Is there a sort
of distilled message that could be drawn from the study for a consumer audience?

Professor Babbel: The genesis of the study is as follows.  There has been a lot of misinformation in the popular
press regarding FIAs. The vast majority of newspaper and magazine accounts vilify FIAs based on the results of
alleged academic studies. The in-depth studies we conducted took over two years to complete and involved six Ph.D.
financial economists and a pair of very well known senior actuaries.  Our studies show that the products of at least
some of the companies in this field are viable – indeed, rather attractive products. Our findings regarding actual
products show that since their inception in 1995, they have performed quite well – in fact, some have performed better
than many alternative investment classes (corporate and government bonds, equity funds, money markets) in any

Annuity Digest: What was the catalyst for the study?  What drove your curiosity?  Was it the seeming disconnect
between conventional financial media coverage of FIAs and what you thought might exist from a performance

Professor Babbel: FIAs hit the market like a storm and soon become one of the most popular insurance products. I
had done several studies on deferred annuities prior to the arrival of FIAs in 1995, and had a natural curiosity to
study the structure, behavior and performance of these new varieties.

Annuity Digest: Asset decumulation is front and center for a number of reasons—including demographics, social
security/public policy, the financial crisis, etc. What role can professionals in academia play in changing the manner in
which consumers are informed about annuity products and in overcoming some of the misperceptions and behavioral
hurdles that exist in the industry?

Professor Babbel: On the one hand, you have sales people and insurance marketing efforts to describe FIAs in a
favorable light. On the other hand you have class action attorneys who do what they can to vilify FIAs. State
regulatory bodies, appropriately, do not typically take a stand, one way or the other, except with regard to whether the
products comply with regulations and whether the sponsoring companies meet solvency requirements. The Federal
Government and FINRA have never regulated these products and currently have no expertise to comment, credibly,
about the merits or defects in these products. Academicians generally “do not have a dog in this fight” and can look at
the products dispassionately. They are not seeking to sell any products, nor expand their regulatory empires. Their
studies are peer reviewed by disinterested experts. Therefore, the studies done in academia should not be fraught
with bias one way or the other. Typically, academicians take years to study products such as these, and one can see
the literature meandering back and forth as greater understanding and more intelligent and appropriate analytical
tools are employed to study the instruments. The main problems with academic studies are that they typically take a
long time to get published, many of the best ones are not readable by a lay audience, and it typically takes an
academician with expertise to sort through the varying methodologies and findings to make sense of them.

Annuity Digest: Asset decumulation and the annuity industry typically involve products that are heavily intermediated
and sold rather than bought.  How might investment professional use the information in your study to better serve
their clients, and how might consumers use the information to better inform/prepare themselves for a very important
decision and purchase?

Professor Babbel: Our studies do not make predictions about how well FIAs will perform in the future. Rather, they
undertake a rigorous analysis of the products and the alleged defects in the products. They found in the products that
were examined in depth, they operated the way they were designed to operate and over the period of their existence,
performed well.

Annuity Digest: Has the industry—either trade groups or marketing/wholesale organizations—approached you about
the study?  If not, why do you believe this might be the case?

Professor Babbel: Yes, but I have thought it best not to write and publish a sponsored study on FIAs because of the
litigation surrounding the issue. Rather, from time to time I have presented our findings in academic conferences and
will ultimately publish something on the subject when I find time. Recently, some other academic articles have been
written that largely corroborate our studies, and with an expanded purview and alternative methodology.

Annuity Digest: Why, in your opinion, has the FIA industry not jumped on this PR and marketing opportunity?  It
seems that either trade groups or asset managers within other asset classes would, to say the least, leverage a report
like this from a marketing and PR standpoint?

Professor Babbel: I do not undertake research to help market any company’s specific products, nor do I endorse a
product of a particular company publicly. I do, however, look at a genre of products, including average features and
average pricing, and comment on the entire genre. For example, I may research whole life insurance contracts,
participating and nonparticipating, and comment on their pricing and performance, but I won’t comment publicly on a
particular company’s product.

About the Author

Name:  Tom Cochrane


Thomas Cochrane, CFA, is the founder of Annuity Digest.                  
Tom launched his first company, Cordova Advisors, in 2002.
The company was acquired by Vimo, a start-up focused on
providing consumers information on healthcare products
and services. Tom served as VP of Partnerships at Vimo for
several years.

Prior to his entrepreneurial endeavors, Tom worked as a
VP at what is now Wells Fargo Insurance Services, and he
began his career at AIG. Tom is a chartered financial analyst
(CFA) charterholder.

Tom is from Minneapolis, graduated from Boston College
and lives in San Francisco.