Why is it that a LIMRA study shows that shoppers who go looking for life insurance online tend not to buy it?
One answer has to do with guaranteed living benefits -- the features were a big part of fixed indexed annuity sales in the first quarter...
By Linda Koco
In the first quarter, indexed annuities topped the charts in sales growth among all annuity lines as compared to first quarter 2011.
The sales volume still did not surpass that of more traditional annuity products, such as variable annuities and fixed deferred annuities, but in terms of sales growth, the products were definitely the leader of the pack, and by a substantial margin.
What’s behind it? The answer is in the sales results themselves.
The sales results
First quarter indexed annuity sales reached $8.1 billion -- up 14 percent compared to first quarter 2011, according to estimates from LIMRA. AnnuitySpecs.com is reporting similar results — first quarter sales of $8 billion in 2012, up by more than 13 percent from first quarter last year.
The differences in results reported by the two firms are not significant, given that the firms have slightly different lists of participating companies as well as different research parameters and definitions.
But the double-digit growth that both firms identified is significant, especially when viewed against the performance of other annuity product lines. For example, total variable annuity sales fell by 7 percent in first quarter 2012 compared to first quarter last year, according to LIMRA. That was on first quarter 2012 sales of $36.8 billion.
In addition, total fixed annuity sales fell by 10 percent on first quarter sales of $18 billion, LIMRA says. That was despite the two-digit jump in sales of indexed annuities, which are included in the fixed total.
The total fixed annuity plunge was a result of sales declines in most fixed annuity categories that LIMRA tracks other than indexed annuities. These other categories include fixed rate deferred annuities (down 28 percent on sales of $7.1 billion compared to first quarter last year), book value annuities (down 32 percent on sales of $5.8 billion), and fixed deferred annuities (down 11 percent on sales of $15.2 billion). Fixed immediate annuities were the only products to flatline, coming in at 0 percent gain on sales of $1.8 billion.
AnnuitySpecs points out that first quarter indexed annuity sales did lag the previous quarter by 3 percent. But Sheryl J. Moore sees the product’s 13 percent increase over first quarter sales last year as the more compelling figure. Moore is president and CEO of Moore Market Intelligence, which owns AnnuitySpecs.com.
“No other lifetime income product is as strategically positioned to thrive in this low-interest rate environment. In fact, the indexed annuity is well-suited for any market environment,” Moore said in releasing her firm’s first quarter numbers.
LIMRA portrays indexed annuity sales as “the driving force in the fixed market” for the first quarter, and points out that for the third consecutive quarter, the products “outperformed traditional fixed annuities, capturing 45 percent of the fixed annuity market.”
Why did it happen?
The question is what accounts for this surprising turn of sales results? How did indexed annuities become a bright light in an otherwise dismal quarter? One answer has to do with guaranteed living benefits. The features were a big part of fixed indexed annuity sales in the first quarter.
For instance, according to AnnuitySpecs, nearly 56 percent of total indexed annuity sales in first quarter 2012 had the guaranteed lifetime withdrawal benefit (a type of guaranteed living benefit) rider elected. LIMRA’s survey found an even higher election rate. It says 66 percent of indexed annuity buyers elected a guaranteed lifetime withdrawal benefit rider when available at time of sale.
But as popular as they are, the guaranteed withdrawal riders and other guaranteed living benefit riders are likely not the only reason for indexed annuities’ charm in first quarter 2011.
After all, similar riders certainly did not stem the 7 percent sales decline experienced by the variable annuity industry in the first quarter. Fully 90 percent of variable annuity sales had a guaranteed living benefit feature elected, said Joseph Montminy, assistant vice president-annuity research at LIMRA in announcing first quarter results. That election rate matched the high reached in fourth quarter 2011, he said. But sales fell anyhow.
Incidentally, the rebounding stock market also did not stem the variable annuity sales decline in first quarter, even though upward bound markets typically do spur variable sales. Indeed, LIMRA reports that variable annuity sales going into separate accounts dropped by 9 percent in first quarter 2012 (to $29.1 billion) compared to first quarter last year.
Other forces were clearly at work. These were safe money forces. Consider:
Add those factors to the double-digit increase in indexed annuity sales noted above, and the first quarter annuity sales picture begins to sharpen.
Buyers appear to have been voting with their dollars for the annuity products that offer safety of principal but with a hint of upside potential.
It is true that more traditional fixed annuities and variable annuities produced substantially higher volume than indexed annuities in the first quarter. But those products also lost sales momentum compared to a year ago while indexed annuities chugged on ahead.
The commission question
Could commissions have spurred the indexed sales increase? It’s unlikely. The average indexed annuity commission in first quarter was 6.5 percent, according to AnnuitySpecs. That is well below the 10 percent to 12 percent which critics believe all indexed annuities products pay, and also below the highest average commission ever recorded by AnnuitySpecs (which was 8.4 percent in third quarter 2005).
The first quarter average commission was up slightly from the 6.3 percent average in the previous quarter, AnnuitySpecs notes. But the first quarter average was still solidly in the 6 percent range that began to be the norm in second quarter 2009.
Actually, carrier disincentives, such as scaling back of living benefit riders and repricing of certain features, probably had a larger impact on reining in sales of competing products. That would be especially the case among variable annuity carriers seeking to manage risk associated with product guarantees. Another disincentive to sales of competing products is the low interest rates offered by traditional fixed annuities, rates born of the prolonged low interest rate environment.
Those disincentives could have influenced some advisors to use indexed annuities instead. But since indexed annuities are also subject some of those trends and pressure, this may not have made a decisive impact.
The presence or absence of great leadership, service, distribution and marketing could be influential factors. But since the annuity industry is for the most part evenly spread in those departments, these factors probably don’t explain why indexed annuities grew sales while others did not.
A more logical explanation has to do with the indexed annuity product design. The products may be complex, but their downside guarantees and market-linked interest crediting speak directly to buyer desire for safety of principal plus hope for gain.
Linda Koco, MBA, is a contributing editor to AnnuityNews, specializing in life insurance, annuities and income planning. Linda can be reached at email@example.com.
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