Insurance professionals could help avert trauma, pain and remorse by helping clients construct a Plan B should they carry debt.
By Linda Koco
The headlines are filled with stories about how the annuity business is suffering multiple economic pressures. But is this the true state of the annuity business today?
That depends on where and how deeply a person looks.
Third quarter industrywide results were downers for sure. On an overall basis, total annuity sales fell 10 percent, to $54.3 billion, from third quarter last year, according to LIMRA. On a product type basis, variable annuity sales fell 8 percent to $36.6 billion, and total fixed annuities fell 13 percent.
But at a more granular level, there were a few uppers. For instance, fixed indexed annuity sales reached $8.7 billion, the same as the previous quarter, the Windsor, Conn., researcher says.
In fact, indexed sales actually inched up by a hair — 0.04 percent -- from second quarter, says another researcher, AnnuitySpecs.com. They were also up 0.24 percent from the same quarter last year, the Pleasant Hill, Iowa, firm says.
This is not to say that all indexed annuity companies held the line; a number of major players were off significantly while some of the newer and smaller players were up. Still, compared to results from the other product lines, the industrywide indexed results are noteworthy.
In addition, the emerging market of deferred immediate annuities sold $270 million in the third quarter, up from $210 million in the second quarter and $160 million in first quarter, reports LIMRA. This is a tiny market — only six active players right now — but the point is, it’s on the move — and up.
Of course, those two points of growth—the indexed annuities and the deferred income annuities — were not enough to offset the downdrafts. Hard times have undeniably hit the industry in general.
What else is in the wind?
Annuity professionals in the field and home office might not want to hang their heads in shame, however. Something else is in the wind that should help provide an offset, or at least a less-than-gloomy a perspective on those sagging industry numbers.
That “something else” is, the industrywide downturn was expected, and a number of carriers intentionally put strategies into effect that would make it happen.
That last point may seem contrary to all rationality but it is not.
As industry professionals already know, many carriers have been voicing concern throughout the year about the deleterious impact on their businesses of the prolonged low interest rate environment and the continuing market volatility. In September, when the Federal Reserve announced its intention to keep the federal funds rate at zero to a quarter percent at least until mid-2015, that concern shifted into high gear, especially in view of the nation’s continuing uncertainty over taxation issues, new regulations, and international economic unrest.
Those combined pressures spurred a number of carriers to stop or curtail writing certain types of annuities, especially contracts with guarantees designed for higher interest/less volatile market conditions. (Morningstar reports that variable annuity carriers alone filed for 106 product changes in third quarter—well above the 40 changes recorded in third quarter last year.)
The carriers knew their cutbacks and product revisions would put the brakes on sales or at least slow them down to a sedate 40 miles an hour. But they made the changes anyhow, often explaining they could not do otherwise without hampering their ability to support profitably the business already on the books. Now, they are looking at the third quarter numbers with a collective sigh of relief, reasoning they did what had to be done.
Responding to skeptics
Skeptics have been heard to say that this bad-news-is-really-good-news story is just that, a story -- something drummed up by faltering carriers to excuse their swooning sales and cover up their poor management.
Even if that were true for one or two carriers, that interpretation is really hard to buy on an industrywide basis.
This is not a go-go economy. This is a post-recession economy with so much uncertainty and so many financial challenges, it would be irresponsible for carriers, even large carriers, not to rein things in in the face of possible over-exposure.
Despite that, and maybe because of it, the industry seems to be planning to take another run at growth, but with a pallet of annuities designed for leaner economic conditions.
In its recent report on variable annuity product changes, for example, Morningstar reports that several new products launched in third quarter with “attractive” living benefit levels. That piece of news files in the face of commonly expressed speculation that the entire living benefit scene is going ka-put.
Admittedly, some advisors might want to amend that living benefit description to say, “attractive for today’s market.” After all, most if not all of the newer features are likely to be less generous than two years ago, or even one year ago.
But the fact remains, certain carriers do want to sell in this market, right now, and they are bringing out products that, though more conservative, still have the bells and whistles that consumers want. (That includes the popular guaranteed living benefit riders, for which demand remains high. When those riders were available, they were elected 87 percent of the time, according to LIMRA’s third quarter report.)
Another signal of insipient growth is that some carriers have begun letting producers know they will accept certain types of business, but subject to certain “capacity” limits. That sounds restrictive but it’s also open-door.
The reference to capacity is reminiscent of property-casualty lingo, as when the carriers talk about limiting their capacity to write X-amount of homeowners insurance in hurricane country in order to avoid over-exposure to hurricane damage. To hear about capacity in life insurance circles suggests that life carriers are taking a similar approach to annuities in these difficult market conditions. They are saying, “We’re staying in the game, we’ll compete and we’ll write -- but only to a point.”
For example, in its recent announcement that it would not accept new 1035 exchange business for a limited period, Jackson National also said it would resume accepting the business and qualified transfers of assets on Dec. 15, “if total premium at the time is within the $1 billion in remaining capacity.”
Some carriers do this without using the capacity argument, of course. Consider MetLife. In May, the New York carrier announced it was intentionally reducing its variable annuity sales in a move to manage its annuity business compared to other writings.
Since MetLife was the industry’s No.1 variable annuity carrier, by sales, in 2011, according to LIMRA, that announcement set a few hearts to pounding. Some worried the variable annuity end times were approaching, so to speak. They completely overlooked that this was a limit on sales, not a market exit. By early November, the carrier reported that it had done both things—substantially reduced its variable annuity sales, but without stopping sales.
In general, the worriers tend to forget that individual company moves are not necessarily predictive of industry results.
Insurance companies make decisions based on many factors. These include not only economic conditions, but also types of policies offered, distribution channels and agreements, target markets, investments, business model, ratings and reputation, innovation, and strength of management. So, even though insurers A and B may decelerate or even evaporate, others often accelerate at the same time, because they have the wherewithal to do so in that period.
The end times would come if everyone jumps ship. That’s not happening now.
Dealing with it
When carriers do make changes that crimp an advisors’ ability to place business, experienced advisors are finding ways to deal with it.
Findings from a study just released by LIMRA and McKinsey & Co. are instructive here. According to the researchers, advisors have been reducing the number of insurance carriers they do business with, to the point that they now place approximately 50 percent of their insurance with their top carrier.
What’s more, advisors say they frequently switch insurance carriers, “due primarily to non-competitive products, concerns about carrier stability, or poor service,” the researchers say.
The advisors in that survey come from multiple distribution channels, including insurance companies, broker-dealers, banks and RIAs, and they sell a variety of products, not just annuities. Still, the message is pertinent to the annuity business. Advisors aren’t sitting still amidst change. If they don’t like what a carrier is doing, they are voting with their production and sometimes with their feet.
Linda Koco, MBA, is a contributing editor to AnnuityNews, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected].
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