The Department of the Treasury and the Internal Revenue Service released new guidance that is “designed to expand the use of income annuities in 401(k) plans.”
By Linda Koco
Indexed annuities hit more than one quarterly record in third quarter. The record that’s been getting all the industry attention lately is the sales high of slightly over $10 billion. But commissions paid to indexed annuity agents also hit a record — a record low, that is.
The indexed annuity commission received by the agent averaged 5.66 percent of premium for the quarter, according to Wink’s Sales & Market Report 3rd Quarter, 2013.
That is down by 5.5 percent from second quarter’s average agent commission of 6 percent. It is also the “lowest-ever” average commission paid to the indexed annuity sales agent, the researcher said.
The average weighted commission paid to the agent in the quarter ranged from 0.03 percent to 8.69 percent of premium, the report said.
What’s behind it?
There is some history behind the decline. According to data from Wink, average agent commissions dropped into the 6 percent zone in second quarter of 2009. After that, they hovered in the 6.8 percent to 6.7 percent range for quite a while but then started declining on until third quarter 2013 when the average dropped into the 5 percent zone.
Previously, between 2003 and early 2009, agent commissions for these products were higher, ranging from 8 percent to 7 percent.
[Note: Because the quarterly numbers are averages, outlier data on the low and/or high commission side could account for an abrupt shift in average commissions. But because Wink calculates its numbers on a consistent basis, the trend-line provides a meaningful look at what has been happening over time.]
Based on the averages shown, it’s easy to see the deleterious effects of the Great Recession on commissions.
Annuity company executives have confirmed that in interviews with InsuranceNewsNet as well as in public speeches. The financial pressure on capital stemming from the Great Recession and the long period of low interest rates that followed forced many carriers to tweak back not only on crediting rates, policy features and marketing plans but also, finally, on commissions, they said.
It remains to be seen whether the record low for third quarter commissions is a signal that the whittling-back strategy is continuing for a while longer, or perhaps a sign that a bottom is in formation. Both trends could be happening simultaneously, with some carriers holding the line a bit longer while others take a pause as they prepare for a rebound later in 2014.
The upturn in interest rates will factor into this. As the chart below illustrates, rates are not yet at levels that would nudge carriers to unleash aggressive sales campaigns with enticing commissions. Today’s rates have not even reached early 2009 levels. However, some insurance executives have said the upward creep in rates over the past several months has already made life easier, so competitiveness may be the other side of the tweaking coin.
The market share factor
Wink’s third quarter report contains some other data that bears on the commission picture in the indexed annuity business.
For one thing, the market share of the various distribution channels saw some interesting changes. The bank, broker-dealer and career channels increased their indexed annuity market share at the expense of the independent agency channel, according to the Wink researchers.
Independent agents still took the biggest share of the business, though. They produced about eight out of every 10 indexed annuities sold in the quarter. But in third quarter 2012 and 2011, independent agents sold nine — not eight — of every 10 indexed annuities sold, according to Wink’s earlier reports. So the balance of power shifted a bit in the recent quarter, as competitors nipped at the heels of the independents.
In particular, banks sold their way into an 11.1 percent indexed annuity market share in third quarter. That’s up from 7.1 percent in third quarter 2012, and from 6.6 percent in third quarter 2011, according to Wink figures.
Assuming that banks pay smaller commissions to their sales agents than do other channels, the galloping bank sales may help explain at least some of the average commission decline that Wink’s radar picked up.
Sales at broker-dealers (wirehouse only) also got a small bounce. Their indexed annuity sales represented a third quarter market share of 2.5 percent. That’s not a big piece of the pie, but it is up from 1.2 percent in third quarter 2012, and it put broker-dealer production back close to where it was in third quarter 2011 (a 2.9 percent share).
Given that wirehouses are not known to be particularly fond of indexed annuities, this turn of events deserves at least a one-eyebrow salute.
The surrender charge factor
The surrender charge periods also merit attention. In third quarter, 81 percent of policies sold had a surrender charge period of 10 years or less. That’s an increase over the third quarters of both 2012 and 2011, when the 10-year or less category totaled 77.9 percent in each year.
In particular, products with surrender charges of six years or less increased their share to 7.5 percent of total sales from 4.9 percent in third quarter 2012, according to Wink; and products in the seven-year category increased to an 11.5 percent share from 4.9 percent the year previous. Meanwhile, products in the eight-to-nine year surrender charge category remained level at 8.2 percent between the two years and those with 10-year surrender charges dropped share to 53.8 percent from the year-earlier third quarter share of 59.9 percent.
The significance of the surrender charge numbers is two-fold. First, the numbers demonstrate that sales are continuing to favor products with shorter surrender charge periods, a trend begun several years ago and that carriers have facilitated with product manufacture.
Second, the decline in surrender period may be contributing to or allied with the decline in commissions. In general, indexed products with longer surrender periods tend to pay higher commissions than those with shorter surrender periods; so if fewer of the long-surrender products are sold, the average commission numbers will fall in response.
In sum, third quarter had quite an indexed annuity story to tell. It was a time when indexed annuity sales broke all previous quarterly sales records to reach a new high while average indexed annuity commissions fell to their lowest point ever.
Annuity specialists who focus only on (or mainly on) indexed annuity sales may have suffered a financial setback of sorts if they or their products were caught up in the commission squeeze. But if they made it up on volume — which could have happened, given the record high indexed annuity sales for the quarter — or if they added other products and services to their menu, they may have broken even or possibly come out ahead.
For agents who sell without regard to commission, some the above discussion will be of only passing interest. Their eyes will focus more on what is going on inside the products (with features, options, flexibility, etc.), how those changes will fit customer needs and the strength of the carriers that back the products. But even these agents will take the commission trend as a barometer of sorts about how the industry is faring.
If commissions continue to drop, at what point will this force agents and distributors out of the business and/or spur them to adopt new practices that enable them to continue? It will take future quarters to get a better handle on this.
Linda Koco, MBA, is a contributing editor to AnnuityNews, specializing in life insurance, annuities and income planning. Linda may be reached at firstname.lastname@example.org.
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