FIAs Face Increasing Levels Of Complexity

A potential arms race may be ahead for fixed index annuity (FIA) business, similar to that in the variable annuity market a decade ago, according to analysts at A.M. Best.

The FIA business is a large and growing segment within the U.S. annuity market, the A.M. Best researchers said in a new survey of top FIA writers. This is leading to what the researchers called “increasing levels of product complexity as companies continue to innovate in response to rising competition.”

The analysts definitely have a point. Carriers have debuted new FIA products or new features on existing FIA products every month of this year. They include design changes, and sometimes entirely new offerings.

Some recent examples from InsuranceNewsNet files appear here, followed by a few observations on the market.

Recent examples

These debuts are not all game-changers. But taken together, they do show that FIA expansion is well under way, fostering a climate where innovation can flourish.

• Add a volatility control index crediting Voya Financial took that step by adding the Voya Point-to-Point Volatility Control Strategy to its Voya Secure Index series and Retirement Index Select FIA lines. The strategy is based on the proprietary CROCI (Cash Return on Capital Invested) US 5% Volatility Control Index from Deutsche Bank. It is designed to reduce volatility by allocating between select U.S. stocks and cash, Voya said.

• Unveil a from-scratch design. Delaware Life Retirement Stages 7 is an all-new FIA from Delaware Life. It also offers a Deutsche Bank-sponsored index option. In fact, it has two Deutsche Bank-sponsored indexes as well as an S&P 500 Index option and a fixed account. The FIA also offers an optional return of premium rider, and an optional withdrawal benefit which provides an increasing (“stacked”) benefit base and guaranteed lifetime income payments.
• Limit access to distribution. That’s what Delaware Life is doing with the new FIA mentioned previously and also with another FIA it rolled out in May. The policies are available exclusively through “a select group of distribution partners,” according to the company. That’s not a policy feature, but it’s a differentiator for advisors who have access to them.
• Offer lots of crediting strategies. Two new FIAs from American National Life provide up to six potential interest crediting strategies. Why so many? “To better fix a client’s interest and needs,” the company said in debuting its ASIA PLUS 7 and ASIA PLUS 10 FIAs.
• Unveil a FIA series. Penn Mutual recently brought out the Premier Foundation Indexed Annuities series. Designed for consumers with differing time horizons, these FIAs are available with a five-, eight- or 10-year surrender charge period. Each also offers two indexed options and one fixed account option; the ability to allocate to multiple accounts and change allocations annually; optional living benefit riders; and access to contract value through free withdrawals, required minimum distributions (RMDs) on tax-qualified plans, or partial annuitization, the company said.
• Enhance with a lifetime income option. Jackson National did that by adding the optional LifePay feature to its Jackson AscenderPlus Select FIA. The feature guarantees income for life starting at age 45, with the payout ranging from 3 percent to 7.5 percent annually, depending on age at start of income. There are annual step-ups for the life of the contract, and policyholders can add or cancel the feature, too, according to the insurer.
• Expand the use of the indexing concept. This last is an index strategy that Allianz Life, the nation’s biggest FIA seller, has added to its Allianz Index Advantage Variable Annuity (not a FIA). Called the Index Guard Strategy, it has annual caps but also a floor on negative index performance. Policyowners can allocate all or part of contract value to the other index strategies at index anniversary. It offers a level of protection from large index losses while maintaining the potential for performance, the carrier said.

The complexity question

Whether and to what extent product expansion adds to complexity has been a subject of discussion ever since FIAs debuted 20 years ago.

From the get-go, FIAs were “different.” They frequently were described as a hybrid between traditional fixed and variable annuities, due to their upside potential and downside guarantee profile. The early entrants said this difference was not synonymous with complexity; rather, it was new.

Over the years, originality in design became a hallmark of FIAs. Developers added an ever-widening array of features—to create new options for customers, to capture the attention of advisors, to underscore differentiation and avoid commoditization, to adjust to evolving regulatory and legal requirements, and to adapt to changing market conditions, among other reasons.

That widening array is what has caused industry veterans to draw parallels between competition in today’s FIA market and that in the variable annuity market. In the mid-1990s, the modern versions of variable annuities — called multi-manager variable annuities — began to sprout. It was a big deal at the time for annuities to have retail mutual fund company subaccounts inside of a variable annuity. When the stock market rallied, sales popped and the concept took hold.

Thus began a years-long rush to bring out more and more of everything inside of variable annuities: more market entries, subaccount options, investment managers, fixed accounts, investing strategies, death benefit options, maturity dates, liquidity provisions, living benefit guarantees and numerous other features. Developers likened the products to Swiss army knives, and market watchers likened the competitive environment to an “arms race,” as the Best analysts have rightly noted.

Complexity came into the picture because of “more.” As more products added more features, there were more voices being raised about prospectuses reaching 100-plus pages, policies with too many moving parts, and hard-to-understand provisions. Providers began focusing on ways to simplify language and features, and many beefed up training and education programs for advisors.

Now it seems the FIA market is following a similar trajectory, with product expansion and increasing sales going hand-in-hand and with concerns about product complexity foaming in the wake. FIA sales were up 14 percent to $38.7 billion in 2013 and another 24 percent to $48 billion in 2014, according to a report on FIA distribution from the Insured Retirement Institute (IRI).

There are signs that the FIA industry is addressing this. For instance, the IRI researchers noted that “some distributors have created specific training programs and suitability review processes to ensure that advisors understand what they are selling, and consumers understand what they are buying.”

The Best analysts, in their FIA report, observed that “as product complexity increases, the risk profile of an FIA is likely to increase.” This is a sobering comment but surely a consideration that will be top of mind as the market continues to develop.

InsuranceNewsNet Editor-at-Large Linda Koco, MBA, specializes in life insurance, annuities and income planning. Linda can be reached at [email protected].

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Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected].