RILA Annuities Are High In Popularity – And Complexity

The fastest-growing investment vehicle for retirees can also be the most complicated and attempts to try and simplify the arcane features of the relatively new product can be daunting.

Still, that hasn’t slowed the popularity of the annuities, called RILAs, or registered index-linked annuities - formerly called buffered annuities or structured annuities. RILA sales broke records in the fourth quarter of 2021 and for the year. Fourth quarter RILA sales were up 22%, to $10.3 billion, In 2021, RILA sales totaled $38.7 billion, 61% higher than in 2020. Record-setting growth rates cooled a bit in the first quarter of this year, but the industry still expects a solid surge in RILAs in 2022.

Growth Unexpected for Some

Those numbers somewhat surprised even veteran retirement industry sales managers Wednesday at the 2022 Retirement Industry Conference in Boston, hosted by Secure Retirement Institute and the Society of Actuaries.

Marie-Laure Chandumont, managing director of Barclay’s life and annuities team, quizzed attendees on the data at a late afternoon session, and while she didn’t seem to be tallying scores, most responses came up short. Nevertheless, Chandumont breezily reviewed the pricing and investment strategies employed by the industry to boost RILA sales and cover their risk and found near uniformity on how investment companies are structuring and hedging their bets.

“Everybody is hedging statically,” she said, explaining that a static hedge is one that does not need to be re-balanced for market volatility. This contrasts with dynamic hedging that requires constant rebalancing as market conditions change. Chandumont produced a chart showing most of the major investment houses go long and short at nearly identical amounts in order to manage their hedges. For example, she showed Ameriprise with $1.1 billion in long investments and were short $1.2 billion. Equitable is $12 billion long and $12 billion short, and so on.

“So, if you go in short, you buy the same amount of long, then you sell the same amount of in short sales, meaning you're hedging one for one,” she said.

Static Hedging is Key

The static hedging is partly the key to how RILA sellers can promise growth beyond a simple fixed rate of return while providing guaranteed protection from loss from market downturns. They are a hybrid of popular fixed indexed annuities that tie performance to major market indexes.  But RILAs offer a broad selection of financial options to deliver specific investment growth with greater protection. With a RILA, investors can set the maximum loss they are willing to tolerate, unlike traditional index annuities. Their popularity boomed during the tumultuous market periods of the pandemic.

Though not entirely new – they’ve been around for nearly a decade – RILAs are the hottest investment vehicle for retirees and those approaching retirement and have recently gained more notice from regulators, said David Elliott, a manager for Oliver Wyman actuarial consulting. But, he explained, the regulator interest is mostly centered on developing rules and approved filing forms and materials to help investors better understand the product.

“There's a lot of regulatory focus on everybody right now,” Elliot said. “And I think it will continue to develop. There are certainly some state regulators looking very, very closely at these things when you’re getting the product approved.  There’s going to be need for greater disclosure and explanation of the principles. You can’t just make them up and there shouldn’t be instances of differently people getting different answers about the product.”

Those might be welcome features for both buyers and sellers. Wednesday’s session on RILAs was advertised as a way to help sellers generate better pricing strategies but was so immersed in numbers, data, and competitive highlights in the 45-minute session that the overarching purpose or takeaway might have been lost on some attendees. Still, with the market currently trending down, no one saw any let up coming in RILA sales.

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at doug.bailey@innfeedback.com.

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