2018 Life/Annuity Outlook Marked by Slow Growth

Sales of individual fixed annuities are likely to be flat or slightly higher in 2018 as annuities compete with money market and short-term bond funds, according to a new survey.

Fixed annuitiy sales fell by 8 percent to $108 billion in 2017 over 2016, noted the forecast by insurance ratings house A.M. Best Co.

The Department of Labor’s fiduciary rule, to which insurers and distributors are slowly adjusting, and low interest rates are also expected to create sales drag this year, according to A.M. Best’s 2018 life and annuity market preview.

Insurers can also look forward to relatively flat earnings as company managers reinvest money into new bonds at lower rates, an effect known as spread compression, the report said.

New product introductions, which help boost sales, have been “somewhat limited,” in the fixed annuity market, wrote A.M. Best analyst Ken Johnson.

There were a couple of exceptions, however.

Product Riders Turn up on Fixed Annuities

Optional guaranteed minimum withdrawal benefit riders, typically available on variable and indexed annuities, are turning up on traditional fixed deferred annuities. Likewise, long-term care riders have been offered on deferred annuity products, Johnson wrote.

Sales of fixed indexed annuities and variable annuities, hit hard by the fiduciary rule and insurers looking to cut back on guaranteed benefits as a de-risking strategy, are expected to turn higher once the market adjusts to new DOL compliance processes, Johnson wrote.

Fourth-quarter sales of variable annuities fell 2 percent to $24.7 billion compared with the year-ago period, LIMRA reported Wednesday.

Year-end sales of variable annuities fell 9 percent to $95.6 billion from 2016, LIMRA reported.

Fourth-quarter sales of indexed annuities rose 5 percent to $14.7 billion compared with the year-ago period. Overall, 2017 sales of indexed annuities fell 5 percent to $57.6 billion compared to 2016, a year of record sales, LIMRA reported.

The outlook for the U.S. annuity market is negative, according to A.M. Best.

Term Life Seen Gaining from Tech

In the life segment, insurers will continue to implement faster underwriting processes and focus on complying with principals-based reserving and repricing in line with new 2017 mortality tables, A.M. Best analysts said.

“The mix of new individual life business is likely to remain relatively consistent with recent experience, dominated by universal life (including indexed UL), whole life, and term life,” Johnson wrote.

Whole life will struggle against UL products, many of which have interest crediting rates based on equity indices or new business interest rates, Johnson’s research team wrote.

More interesting, perhaps, is the change in the mix of new business coming from alternative distribution models and the move away from traditional face-to-face channels as insurance companies penetrate the middle market, primarily through the sale of term insurance.

If insurers see any traction with changing distribution models, term life is likely to gain at the expense of permanent life products.

Reviewing the strategic plans of life insurers for 2018, most companies understand that their business models hinge on their ability to profit from technology “in virtually all aspects of their business,” wrote Johnson in the 25-page report.

2018 Life Sales in Single Digits

Life sales will remain in the low single digits and companies that don’t keep up with technologies that help them cut distribution costs and speed up the pace of issuing policies will be ripe for consolidation, the researchers wrote.

This year could also shed new light on mortality trends, which have been plateauing as the average life expectancy in the U.S. showed a slight decline in 2015 for the first time since 1993.

People who die earlier than expected mean life insurers also have to pay benefits sooner than planned.

The outlook for the U.S. life segment is negative, according to A.M. Best.
Life insurance sales data for 2017 is expected in mid-March.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected]