Indexed Annuities Are Changing – And Selling

By Linda Koco

Many indexed annuities have gone through product design modifications and commission cuts in recent months, but that doesn’t seem to have put a damper on sales. That may seem ironic if not downright baffling, but annuity experts think it makes eminent sense.

The changes have come in response to the prolonged low-interest rate environment, and the pressure that has put on carriers’ ability to support product guarantees and related features, according to a wide variety of annuity watchers.

Product designs have been shifting so quickly that, in some cases, “all you have to do is blink, and there are new changes all over,” says Dana Pedersen, vice president for annuity product development at Phoenix Companies.

The guaranteed lifetime withdrawal benefit (GLWB) riders, now offered by more than 20 companies, have been a target for many of these changes, she says.

Worth noting is that although many carriers have trimmed back on the benefits, they have not pulled out of the market.

The pace of change

Sheryl J. Moore paints a clear picture of the pace of change. In second quarter 2012 alone, nine insurance companies made changes to their indexed annuity products on 14 different occasions, says president and CEO of Moore Market Intelligence, the Des Moines firm that owns AnnuitySpecs.com, an indexed annuity product resource.

As for commissions, these averaged 6.33 percent of premium in second quarter 2012, according to AnnuitySpecs’ second quarter report. That’s down from 6.52 percent in first quarter and it’s the lowest-ever average commission for sales agents in this market, the report says. Commissions have fallen to the 6.33 percent level only one other time, in fourth quarter 2011, the report notes.

Not every company has made commission cuts, points out Pedersen, but she has noticed that those that did so have dropped their rates by 5 percent to 15 percent over the past six months. Some have started offering other types of commission structures, too, she says. For instance, rather than offer the traditional first-year commission on a product sale, a few carriers will pay some of the comp in year one and then defer the remainder to years two and three.

Despite the multiple product changes and the rock-bottom commission averages, indexed annuity sales have been robust.

AnnuitySpecs.com is reporting that second quarter sales were $8.7 billion, up by more than 8 percent over first quarter and up by nearly 6 percent over the same period last year.

LIMRA is reporting nearly identical numbers. Second quarter indexed annuity sales reached $8.6 billion, up 6 percent compared to the same quarter last year.

Second quarter’s sales made for the second-highest quarter in indexed annuity history, Moore points out. The sales were only 0.60 percent lower than third quarter 2010, which is the industry’s record-setting sales quarter.

What’s more, the second quarter results also marked the fourth consecutive quarter in which indexed annuities have outperformed traditional fixed annuities, says LIMRA. The indexed products now hold 47 percent of the fixed annuity market, the researcher adds.

Customer value

Pedersen’s take is that, despite all the product changes, indexed annuities still offer “tremendous customer value,” particularly when compared to products such as bank certificates of deposit, multi-year guaranteed annuities, and living benefit features in variable annuities.

LIMRA points out that indexed annuity sales are benefiting from the fact that GLWB riders continue to be offered with the products.

Eighty-seven percent of second-quarter indexed annuity sales involved annuities that offered a GLWB, and 71 percent elected a GLWB rider, the researcher notes, adding that this is the highest level since LIMRA began tracking indexed GLWB election rates one year ago.

AnnuitySpecs is reporting lower numbers — and declining numbers — on GLWB elections. According to Moore, the elections actually dropped in second quarter to 53 percent of total indexed annuity sales. That’s down from nearly 56 percent in first quarter and from 58 percent in fourth quarter 2011, according to data in earlier AnnuitySpecs reports.

The disparity in the GLWB election that the two firms are reporting may reflect different ways each captured GLWB data, different definitions used, different carriers in the data set and other unique research parameters. Still, both sets of figures share an important commonality: Both indicate that more than half the sales in second quarter include the GLWB feature elected.

This strongly suggests that GLWBs continue to remain popular and may be viewed as a key driver behind the strong sales results.

The modest decline in election rates that AnnuitySpecs has detected may be a signal that the product changes did have a slight influence on desirability of the GLWB features. (Or, as Moore puts it, the bulk of second quarter’s product changes “affected the relative competitiveness” of the GLWB riders.) But that influence clearly was not enough to put a big dent in sales.

Indexed annuity trends

Pedersen provides an example of one type of change that producers might be seeing in the indexed annuities they sell, and that is the rollup provisions that the GLWB riders provide.

The rollup provisions guarantee that the product’s “benefit base” will increase annually by a certain interest percentage, either simple or compound, for a certain number of years during the policy’s accumulation period. (The benefit base is the value the company uses for determining withdrawal benefits the customer will receive.)

A 10-year rollup period has been typical in most GLWBs, but some companies today may have moved that down to a seven-year period, Pedersen says.

And some carriers may have lowered the rollup interest rate to, say, a choice of either 8 percent guaranteed, or a 5 percent guaranteed but with the possibility that, depending on interest credits, the actual rate could go higher, perhaps to 10 percent or 11 percent. With designs like this, Pedersen says, customers can choose between a pure guarantee or a guarantee that offers a lower floor rate with the possibility getting a higher rate—one that might increase the income stream once withdrawals start.

Two other product trends she sees are: the availability of indexed annuities with long-term-care benefits, either as an enhancement to the basic annuity benefit or as a true long-term care coverage (as permitted under the Pension Protection Act of 2006); and the arrival of so-called combo fixed indexed annuities that offer not only income withdrawal benefits and long-term-care benefits of some type but also a death benefit.

It may be challenging for agents to keep up the flood of changes in indexed annuity offerings, Pedersen concedes. The changes mean there are more products to learn about and there is more need for education, she says. And producers may need to spend more time helping clients decide which products and features to choose.

But there are positives, too, she contends. “Producers now have more options to offer, and more types of products that will enable them to meet the needs of more types of clients than previously.”

In addition, she says, indexed annuity companies are spending more time on producer education and training, providing presentations that explain the product in the simplest form possible, and introducing tools that help producers perform functions such as determining the income level the client can achieve.

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

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