By Linda Koco
What to make of annuity trends in in 2015? Here is a look-back in four key areas. The overall picture is one of an industry actively engaging in developing its business. No more sitting in a cave, waiting out an economic storm.
DOL fiduciary rule
Many insurance and annuity practitioners locked horns with the Department of Labor (DOL) this year over the federal regulator’s potentially game-changing proposed fiduciary rule. They are concerned the rule will have a negative impact on how annuities would be sold. In addition, they are concerned about how the products especially fixed index annuities, would be treated for regulatory purposes. This could create potential harm to consumers by curtailing access to advice, industry professionals warn.
The year ends with fiduciary rule opponents continuing their criticism of the proposal, supporting legislative counter-proposals and participating in litigation strategizing. This is happening even as all the parties involved wonder what the final ruling will look like.
Sales were another area of notable change in 2015. For the first nine months of the year, total annuity sales — variable annuities (VAs) and fixed annuities (FAs) combined — fell by 2 percent, to $175.3 billion, compared with the same period last year, according to LIMRA. That’s not altogether surprising, in view of 2015’s drumbeat of volatility in equities and still-low interest rates.
The year’s market-changer has to do with FAs, especially the fixed index annuity (FIA) variety.
The third quarter represented the highest mark for FA sales in more than six years, Beacon Research reported. A lot of that explosive growth came from FIAs, which soared 7 percent in the first nine months and 22 percent in third quarter, compared with last year, according to LIMRA.
For the first nine months, total FA sales increased 2 percent, to $74 billion, compared with the same period last year, LIMRA reported. In third quarter alone, total fixed sales shot up 21 percent, to $27.7 billion, as compared with third quarter last year.
Another FA product, the deferred income annuity (DIA), held its position as the annuity product to watch. DIAs, which allow policyholders to defer their annuity payouts for many years, gained industry recognition only a few years ago, and yet they already have a slot on LIMRA’s quarterly sales reports. For good reason: In the third quarter, the DIA sales grew by 2 percent over the same year-earlier period. Their journey has been uneven, however. For instance, in the first nine months, DIA sales were down 7 percent from the same period last year.
Meanwhile, VA sales have gone south. They dropped 4 percent year-over-year, to $101.3 billion, and they fell 7 percent in the third quarter, to $32.9 billion. This decline may look like an extension of the VA industry’s intentional retrenchment on new VA business that came with the de-risking era after the last recession. However, it probably has more to do with today’s restive markets and the search for safety that always follows such markets.
The magnitude of the sales shift can be seen in the market share numbers. In the third quarter, the VA market share was 54 percent, based on LIMRA’s numbers. Three years earlier, it was 67 percent.
One change that annuity professionals keep buzzing about is this year’s rise in FA sales at banks and broker/dealers (B/Ds). The increase is especially noticeable in the FIA product line, in which neither banks nor B/Ds had shown much interest previously.
In the third quarter, for instance, bank sales of FIAs represented 18.9 percent of total FIA sales, according to Wink Inc. That’s up from 10.5 percent in second quarter. As for B/Ds, full-service national and independent B/Ds combined took an FIA market share of nearly 17 percent in the third quarter, up from nearly 15 percent in second quarter, according to Wink’s figures.
Regarding FA sales that are not indexed, banks have been active in this market for several years and they seem to be staying there. In third quarter, for instance, banks represented nearly 49 percent of this market’s distribution, according to Wink, which began publishing traditional FA sales data earlier this year. As for B/Ds, the national and independent firms combined produced nearly 12 percent of the traditional FA sales in the third quarter.
Similar trends, although with slightly higher percentages, showed up in multi-year guarantee annuity (MYGA) sales at banks and B/Ds, according to the Wink data.
The year’s stock market volatility and continuing low interest environment may have nudged banks and B/Ds to consider offering FIAs as well as traditional FAs and MYGAs to conservatively-minded customers. Some of the newer FIA designs may have caught their eye too. For whatever reason, these two channels are now “on” to annuities.
New annuity approaches
Individual annuity product development saw quite a bit of activity in 2015. On the VA side, several carriers brought out or updated their investment-only VAs, which they are offering as an alternative to income-oriented VAs. But VAs with guaranteed income features are still available. In fact, a few VA carriers even brought out new income guarantee features this year, a clear nod to the fact that some VA buyers want both the VA’s upside potential and the income guarantee.
On the fixed side, the industry saw a profusion of managed volatility indices added to contracts. Wink reports that 27 companies now offer some such an index. Several FIA carriers added or updated guaranteed lifetime withdrawal benefits (GLWBs) too.
In both trends, the effect was to make the fixed products attractive to customers who want more certainty and less risk with their annuity account values and their annuity payouts.
A specialized form of DIA — the qualifying longevity annuity contract (QLAC) — started hitting the streets for the first time in early 2015. This followed last year’s Department of Treasury regulations permitting purchase of these longevity annuities within individual retirement accounts and defined contribution retirement plans such as 401(k)s. When those regulations came out in July 2014, no such DIA even existed. But by November 2015, there were 11 carriers in this market, according to the LIMRA Secure Retirement Institute.
No industry sales data on QLAC sales has been published yet, but LIMRA is predicting that these sales will grow in 2016.
A word about DIAs in general (not just QLACs): Although actual sales in 2015 seem to be up and down, advisors definitely are working with the products. In the third quarter, for instance, 28 percent of advisor searches on the CANNEX income annuity database were for DIAs. That’s up from 24 percent one year earlier and from 12 percent the year before that. Moreover, searches on all types of income annuities on the database were up — by 24 percent — from the second quarter. This is significant because advisors do CANNEX searches when working with clients on income solutions.
In 2015, the annuity industry jumped into the fiduciary threat with both feet. It developed and sold products aimed at conservative buyers as well as those more interested in accumulation buildup. And it put a collective toe in the water on QLACs and DIAs, despite uncertainty about where these initiatives will go. So it was protecting, developing and risking at the same time.
In a year-end report on the retirement industry including annuities, the Insured Retirement Institute acknowledged that as 2016 approaches, the industry still faces headwinds such as volatility, low interest rates and the proposed fiduciary ruling.
However, the report also said, “The demographics remain favorable as the population continues to age and consumers continue to become more cognizant of the extent to which they are responsible for generating their own income in retirement. This is a positive demand factor that should continue to create favorable business conditions and spur continued innovation in product design, helping to offset some of the headwinds.”
InsuranceNewsNet Editor-at-Large Linda Koco, MBA, specializes in life insurance, annuities and income planning. Linda can be reached at email@example.com.
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