The first weeks of 2022 gave investors the shivers as stock shares plunged amid geopolitical fears, inflation, COVID-19, and interest rate hikes.
The Dow Jones Industrial Average fell about 7% before beginning a slow rebound in the last days of January. A series of interest rate hikes planned by the Federal Reserve might be the biggest disruption of all, analysts say.
“The largest driver of this move has been the intensified level of uncertainty. The usual suspects for this uncertainty have been the Fed and their rate hike plans, hot inflation, and slowing growth,” wrote Lindsey Bell, chief money and markets strategist for Ally.
Annuity sales are influenced by a whole range of economic factors, including market performance and interest rates. While annuity sales rebounded strong from a pandemic-influenced dip in 2020, the outlook for the rest of 2022 remains murky, analysts say.
In addition to interest-rate uncertainty, inflation concerns linger, and regulatory changes are causing disruption among distribution channels. It could all add up to a difficult sales year for annuities. But executives like Doug Wolff, president of Security Benefit Life, are banking on the power of annuities to deliver retirement security.
“I think it will be a good year for annuity sales, even if some of the things we’re talking about — the potential for higher inflation, the potential for a market pause or correction — come into play,” Wolff said. “Because in some ways, they will just remind people of some of the power of annuities — being able to save, invest and accumulate dollars in a relatively safe way.”
Growing annuity sales in 2022 will prove difficult simply because 2021 sales were so strong.
Total annuity sales totaled $254.8 billion in 2021, up 16% from 2020. It was the best year for annuity sales since 2008 and the third-highest sales recorded in history, according to preliminary results from the Secure Retirement Institute U.S. Individual Annuity Sales Survey.
Total annuity sales were $63.4 billion in the fourth quarter, 8% higher than fourth-quarter 2020. “Strong equity market growth in the fourth quarter and in 2021 propelled double-digit growth in both traditional variable annuity and registered index-linked annuity sales, resulting in strong year-over-year results,” said Todd Giesing, assistant vice president, SRI Annuity Research.
The pandemic cut sharply into 2020 sales, setting up the nice comeback year. Forced technology gains and new ways of distance selling were among the positives to emerge from the COVID-19 shutdown. Many in the industry expected sales to take off for greater heights thanks to these gains.
Although that may happen, there are new storms for producers to contend with — namely the Department of Labor Investment Advice Rule. The rule, written during the Trump administration and allowed to take effect by the Biden team, took full compliance effect on Feb. 1.
The investment advice rule has two main parts: a new prohibited transaction exemption allowing advisors to provide conflicted advice for commissions; and a reinstatement of the “five-part test” from 1975 to determine what constitutes investment advice.
It replaces the Obama administration fiduciary rule, which imposed substantial regulations on commission-based sales of annuities. A federal appeals court sided with industry plaintiffs and tossed out the rule in 2018.
The Federation of Americans for Consumer Choice, joined by a number of independent insurance agents and agencies, sued the Department of Labor last month, claiming the new rule improperly “broadens the agency interpretation of who is considered a fiduciary.”
For now, the new rules are the rules and will make selling annuities more difficult, said Sheryl Moore, head of Moore Market Intelligence.
“There will be required forms for agents to disclose their commissions and say that they don’t have a conflict of interest and show some due diligence to show the products considered,” she noted. “Any time there’s a change in the sales process, it has a negative effect on sales, at least temporarily.”
Goldman Sachs is forecasting that the Federal Reserve will raise interest rates five times in 2022. Officially, the Fed is signaling its intention to raise rates in March. Subsequent rate increases will follow as needed, Fed Chair Jerome Powell has said, while officials monitor how quickly inflation falls from current multidecade highs back to the central bank’s 2% target.
Higher interest rates will make some annuities more attractive to consumers. Whether rates increase enough to lure buyers away from other options remains to be seen.
“I would expect annuity sales to be up again in 2022,” Wolff said. “And I think if interest rates go up, it may be even more than what people are predicting at this point.”
In particular, fixed indexed annuities could see a sales surge if rates climb. Momentum is already trending that way, the SRI reported. FIA sales were $63.7 billion in 2021, up 15% from the prior year, SRI found, and that marks the largest annual growth for FIA products in three years.
“Sometimes I think a financial advisor’s toughest job is getting that investor to potentially take a little bit more risk, because they realize that investor may still need some accumulation,” Wolff explained. “A fixed indexed annuity is a way to do that but still have the client get a principal guarantee and some of the downside protection that comes with it.”
Harry Dent, Harvard University-educated economist and author, is among those predicting a market crash this year. Dent made a number of bold predictions through the recent decades, some right and some wrong. But he predicted the dot-com bubble burst in 2000 and the populist surge that ushered former President Donald Trump into office in 2016.
In a November interview, Dent predicted “the biggest recession, or a depression, of our lives” in 2022 and added that the economy won’t recover its growth power until 2024.
Should we see a massive market correction this year, annuity sales would no doubt suffer. Individual annuity sales dropped 11% in 2009, the year following the housing crash and the Great Recession.
Again, Wolff is confident that consumers would find the protection offered by some annuity products to be a safe zone in a market downturn.
“Sometimes that can cause a pause for people putting their money anywhere,” Wolff acknowledged. “But I still think that the power of both fixed and fixed indexed annuities is even more evident when there’s some hit in the equity market.”