Echoes Of 2008: Annuities Surge When Equities Crash

Yes, it sounds an awful lot like 2008, but this crisis has some key differences for the annuity market.

The past few weeks of dramatic news might sound eerily similar to the 2008 crash, but there are some key differences for annuities, as well as some positive similarities.

One not-so-positive similarity is the cut in annuity rates. Annuity analysts are seeing insurance companies cut their annuity rates substantially, particularly on indexed products. Carriers have been updating moving parts such as caps and participation rates on indexed products at a fast clip according to Wink and Beacon Research, two organizations that track annuity sales.

Carriers are struggling to price their products as interest rates head south, said Jeremy Alexander, CEO of Beacon.

“The most affected group is some of those index contracts, where we're seeing big declines in caps and participation rates,” Alexander said. “In a time of volatility, option prices go up. And if you take a look at the VIX index, which is the index of volatility, you can see historically high, incredibly high historical volatility in the market right now. In this market, the options budget buys a lot less of a cap or a participation rate or whatever that moving part is.”

Same, But A Little Different This Time

The new rates will affect indexing on new products as well as decreases in the rate when current contracts are renewed.

In that way, the effect on annuities is similar to what happened in the 2008 crash. Rates were low, but demand was high in the flight to safety.

“In most bad economic times, money flows into safety,” Alexander said. “We’ve seen trillions and trillions going into short-term treasuries. So, we expect to see more and more dollars moving toward fixed annuities.”

That was the experience for annuities, particularly fixed index, during the crash. FIA growth has been so strong that it powered fixed annuities to overtake variable annuities as the dominant category in sales. Last year, FIAs set another sales record.

Alexander said he expects that clients will flock to non-indexed annuities because the indexed rate will be low for some time. But as volatility settles, cap rates will increase, making FIAs more attractive.

But Alexander said he sees a fundamental difference in this crisis.

“I cannot say that this is like 2008 because that was a financial crisis based on subpar bonds,” Alexander said. “We have a much stronger financial system right now. This crisis is caused by a couple things. You've got the oil issue in the Middle East, but you also have this coronavirus where no one really knows what's going to happen economically. So, in many ways, it's a different animal.”

Will Capital Remain?

Sheryl Moore, CEO of Wink, also said although this crisis has many similarities to the recession, the underlying financials are fundamentally different. Back then, FIA sales were so strong that some carriers had to stop selling for a while.

“That was a little different because capital was tight at the time,” Moore said. “There were huge capital constraints that really prevented companies from issuing much annuity business. And that's not really an issue at this time, at least not yet.”

But one of the unusual features of this crash is a plummet not only in equities markets, but also in bond prices. That is odd because of the increased demand. So, that is creating a unique pressure on carriers that need safe investments to support reserves.

Moore said she is seeing many similarities to the last crash, such as the rate cuts.

“It's very similar to 2008 from a product standpoint,” Moore said. “I've had companies dropping rates twice in the same day, over the past two weeks.”

Steven A. Morelli is editor-in-chief for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers and magazines. He was also vice president of communications for an insurance agents’ association. Steve can be reached at [email protected]