If 2017 is shaping up to be a letdown for annuity sales, it wasn’t for lack of trying as insurers launched new products and tinkered with product features to burnish annuities for distributors battling a tough regulatory environment.
Several trends dominated the annuity industry this year as the products struggled mightily against the Department of Labor (DOL) fiduciary rule that, in the end, only managed partial implementation yet extended the state of quasi-limbo.
Fee-based annuities fanned further into the market while buffered variable annuity sales took off. Volatility control indexes proliferated in the indexed annuity segment, and annuities carrying shorter surrender periods and lower commissions fell into agents’ laps.
Fee-based indexed and variable annuities came on strong this year. Insurers did their best to prepare financial advisors with alternatives at a time when the DOL rule dragged down sales, the bulk of which are commission based.
The “strong” showing is, of course, a relative term given the growth from such a small base. The industry is still waiting to be convinced that advisors will take a shine to fee-based annuities.
Third-quarter sales of fee-based indexed annuities were estimated at $48 million compared with only $2.2 million in the year-ago period, LIMRA reported. Even with the big increase, fee-based indexed sales represent 0.4 percent of total indexed sales..
Overall, LIMRA forecast sales of indexed annuities to drop by 5 percent to 10 percent in 2017 from the $61 billion in 2016 sales.
Third-quarter sales of fee-based variable annuities, meanwhile, rose 52 percent to $550 million compared with the year-ago quarter. However, fee-based VAs represent only 2.5 percent of total VA sales.
Nevertheless, fee-based sales offered encouraging signs in a gloomy year during which VA sales are forecast to drop by 10 to 15 percent from the $104.7 billion in VA sales in 2016.
After all, 2017 had started out with some promise following record sales of fixed annuities in 2016 and the Trump administration’s announcement that a review of the fiduciary rule was warranted and the rule could be delayed.
By the end of the first quarter, the industry could sense excitement building around the structured or buffered variable annuity, a product that seemed to have reached critical mass even though it has been in the market for more than a decade.
With double-digit growth through the early part of the year, the surge was on. By the end of the year, two more big annuity companies – Voya Financial and Lincoln Financial – said they would launch buffered products in 2018.
Next year, six companies will sell buffered VAs, up from four this year.
Whether buffered VAs represent a new direction for a shrinking overall VA market remains to be seen. For now, insurers and distributors seem to have found a product perfectly matched for an era of low interest rates.
Buffered VAs are structured to protect buyers against most market losses – but not the huge losses – in exchange for a higher cap on credited interest.
Buffered VAs don’t require as much capital as traditional VAs with income guarantees. This gives insurers the opportunity to sell lower commission and shorter duration VAs and diversify VA exposures, analysts said.
Policyholders benefit by taking advantage of higher cap rates at a time when market indexes seem to be breaking monthly records.
Third-quarter sales of buffered VAs rose 15 percent to $1.7 billion compared with the year-ago period, LIMRA reported.
Buffered variable annuity sales, which reached just under $2 billion in 2014, were forecast to hit about $9 billion in sales in 2017.
Indexed Annuities: Volatility Control
In the fixed indexed annuity market, a big story this year (and since 2013) was the proliferation of volatility control indexes, which is due to the prolonged low interest rate environment.
Low rates are not delivering enough yield to deliver attractive cap rates using traditional indexed annuity crediting methods, according to indexed annuity experts.
Fifty-four different volatility control indexes populate the indexed annuity market, from the Barclays U.S. Low Volatility II ER 5%/7%, to the Lenwood Volatility Control Index to the S&P 500 Low Volatility Daily Risk Control 8% Index, to the Transparent Value Blended Index.
Volatility control index crediting methods offer indexed annuity marketers and salespeople the opportunity to promote a product with “unlimited” interest earning potential, despite the inherent limitation of indexed interest that is associated with indexed annuities.
It also gives insurance companies the opportunity to market products that are co-branded with big names such as Morgan Stanley, Merrill Lynch and Goldman Sachs.
“With the availability of volatility control indexes on indexed annuities, you can offer the product without the cap and talk about the unlimited potential for gain,” said Sheryl J. Moore, president and CEO of Moore Market Intelligence and Wink Inc.
So volatility-controlled indexes give an opportunity to market indexed annuities despite historically low interest rates.
Surrenders, Commissions, Banks and B/Ds
Retail annuity agents reported earlier this year that they could expect shorter term surrender charge products - and they would be right.
Surrender periods on fee-based or advisor-sold variable annuities were trimmed significantly in preparation for the DOL’s fiduciary rule as longer surrender charge products are more difficult to justify under the rule.
Sales of indexed annuities with surrender periods of less than 10 years gained market share, compared to indexed annuities with surrender periods of more than 10 years, according to Wink data.
Commissions on indexed annuities also fell this year, continuing a long-term trend.
The average commission on an indexed annuity in the third quarter was 4.95 percent, the lowest ever, Moore said.
Shorter surrender periods on indexed annuities correlate with higher sales through broker/dealers and banks, as compared to independent agents.