FIA indices evolve as the interest rate environment changes

By Susan Rupe

Insurance companies continue to add newly launched indices to their fixed indexed annuity products, leading to a growing need to educate on the difference between live and back-tested index performance to help properly set policyholder expectations.

A panel of industry leaders discussed what goes into the development of an index during a recent National Association for Fixed Annuities webinar.

The first step in developing a new index strategy is to determine the new index’s goal or objective, said Phil Brzenk, managing director and global head of multi-asset indices, S&P Dow Jones Indices.

“What are you trying to achieve?” he said. “Context is always helpful. Are you looking for a multiasset index? Are you looking for equity-only strategy? Is it an accumulation product? Is it an income product? What kind of crediting offerings are you looking at?”

Answering those questions leads to “do we have something on the shelf that can work for that particular case or do we need to develop something new in terms of taking something and building on an existing strategy?” he added.

If a new index strategy is needed, Brzenk said, the next step is working with clients and partners “to think about what the rules could be from an index standpoint. We don’t want to develop something in a vacuum. It means going through an interim process, checking how does this strategy perform? How does this work in different environments as well? Does it achieve what it’s trying to achieve in terms of that objective?”

When developing strategies or designing indices, it’s important to understand how they will be used in a particular annuity product, he said. “What that means is to have that understanding in terms how the product fits and what kinds of features are offered in the product, and how companies are getting exposure to the index or offering exposure to their policyholders. Having both those knowns gives you the ability to understand what features need to go in the index.”

Low interest rates lead to index innovation

As interest rates went down in the early 2020s, the industry turned to innovation in creating indices, said Eric Taylor, senior vice president for distribution with Corebridge Financial.

“When you think about the benchmarks of financial planning and the opportunities for diversification, there was a strong desire to find different ways to add value in different environments,” he said. “That started to change the regulatory view of how an illustration must be constructed. So you could construct an index to have more stable option costs over time. You could construct an index to have dividend yields included and all of those will have different changes in the way they react to different market environments. It doesn’t make one index better or worse than another – it just means that it has been designed for a certain purpose and hopefully if you combine some of those opportunities together, you get a smoother flow of returns to the client.”

The higher interest rate environment of the past three years means, “it’s a lot different story” when it comes to setting consumer expectations on FIAs, said Nate Miles, director of annuity marketing with Advisors Excel.

“Back when the interest rate environment was really low, we focused more on the consumer benefits the product brought and we had less of a focus on the return profile of what the products brought,” he said. “Now we see a rising interest rate environment and the rates are a lot different now than what they were before. So being able to talk through that with advisors and maybe make more of a focus around the product features and benefits is a big piece of what we do.”

Susan Rupe is editor in chief, magazine, for InsuranceNewsNet. She formerly served as communications director for an insurance agents' association and was an award-winning newspaper reporter and editor. Contact her at [email protected].