In the fixed indexed annuity market, the marketing decibels around the accumulation story are ringing, even if it’s the week before Christmas.
“Independent agents continued to shift their emphasis from guaranteed income to accumulation products focused on upside potential,” said John Matovina, CEO of American Equity Investment Life, one of the nation’s largest sellers of indexed annuities.
“We addressed this shift by placing more emphasis in our marketing efforts on our Choice Series at American Equity Life,” Matovina said in a recent conference call with analysts. “The Choice Series accounted for 22 percent of American Equity Life’s sales in the third quarter versus 17 percent in the second quarter.”
Why the shift in emphasis by agents?
Volatility Indexes Part of Conversation
Volatility control indexes have offered agents an opening to talk about higher returns and better accumulation, according to industry experts.
Participation rates and spreads on volatility control indexes are considerably more attractive than those offered on plain vanilla indexes like the Standard & Poor’s 500 index, said Sheryl J. Moore, president and CEO of Moore Market Intelligence and Wink Inc.
Volatility control indexes, as the very name suggest, smooth out the highs and lows of the market to earn a more consistent return.
While the jury is still out on whether these newer indexes will return more interest than the indexes used over the past 20 years, they are anticipated to return interest more consistently.
So, instead of traditional indexes where a contract holder typically may earn 0 percent one year, and 6 percent the next, volatility controlled indexes give the contract holder a greater likelihood of earning 3 percent one year and 3 percent the next.
While the opportunity for unlimited gain may be true theoretically, unlimited gains aren’t realistic.
This is because indexed annuities themselves are self-limiting. Indexed annuities prevent buyers from losing principal, and therefore limits loss. But indexed annuities also limit gains by imposing caps, reining in participation rates and assigning assets to specific allocations.
From an agent perspective, talking about higher potential for returns – upside potential – is a more compelling story than talking about caps when interest rates are still relatively low.
GLWBs a More Complicated Sell
The focus on the accumulation potential of indexed annuities also is taking place because the guaranteed lifetime withdrawal benefit (GLWB) story has become a more complicated story than in the past, experts said.
Shortly after GLWBs were launched on indexed annuities in 2006, interest rates dropped. Agents selling indexed annuities switched from emphasizing the cap rates on the annuity to emphasizing the roll-up rate on the lifetime withdrawal benefit rider.
“People were saying I can’t sell a 4 percent cap on an indexed annuity but I can sell a 7 percent roll up on a GLWB rider, so several years ago we saw the focus switch from accumulation to income,” Moore said.
But now the tables have turned.
After indexed annuity sellers entered into an arms race with roll-up rates as high as 7.5 or 8 percent, GLWBs became commoditized and “spread sheeted.” Ultimately, roll-up rates became harder to price.
In lieu of offering roll-ups, companies have switched to increasing their benefit base value through other methods, such as crediting that value with any fixed or indexed interest earned on the annuity.
While this may provide no less value, it is more difficult to “guarantee X percent” without a roll-up.
As a result, the income story gradually ceded ground to the accumulation story.
Delay Taking Income
Buyers prefer to lock in equity gains, protect their principal and delay taking income, said Brian Kroll, head of annuities solutions for Lincoln Financial.
“This shift (to accumulation) is being driven by our clients’ demands,” Kroll said.
Every deferred annuity is sold with income and accumulation potential, but depending on the direction of other variables in the market, agents may want to stress a different feature of the indexed annuity."
The question is how and when the tide shifts between marketing an annuity for accumulation, as agents seem to be doing now, and marketing an annuity for income, as agents did several years ago and are likely to again in the future.
For advisors, the fact remains that Americans are terrified of running out of money in retirement.
For the moment, preretirees and retirees may be more concerned with accumulation at a time of seemingly impregnable stock market increases and low interest rates.
But for insurers and distributors, it’s only a matter of time before the conversation around indexed annuities shifts back toward income.
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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