FIAs Give Traditional VAs A Jolt

By Linda Koco

Fixed index annuities (FIAs) pose a threat to traditional variable annuities, thanks in large part to the living benefit features in FIAs. This is according to a new report from Cerulli Associates.

From 2007 to 2014, the compound annual growth rate for FIAs was 9.7 percent, Cerulli researchers pointed out. Much of this growth came from consumers buying FIAs with guaranteed living withdrawal benefits (GLWBs), some with benefit base rollups as high as 8 or 9 percent and withdrawal rates greater than those in variable annuities, the report said.

Meanwhile, traditional variable annuities went in the opposite direction. Their flows peaked in 2007 and then “plunged” after the financial crisis of 2008-2009, Cerulli said. And when the variable carriers later moved away from selling living benefits, growth in variable annuity flows became “non-existent.”

By 2014, the annuity market felt the jolt as variable annuity sales dropped by more than 3 percent compared with the year earlier. FIAs mainly fueled the total annuity industry sales growth in 2014, according to Cerulli director Bing Waldert.

The presence (or absence) of the living benefit feature is so critical to this chain of events, Waldert said, that FIA sales surged “largely due to their living benefits and bonuses.”

That’s not just in yesteryear. FIA products look “much more attractive to investors of late," Waldert said. He attributed this “mainly to the shortage of other options available to income-seeking investors, such as bonds and traditional variable annuities.”

Not the only ones

But FIAs are not the only products with future growth potential, according to the report. Over the next six years, there will be steady growth in deferred income annuities (DIAs), immediate income annuities, and investment-only variable annuities (IOVAs) — as well as growth in FIAs, the Cerulli analysts predicted.

At the same time, traditional variable annuities will lose market share as insurers continue to move away from living benefits, they said. Traditional fixed annuities will languish too, the researchers said, remaining in “scant use until interest rates, and crediting rates, start to rise.”

The product predictions dovetail with development and sales trends that InsuranceNewsNet has been following over the same period. For example:

Deferred income annuities. There are now around 15 carriers in the DIA market, selling a product line that barely existed in 2010.

The majority of today’s DIAs debuted in 2013 and 2014. DIAs experienced record growth in 2014, reaching $2.7 billion in sales. That was an increase of 22 percent from 2013, according to LIMRA Secure Retirement Institute (LIMRA SRI).

A specialized version of the DIA product line is emerging too. This is the qualifying longevity annuity contract (QLAC). Although the federal government approved QLACs for sale in certain qualified plans only one year ago, there are already more than 10 carriers offering the products.

Immediate income annuities. These single-premium fixed products have been around decades, but they only had ho-hum sales — that is, until a rising number of advisors, financial media and older consumers began to see value of including income annuities in retirement portfolios. In 2014, immediate income annuity sales jumped 17 percent over the previous year, according to LIMRA SRI.

Advisory activity involving income annuities is up too. For example, in third quarter 2015, advisors made a total of 320,900 searches on income annuities on the Cannex USA database. That’s up 24 percent from the 258,600 searches in second quarter. The Cannex database tracks product and quote searches made by advisors who are working with retirement income clients.

Investment-only variable annuities. IOVAs are variable annuities that do not have lifetime income guarantee features but do have a wide assortment of subaccounts, including alternative options. They generally tout lower overall cost to the consumer due to their lack of guarantees. They are not exactly new, as their precursors were variable annuities in the days before living benefits, when guarantees in variable policies were unheard of.

Modernized IOVAs started green-shooting roughly a decade ago. However, variable annuities with living benefits were all the rage at that time, so the new IOVAs struggled for a place in the sun. by 2014, however, variable annuity living benefits were on the wane and six to 10 carriers were in the IOVA market. Cerulli said IOVA sales in 2014 were on pace to surpass their sales in 2013.

Not your father’s annuity market

If the above doesn’t sound like your father’s annuity market, that’s because it isn’t. The annuity market that Cerulli is predicting closely resembles the product positioning that is underway today, not yesterday.

Cerulli sees a threat to traditional variable annuities in the rise of the modern FIAs. But that doesn’t necessarily mean variable annuities will become extinct. A more likely scenario is challenge and change, with FIAs, DIAs, immediate annuities and IOVAs evening out market share with other individual annuity products.

InsuranceNewsNet Editor-at-Large Linda Koco, MBA, specializes in life insurance, annuities and income planning. Linda can be reached at [email protected].

Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected].