FIAs on a Tear But for How Long?

Fixed index annuities (FIA) are all the rage, superstars of the fixed annuity world, worthy of red carpet treatment, and maybe a support Oscar for boosting fixed annuity sales to more than $74 billion in the first nine months of last year.

How long can this party last?

Every actor hides a vice, and the FIA’s demons lie — perhaps — with the independent producer and agent channel’s overreliance on FIAs.

First, the high: In the third quarter of 2015, FIA sales hit a record $14.4 billion, an increase of $2.7 billion from the year-ago period, according to Beacon Research in Northfield, Ill.

Who sells most of those FIAs? Independent producers and agents.

In fact, more than 60 percent of FIA sales came from independent producers and agents last year, far and away the dominant distribution channel for FIA sales.

Now, the low. When measured by product category, about 88 percent of independent producers’ and agents’ fixed annuity sales come from FIAs.

As far as FIAs are concerned, the independent producer sales channel has almost reached saturation point, according to Beacon Research.

“Unless this channel expands, higher sales of FIAs will have to come from somewhere else,” said Beacon Research CEO Jeremy Alexander in a recent briefing on the 2016 outlook for fixed annuity sales.

Key Distribution Channel Shrinking

FIAs allow owners to benefit from gains when markets rise, but limit exposure to losses when markets fall.

For a baby boomer in retirement, many financial advisors agree that FIAs have their place. FIAs’ explosive growth adjacent to the humdrum performance of the rest of the fixed annuity world -- beset by low interest rates and stagnant sales -- make them superstars by comparison.

When FIAs hit the market more than 15 years ago, independent producers and agents were just about the only sales distribution channel in town. In 2002, only independent producers and captive agents were selling FIAs.

But the producer and agent channel, still a sales locomotive for FIAs, has been shrinking faster than the polar ice cap ever since. Independent broker-dealers (IBD), banks and even a wirehouse or two have warmed to FIA sales and are eroding independent producers’ market share.

“Now you are seeing carriers, banks and BDs see that penetration,” Alexander said. “That's the story happening in the index world.”

Yet, even as more distribution channels get into the FIA distribution game, none are as aggressive about, or as reliant on selling FIAs as independent producers. That means FIAs could see slower future growth unless the competing channels boost FIA sales.

Since total sales of fixed annuities aren’t growing, the only way for this market to grow is to start seeing other channels embracing FIAs, Alexander said in an interview Tuesday with InsuranceNewsNet.

The question is will other channels step up? Will captive agents, banks and savings and loans, regional broker-dealers and IBDs pick up the slack?

Other Channels to the Rescue?

Captive agents derive about a quarter of their sales through FIAs. But they accounted for less than 10 percent of all FIA sales at the end of the third quarter last year, and remain under the control of life and annuity carriers.

If carriers want to quash FIA sales for regulatory or financial reasons, captive agents have no choice but to follow suit.

Could IBDs and banks emerge as white knights and sell more FIAs?

They, too, have their drawbacks.

About 70 percent of all fixed annuity sales closed by IBDs are FIAs, according to Beacon. In many instances, insurance carriers own the IBD and IBDs can control the distribution of annuity sales if they want, Alexander said.

In the heavily regulated bank channel, more than 30 percent of fixed annuity sales consist of FIAs, but the bank channel makes up less than 20 percent of all FIA sales by distribution.

Besides, banks can get awfully skittish when dealing with index-linked products that take on more risk and aren’t insured by the U.S. government.

FIAs, too popular and lucrative to ignore, will see more growth in other distribution channels, Alexander said, but by how much and to what extent is another question as money flows back and forth between fixed and variable annuities.

Indexed annuities are on the verge of becoming “mainstream,” if they aren’t already, and that means they are getting a temporary lift from boarder the market forces: lower variable annuity sales, stock market volatility and even the U.S. Department of Labor’s fiduciary rule proposal.

Now it’s up to the distribution channels to fight over FIAs, if distributors are serious about claiming their share of the spoils in one of the few growth stories of the fixed annuity market.

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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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].