In 2007 — before the Great Recession — variable annuity sales were $184 billion, representing more than 70% of the total U.S. annuity market. Over the next decade, economic and regulatory changes — as well as product innovation in fixed indexed annuities — shifted the annuity landscape as consumers sought out protection-focused products and carriers carefully managed their VA book of business. By 2020, VA sales were just under $102 billion, holding just 42% of the total annuity market, according to the Secure Retirement Institute U.S. Retail Annuity Sales Survey.
Evolution Of VA Products
Today the VA market has diverged into two distinct markets: traditional VAs, primarily used for accumulation, tax deferral, and guaranteed income solutions; and registered index-linked annuities, a rapidly expanding product line, which offers investment growth opportunity while minimizing risk from market downturns.
Since the Great Recession (when close to 90% of VA contracts included a guaranteed lifetime benefit rider) many VA carriers have limited their VA GLB business and some have exited the GLB market altogether. A decade of ultra-low interest rates and a more cautious approach to risk management have prompted carriers to pivot to less market-sensitive products. This has created significant consolidation in the VA GLB market, with the top three carriers in 2020 accounting for 50% of all VA GLB sales. We believe this will present opportunities for smaller carriers with lower risk profiles to compete in the VA GLB market.
That said, the shift to simpler, straightforward VA products is a winning proposition in the current environment. For the first time since the early 2000s, non-GLB VA sales have outperformed VA products with GLB riders. Traditional VA sales were $22.7 billion in the second quarter, a 37% increase from the prior year. Year to date, traditional VA sales totaled $43.6 billion, up 16% from the first half of 2020.
Yet consumers’ desire for protected investment growth remains strong, and RILAs are providing the most attractive option in a low interest rate environment. Over the past five years, RILA sales have quadrupled from $6.3 billion in 2016 to $24.1 billion. Several carriers, recognizing this market opportunity, have entered the market. In 2016, there were just a handful of companies in the RILA market. Today, there are 15 carriers offering RILAs. With more carriers offering RILAs and the expected expansion of carriers offering GLBs in these products, SRI is forecasting RILA sales to continue their trajectory, doubling sales by 2025.
For the past five years, independent broker dealers have dominated overall VA sales, growing their market share to represent more than 40% of VA sales in 2020. During the pandemic, IBDs adapted more quickly to the virtual sales environment than other channels did. In the second half of 2020, sales of VAs through the IBD channel increased 13%. Career agents’ VA sales also rebounded substantially after the start of COVID-19. The sales in other channels — banks, independent agents, national BDs and direct to consumer — have remained steady or fallen during the pandemic.
A Shift To Accumulation
Creating income is expensive in a low interest rate environment. When we look at the VA market from an investment objective perspective, we see the largest growth in products that focus on market growth potential — VA products without GLBs elected or available, and guaranteed minimum accumulation benefit-elected sales. VA sales in this category have jumped 35% over the past five years, from $38.7 billion in 2016 to $52.4 billion in 2020. Meanwhile, sales of VA products that generate deferred guaranteed income — VA products with guaranteed lifetime withdrawal benefit, guaranteed minimum income benefit or guaranteed minimum withdrawal benefit riders elected — have fallen 36% since 2016. SRI expects this trend to continue until interest rates improve, which would allow manufacturers to provide living benefits with more competitive features.
The resiliency of the VA market has been driven by product innovation, adoption of technology and increasing demand for products that provide investment yields and protection. The VA market is not what it was prior to the financial crisis in 2008, yet it remains the top selling annuity product in the U.S. While the market changed and VA carriers diversified their offerings, VA products continue to be a staple for advisors helping their clients navigate retirement. With that, we are projecting this market to grow as much as 5% to 10% every year through 2025.