Longevity risk may be opening the door to the biggest growth opportunity for annuity carriers, according to the Deloitte Center for Financial Services.
Should that happen, it could mean a big growth opportunity lies ahead for advisors who work with annuity products, too.
But just how is this potential opportunity playing out?
In its 2015 Life Insurance and Annuity Industry Outlook, Deloitte painted a picture of the annuity future as being linked to growth in longevity and all the trends that come with that.
Addressing longevity risk is one of five “pillars for long-term success” that the firm’s researchers identified in the forward-looking report. The Deloitte experts said these pillars should rank high on insurers’ strategic agendas.
Given the aging U.S. population, improved health care and lengthening lifespans, helping consumers generate sufficient savings and income for retirement “could turn out to be the biggest growth opportunity for life and annuity carriers,” they said. And annuities can play a key role in this.
Big growth opportunity
Consumers are increasingly worried about the possibility of outliving their assets, the researchers said. They noted that half of those responding to Deloitte’s 2013 Retirement Challenge survey said they have not saved enough to cover them through retirement.
In addition, 40 percent expressed a “sense of helplessness” about being able to have sufficient retirement income.
Given that and the fact that 10,000 or so baby boomers are turning 65 every day, dealing with “longevity risk “could perhaps be the biggest growth opportunity” for annuity carriers, the researchers said.
They pointed in particular to the 401(k) system, which has continued to grow as traditional pensions have declined. The 401(k) plans should provide “a natural platform for longevity solution marketing,” with carriers being able reach prospects who are “prime candidates for guaranteed lifetime income products,” Deloitte said.
Annuity carriers are in a “prime position” to better educate consumers about the need for reliable retirement income streams, as well as the potential for annuities to meet that demand as part of a 401(k) or individual retirement account (IRA) distribution, they said.
Looking ahead, the researchers noted that life and annuity carriers might look into routinely reporting not only the total dollars in consumers’ retirement plans but also how the account value could generate a regular income over the long term.
This reporting would be done in statements that plans send out regularly to those who hold 401(k) plans and IRAs.
Advisors are well aware that some 401(k) providers already provide this type of information in plan statements to participants. However, the Deloitte researchers are talking about this becoming “routine” for 401(k)s and IRAs.
Having regular reports that indicate how a nest egg can be used to generate long-term income can "plant the seeds for an annuity transaction," the researchers said.
Another opportunity enhancer might come from a "requirement" that defined contribution plans offer a lifetime income option. Such a requirement would require changes to current regulations, Deloitte allowed, but "annuities would be a natural product to offer such longevity coverage."
The federal government already has put out advisories that "should help facilitate" the use of 401(k)s for annuity sales, according to the study.
One example is the new rules that the IRS issued in July 2014. This allows people to buy longevity annuities — called qualifying longevity annuity contracts (QLACs) — in their 401(k) plans and IRAs.
Other examples include the October IRS notice that allows employers to include annuities in target-date mutual funds that often serve as a default investment option in 401(k) plans, and the release of public statements from government officials in support of income annuity use.
As Deloitte sees it, "annuity carriers are in a prime position to better educate consumers about the need for reliable retirement income streams, as well as the potential for their products to meet that demand as part of a 401(k) or IRA distribution."
The report does note that the annuity industry faces challenges in the retirement market.
Because of the long-tail nature of the risk and the uncertainty of investment markets, the researchers explained, profitably designing and underwriting longevity-related policies could be their “most formidable challenge.”
Among suggestions offered to deal with challenges were for carriers to “stay engaged" with customers and work with them to manage expectations and use of product features. This is as opposed to treating a longevity product sale as a one-time event and hoping that the built-in assumptions prove profitable.
Another suggestion is to develop more “multipurpose” hybrid products that address various needs of older people. An example would be "combining life insurance, retirement income and long-term care coverage in a single policy, while limiting longevity exposure by capping lifetime income benefits."
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