Equity-indexed annuities credit an interest rate linked to an equity index, usually the S&P 500. They also provide downside protection in the form of a minimum guaranteed rate. EIAs were developed in 1995 partly to give insurance companies and non-registered producers a variable annuity alternative.
Sales of these products have shown some impressive gains and accounted for almost 20% of fixed annuity sales in 2003 for participants in the Beacon Research "Fixed Annuity Premium Study." In addition, the EIA share of study participants fixed annuity sales generally increased from month to month in 2003, from some 15% in January to almost 25% in December (see Chart I).
What are the factors behind the increased popularity of equity-indexed annuities in 2003? Not surprisingly, the most obvious driver seems to be rising equity prices. Beacon Research looked at correlations between EIA sales and several independent variables. By far the strongest relationship was with the S&P 500 (see Chart II).
But EIA sales didnt move in lockstep with the stock market. Sales of these products dropped from June 1, 2003, through Aug. 1, 2003, even though the market was tending up. Why did this happen?
There was a 40% increase in 5-year Treasury rates during this period. Independent producers may have switched back to traditional fixed annuities when rates rose. And, these same producers may have shifted away from EIAs because they are more complex, and hence more difficult to explain than Treasuries.
Equity-indexed products also tend to have lower minimum guarantees and longer surrender periods, making them less attractive to the conservative fixed annuity investor.
Independent producers accounted for more than 92% of our study participants EIA sales in 2003, so their choices of product types have an enormous impact.
However, equity-indexed products have many advantages. They provide the consumer with more upside potential than traditional fixed annuities with less risk than VAs. According to various EIA providers, many of the index products outperformed products in other asset classes (such as 5-year FAs and equity funds, index funds and bond funds).
missions in relation to other annuities. There are newly designed products offering fewer "moving parts," shorter surrender periods and even fixed-rate options with competitive yields, addressing disadvantages that EIAs have been perceived to carry in the past.
