The Four Horsemen Of The Annuity World These trends will drive much of what happens in the next 5 years
By Timothy C. Pfeifer
One of the questions frequently asked of a consultant is, "So, whats the latest and greatest?" In the annuity world, this is often difficult to answer, both because the market sometimes takes a breather for periods of time and also because the latest isnt always so great.
Now, however, there are some clearly identifiable initiatives steering the annuity world. Four in particular are driving much of what will constitute the annuity landscape over the next 5 years. The pipeline is filled (and filling) with variations on these primary themes.
Here, then, in no particular order, are :
1) Guaranteed Living Benefits on Variable Annuities
Readers of this article are undoubtedly not surprised by this market driver. GLB features have become the key catalyst for market success in variable annuities. Insurers that lagged in developing them have been punished via losses in market share, while those producing a steady stream of well-crafted GLBs have been rewarded.
Over the past 18 months, GLB design has shifted away from "guaranteed minimum income benefits" and toward "guaranteed minimum accumulation benefits" and most importantly, "guaranteed minimum withdrawal benefits." Prices generally have crept up over past levels but not enough to spawn a customer or producer backlash. Insurers have continued to refine their risk management processes for GLBs, with strong dynamic hedging approaches providing a real competitive advantage for some companies over the rest of the pack.
GLBs are going to continue to be the showcase feature of variable annuities, even in the event of a rising equity market. This is not only true in the United States market, but also in the growing variable annuity markets internationally. Many product variations are in the U.S. pipeline that will extend and sweeten the benefits seen to date. Some combine features already seen into one package; some create generous guarantees available under contingent events; and others define GLBs of types never seen before.
2) Equity-Indexed Annuities (EIA)
By now, most everyone has seen the statistics on EIA sales growth over the past few years. While interesting in itself, the intriguing part of the EIA market is the expansion in participants and designs likely to occur over the next few years.
Some insurers that previously tended to sell against EIAs now have begun either developing such products or seriously looking at them. The concept of an EIA portfolio co-existing with a variable annuity portfolio, previously thought unspeakable, is now seen as feasible and maybe pragmatic. In rising interest rate environments with choppy equity markets, EIAs may be a standout offering. Commissions will drop over the EIA market as a whole, although in some channels, they will remain higher than those for most other annuities. This will help product competitiveness.
It has been predicted that EIA product designs will become simplerand they have, a little. It is a primary goal of many new and existing entrants to do 3 things with EIA design: streamline the design with only 1 or 2 moving parts; share the index growth "home runs" more completely with the policyholder; and offer policyholders choices between conservative EIA designs and more risk-taking designs.
