Equity-indexed annuities have been the hottest product in the annuity market for the last four years. Sales have grown from $6.5 billion in 2001 to $23.3 billion in 2004 and will possibly reach $30 billion in 2005, according to Advantage Compendium, St. Louis.
What will it take to continue this torrid pace? Will the forces that drove the growth enable it to continue?
During this period, EIA purchasers anticipated index growth while enjoying the comfort of downside protection. (That growth is something they did not anticipate in the years immediately prior.)
Low interest rates also boosted EIA sales, as purchasers often found declared-rate fixed annuity interest too low, but found the upside index-based potential of an EIA an attractive addition.
Declining commissions added value to the product, too.
If the stock market avoids a sharp drop, the optimism that helps EIA sales will continue.
Interest rates always are unpredictable. If they stay low, they will continue to give EIAs an advantage over declared-rate fixed annuities. If interest rates rise, particularly if long-term rates are noticeably higher than short-term rates, EIAs could become even more attractive.
But there are challenges in the increased scrutiny now going on concerning sales methods and the possible treatment of EIAs as securities.
For example, guidance from the National Association of Securities Dealers is causing some structuring and tightening of suitability and disclosure procedures for some agents. However, this should not detract from sales.
The SEC's addressing of securities registration issues will have an unknown result. If EIAs are considered to be securities, one-third of the agents now selling the product will have to decide whether they want to take the step of becoming a registered representative.
On the other hand, if the product is registered, it will become more attractive to broker-dealers.
Even without SEC involvement, the industry should expect more registered products in the market in the near future.
