In the first 9 months of 2005, indexed annuities continued making impressive sales gains and claimed an increased share of overall fixed annuity sales compared to the same year-earlier period. But 3rd quarter 2005 data shows indexed annuity sales actually fell from the prior quarter and the same quarter last year. (See Charts 1 and 2.)
There are several possible reasons for the 3rd quarter's decrease. A lot of negative publicity has come out regarding these products, including a series of lawsuits arising from allegedly unsuitable sales of indexed annuities to senior citizens.
Some of this negativity also has arisen from public comments by National Association of Securities Dealers officials.
The NASD's expressions of concern have not been limited to public statements. In August 2005, NASD issued its Notice to Members 05-50 advising that members are responsible for supervising indexed annuity sales by their registered representatives.
The many repercussions of NTM 05-50 reportedly have included considerable confusion and trepidation among dually licensed independent producers.
On an anecdotal basis, it appears that many of these producers have stopped selling indexed annuities and turned to variable annuities as a replacement. These anecdotal accounts gain some credibility by the fact that sales of VAs increased in the 3rd quarter even though the S&P 500 essentially moved sideways–an unusual occurrence.
It is estimated that some 60% of all independent producers hold a securities license. Since the vast majority of indexed annuity sales are generated by independent producers, any reluctance to sell these products on their part would inevitably have a significant impact on overall indexed annuity sales.
Other factors may be having an effect, as well. One is a trend toward shorter-duration indexed annuity products. Shorter surrender periods tend to lower caps on rate of participation in the increase of an index. This is the case because carriers invest in shorter-term fixed income instruments to back the product's minimum guarantees. The lower the cap or participation rate, the less upside potential an indexed product appears to offer.
Shorter-term interest rates also may have had an impact. Rates rose steadily in 3rd quarter 2005. Rate increases might actually be expected to have had a positive effect on indexed annuity sales. Insurers are able to offer higher participation and cap rates as rates rise because they need to reserve less money to back minimum guarantees. From 2003 through September 2005 there was a .71 positive correlation between 5-year Treasuries and indexed annuity sales.
So, why did 3rd quarter sales drop as rates rose?
Keeping the 3rd quarter's flat yield curve in mind, short-term Treasury rates may have reached the point where indexed annuities compared unfavorably to Treasuries and bank certificates of deposit. Investors expect to receive a risk premium from an indexed annuity. This risk premium is reduced as shorter-term rates rise.
