A fixed annuity, by its very nature, lacks a certain sizzle when compared to variable annuities or equity indexed annuities.
Fixed annuities have been around since 1648 – some say since Roman times – and although they have been spiced up here and there by product innovations, they remain fixed annuities.
Nevertheless, experts on fixed and equity indexed annuities see a compelling era of innovation dawning soon.
"By the end of 2007 and into 2008 we're going to see a surprising amount of innovation in fixed annuities," predicts Sharon Havener, director of fixed annuity sales at Lincoln Financial Group and member of the board of the National Association for Fixed Annuities.
The stage has been set, Havener says, by the baby boomer demographic and its changing needs. "There have been complaints that the fixed products have been too conservative, slow to change. That's going to change."
The marketplace also is witnessing "very visible innovations like the guaranteed returns of the new (Protective Insurance) policy, or the new Integrity (Insurance) policy," which are prime examples of fixed product innovation "being driven by the demographic," adds NAFA executive director Kim O'Brien.
Some serious innovation has already begun, and carriers conventionally have been quick to pick up on the successful pioneering efforts of competitors.
"Carriers now are adding lots of features and benefits that get at the guaranteed minimum income benefit question, guaranteed minimum withdrawal benefits, a focus on immediate annuitization," says Michael Ebmeier, principal of Forest Hill, Md.-based Producer's Choice East. "You're seeing some changes in immediate annuity policies that allow for some creative applications to craft income streams."
Boomers necessitate changes
When it comes to fixed product innovation, the combination of carrier identification of investor needs with the demographically inevitable shift from a portfolio accumulation phase to an income distribution phase is producing innovation.
"Empirically, we are shifting into the distribution phase," says O'Brien. "The demographics have shifted. Before we were in the accumulation phase, because all the baby boomers were accumulating. So I don't see a (demographic) earthquake per se, but I do see it heightening in the next five to 10 years. What that emerging demographic means is a bigger market base to provide the fixed annuity insurance product. The need is burgeoning as the baby boomers are heading into their retirement years."
Havener said one reason is that carriers in the past couple of years have taken unprecedented advantage of information technology to study their policyholders' and prospects' needs.
"What carriers have been doing now – particularly the large, well-established players in the United States of which I am aware – is they have purchased or embarked on studies involving the public to ascertain what their needs are," says Ebmeier. "They really have gone about doing their homework over the last couple of years."
Ebmeier argues that the demographics alone are not the key facts on the ground. "We have lots of older folks today and we've been dealing with their financial issues fairly successfully, so you think that with that group, even if it expands by a factor of 10, why couldn't you just expand your current capabilities to match that?"
For Ebmeier, at least, the reason has to do with the most revealing study result: not the tidal wave of boomers reaching retirement age so much as the disappearance of defined benefit plans.
O'Brien agrees. "NAFA doesn't believe in marketing to a demographic; we believe in marketing to a need. Marketing to a demographic suggests that – because you're a 42-year-old and have two kids and a house in the suburbs – you need a fixed annuity. That is totally inaccurate. Needs analysis is what's important."
If it's fixed, break it
Here are the main areas in which these changing boomer needs are yielding innovative fixed and equity-indexed annuities:
