In an annuity marketplace dominated for so long by variable products, the financial crisis has turned out to be quite a powerful equalizer.
Fixed and variable annuities are selling at roughly the same pace for the first time since the mid-1990s, observes Noel Abkemeier, consulting actuary and principal at the consulting firm Milliman. "It's back to being about a 50-50 [market] share for each."
"The fixed annuity is back with a bang," declares Garth Bernard, president and CEO of Sharper Financial Group, a Boston, Mass., consulting firm that specializes in retirement income solutions. That re-emergence isn't an aberration, he says, but rather an indication that as much as investors like income guarantees such as those offered with variable annuities, they also want assurance that their assets will grow.
Whereas the decade leading up to the financial crisis was largely about one-upmanship in the VA space, particularly with living benefit options the post-crisis era in the annuity market will be about annuity products that are simpler, less costly and a better fit for investors, according to Bernard.
At the crossroads
"We are at a very interesting crossroads," he says. "Investors who are in or moving toward retirement aren't necessarily looking for outsized returns. They want guarantees on their assets as well as their income. It's a case of 'slow and steady wins the race.'"
The increasing emphasis on asset protection, he concludes, "will be a powerful catalyst to growth in the fixed annuity market."
With the recent major surge in fixed annuity sales, insurers are adding subtle new twists to their plain-vanilla fixed annuity offerings. While those changes aren't of the magnitude of the recent "arms race" with VA living benefits, they are substantial enough to warrant the attention of advisors and their clients.
Setting the benchmark
One change is the additional emphasis insurers are placing on fixed annuities with a market value adjustment (MVA) feature. Like a traditional book-value fixed annuity, MVA products pay a declared rate of interest for a specified period. But unlike book-value contracts, they also impose an adjustment positive or negative to the annuity account value at the time of partial or full surrender. The amount of the adjustment is based on any change in a benchmark interest rate since inception of the contract. If the benchmark rate is higher, an MVA will decrease account value; if the rate is lower, account value increases.
MVAs have been around for decades, but lately they have gained significant ground on the sales front because they appeal to insurers and investors alike. Insurers favor MVAs because they provide an extra layer of risk-management to protect them in instances where contract-holders opt to surrender before the annuity reaches full term, explains Abkemeier. Meanwhile, some investors prefer to take on the interest-rate risk associated with an MVA if it means getting a higher base rate than that of a book-value fixed annuity,
