These are volatile times in the annuity market for distributors, producers and end users alike. Low interest rates and topsy-turvy equity markets are clouding the supply and demand picture. There's uncertainty on the government policy front and flux in the product lineup. So whether you're involved with traditional fixed products, indexed products, variable products or all the above, keeping abreast of developments in the fast-moving annuity arena is imperative if you're going to do right by your clients.
Here's a breakdown of some of the key trends that annuity experts say warrant an advisor's attention through 2010 and beyond.
Variable Annuities
Sales & marketing.
Variable annuity sales were largely flat throughout 2009, hitting $30.4 billion in the first quarter, $31.8 billion in the second quarter and $31 billion in the third quarter, according to figures from the Insured Retirement Institute in Washington, D.C. However, according to IRI, overall sales were down in the third quarter compared to the $37.8 billion recorded during the same period of 2008, an indication investors remain wary of committing to a product so closely linked to the volatile equities market.
The numbers don't necessarily say so, but according to Todd Erkis, a principal in the insurance consulting practice at New York City's Towers Watson, variable annuities just might be an easier sell today, because they afford clients access to features that address major concerns such as outliving their retirement savings and losing principal. Advisors can build a compelling case for a variable annuity by showing clients how their assets would have performed during the recent market plunge had they resided in a variable contract protected by some kind of principal guarantee, for example. "The variable annuity is a much harder sell when markets are chugging along at [average returns of] 10 percent," notes Erkis.
Advisors who dismiss variable annuities and their optional guarantee features as unjustifiably pricey for what they deliver might want to reconsider that stance, he adds, "because there might be more benefit there than you thought," at a cost that's justified for the protection such a guarantee provides.
Product development.
Variable annuity living benefits generally cost more and come with less rich benefits than they did 18 months ago, mainly because insurers have moved to de-risk those features to make them sustainable over the long term. Still, Joseph Montminy, research director at Windsor, Mass.-based LIMRA, an organization that tracks the annuity market, says those features aren't going away anytime soon, since they continue to resonate with variable annuity buyers, 90 percent of whom purchase some sort of living benefit rider with their contract.
But insurers are also taking variable annuities in intriguing new directions. Some are unveiling next-generation income guarantees investors can purchase with a variable annuity, points out Curtis V. Cloke, LUTCF, CLTC, an Iowa-based advisor who founded the Thrive Income Distribution System. These riders create a dedicated subaccount within the contract whose purpose is to generate an income stream that begins for the contract holder at a specified date in the future.
"Manufacturers are really starting to take a hard look at these types of features," he says. "Basically you're securing a portion of asset value for deferred income payments, without cannibalizing assets [within the contract] to create that income. What it enables clients to do is keep much more of their portfolio engaged for growth and to pass on to heirs."
The group retirement account market is another new area of focus for variable annuity manufacturers. In December, for example, Symetra Life Insurance launched the Retirement Passport group variable annuity for the 403(b)/457 market. According to Erkis, insurers are also likely to target retirement plan rollover candidates with low-fee, annuity-like withdrawal guarantees that afford downside protection and guaranteed income.
Regulatory and government policy developments.
An overhaul of the federal financial regulatory system is in the offing, which leaves uncertainty as to which regulatory body will be overseeing variable annuities. Advisors who sell and/or recommend variable annuities would be wise to keep tabs not just on financial regulatory reform, according to Erkis, but also on state and federal policies dictating capital and reserve requirements for manufacturers that provide variable annuities. Those actuarial guidelines are known as VA-CARVM. "Regulators want to make sure insurance companies are adequately capitalized to cover their [annuity] guarantees, and for the most part, I think they are."
Traditional Fixed Annuities
Sales & marketing.
After a banner year in 2008 and a strong start to 2009, sales of traditional fixed annuities, including those of the MVA (market value adjustment), book value and fixed income varieties, slumped as the year progressed, falling sharply from $19.6 billion in the second quarter to $14.6 billion in the third quarter, according to figures supplied by Illinois-based Beacon Research. Still, sales were strong for the first three quarters of 2009 relative to the same period of 2008, with gains of 25 percent for fixed annuities with a market-value adjustment feature and 18 percent for book value products.
