Assessing the annuity landscape

Among some of the benefits, costs decreased for hedging living benefits, reserve requirements for living benefits decreased, and immediate and deferred income annuities offered higher payout rates—meaning consumers received more retirement income.

IRI noted in the same report that interest rate levels and the direction of the rate changes affect the cost and benefit of annuities.

The 10-year constant Treasury maturity rate, a rate used as a reference in pricing debt securities issued, increased in 2013, IRI said.

Rising rates contributed to higher fixed annuity sales as:

• Payout amounts increased on immediate and deferred income annuities.

• Fixed deferred annuities offered higher crediting rates.

• Fixed indexed annuity caps and participation rates increased.

Interest rates also impact variable annuities. "Everything else being equal, rising interest rates generally lead to lower hedging costs and lower reserve requirements," IRI said. "This may provide carriers the flexibility to increase their variable annuity business and to stabilize fees."

While some carriers have stopped offering death benefits, Morningstar reported that 74.5% of VAs still include them. New annuity products without death benefits are designed for clients who are less interested in guarantees and more interested in tax deferral, asset class diversification including the use of alternative investments, and greater investment options, according to IRI.

It's also important to note that the number of FINRA arbitration cases regarding variable annuities has been dropping. While there were 274 such cases in 2010, there were 212 in 2011 and 174 last year.

As to product innovation, IRI noted in its report that a "turning point" occurred in 2013 for annuity product development with the expansion of several product types.

IRI projected that deferred income annuity (DIA) sales were likely to exceed $2 billion in 2013, a doubling of sales over the previous year.

On the legislative front, IRI is closely watching the National Association of Registered Agents and Brokers Reform Act (NARAB II), which would establish a one-stop, national licensing clearinghouse for financial professionals holding state insurance licenses in multiple states.

IRI said that its research shows that NARAB II's passage would remove a barrier that is impeding broker-dealers' ability and financial advisors' willingness to sell annuities.

Lee Covington, IRI's senior vice president and general counsel, said "there has been unprecedented momentum during this Congress to move NARAB II forward."

The Senate passed NARAB II legislation as part of a flood insurance bill in late January, Covington said, and the House passed stand-alone NARAB II legislation last September, but acted on its own version of a flood bill.

"Policymakers on Capitol Hill clearly see the benefit of streamlined and cost-effective insurance licensing across state lines," Covington said. "Now the challenge is to find the right legislative vehicle to ensure its passage through Congress."

Covington added that there may be an opening on the "near-term horizon" as Congress must reauthorize the terrorism risk insurance program. "Whether it is through this legislation or some other bill, we will continue to work with congressional leaders to pursue NARAB II and its promise of efficient insurance licensing for financial professionals operating in multiple states."