Don't Let Record Sales Fool You: The Annuity Industry Is Stuck

Annuity sales reached an all-time high last year.

But scratch below the surface, and you'll see the industry's core remains stagnant.

Given last year's rising interest rate environment and market volatility, it's not surprising that many investors turned to certain types of annuities.

Annuities boomed in 2022, with sales hitting $310.6 billion, a 17% increase from the previous record set in 2008 according to LIMRA data. That's a pace LIMRA predicts will continue.

But underneath these numbers is a different story entirely — a story about an industry being held back by antiquated processes and systems.

Sure, Record Sales

First let's take a closer look at the record set in 2022.

Multi-year guarantee annuities — a type of fixed rate annuities — blasted off, seeing $27.4 billion in sales in the third quarter alone of last year, according to Wink.

This was a 4.7% increase over the previous quarter and a staggering 138% increase over the third quarter of 2021.

To put that in perspective, the third-quarter MYGA sales numbers for the third quarter of 2022 approximated the average annual sales for years before 2022.

Fixed and fixed indexed annuities, or FIAs, also had a record-breaking third quarter last year, with $21 billion in sales, up 6.9% over the previous quarter and 20.9% from the third quarter of 2021.

Look Deeper

At the same time, sales of traditional variable annuities fell 41% compared to sales for the fourth quarter of 2021.

Last year, traditional variable annuity sales totaled $61.8 billion, down 29% from 2021.

In other words, after excluding sales of interest-rate sensitive MYGAs, the industry's core struggled.

The explosive growth seen in MYGAs and FIAs over the past year should not be surprising.

They're interest-rate sensitive, and the rising-rate environment and market volatility seen over the past year has created a perfect storm for investors to flock to the relative safety of these products.

However, what goes up must come down, and we'll eventually see a reversal in rates.

When that happens, we can expect to see sales of these products cool and then the numbers will tell a different story — unless sales of traditional VAs and riders re-emerge.

This is where things get tricky.

If you compare MYGAs and fixed annuities to traditional variable annuities with living benefits, they're relatively straight forward products with fewer moving parts.

Advisors taking advantage of the rate environment could be new to annuities, or revisiting them after an absence, and may not make the move to more traditional solutions once rates recede.

And, even if they do, they're in for quite a surprise when it comes to the complexity of not only the products, but the process itself to research, recommend, transact, and manage them.

Best Interest Conundrum

More than 30 states so far have adopted rules requiring a best interest standard, an upgrade from the original suitability rules for annuity sales.

Under the best interest revision, annuity sellers will have to document that they have acted in clients' best interest, told them about any conflicts of interest, and helped them consider a wide range of products.

Again, with MYGAs and fixed-rate products, this is objectively easier to accomplish, since the process is based more squarely on consideration of a single rate.

Complying with the new standard will require financial professionals to show at least two to three products to clients considering annuities, and to record that they did that.

Sounds simple, right?

Believe it or not, many broker dealers are not equipped, from a technology standpoint, to illustrate and store these products side by side. Because of lack of adequate tools, they are at risk of violating best interest.

It's questionable whether they can genuinely act in a client's best interest without evaluating the full spectrum of available solutions, and documenting that they have done that.

This issue highlights gaps in the annuity sales process, which could be remedied through use of technology that enables financial professionals to efficiently compare many annuity products and show how the annuities fit in a portfolio.

This is more proof that the annuity sales process is broken.

More than ever, as an industry we must come together and leverage digital solutions that can help financial professionals better meet the needs of their clients.

For too long, all the players in the annuity sales process have been building their own systems.

This doesn't work.

Carriers, distribution firms, technology partners, and direct sellers need to become part of the same ecosystem that leads to one, holistic view of a client's financial plan.

That's how we'll keep this industry moving forward.

It's the long-term solution that can help all ships to rise — which is more promising than continuing to rely on the hot streak of one particular product type over the short run.

Michael Kazanjian is the chief marketing officer of FIDx, a firm that aims to change the way insurance products are used to achieve client retirement goals within wealth management.