(This was the first of a series of LifeHealthPro articles published in the summer on the annuity space.)
Many financial advisors are still seeing the insurers with which they do business raise prices, decrease benefits and features, discontinue products and, in some cases, even exit the business. Despite the somewhat steady growth of the US economy in early 2012, the global economic outlook looks less certain. And, unfortunately, an extended period of historically low interest rates and increased pressure on insurer profitability looks more certain. These concerns will continue to have a negative impact on annuity writers and will send companies in search of sustainable, yet profitable, product designs. As a result, we expect to see an ongoing revamp of products, features and investment options during the remainder of 2012 and into 2013.
For an advisor, agent or wholesaler in this environment, this means there is a heightened need to understand not only what product suites your providers are offering, but also to understand the changes that competitors are making to those product suites and how they affect your clients and their financial decisions. At Ernst & Young, we have identified five trends that we believe will significantly impact the annuity and retirement landscape over the next 12 to 18 months.
#1. Continuing change and innovation in the variable annuity space.
During the first quarter of 2012, Hartford Life announced that it will no longer sell variable annuities. This follows the exit of Sun Life, Genworth and ING in 2011, and the scale-back by MetLife throughout 2011 and 2012. Consequently, distributors are now very sensitive to the possibility that a company may not offer variable annuities in the future.
Product trends in 2012 continue to focus on restructuring living benefits on variable annuities. Some companies have decreased the withdrawal percentages (the amount of the income base that a policy owner can withdraw each year) and bonuses, increased the charges or made the investment options more restrictive. Others have introduced new, less-competitive benefits and pulled the richer ones from the market.
Source: Ernst & Young’s Retirement Income Knowledge Bank®
Insurance companies continue to look for new ways to de-risk, such as managing volatility within the funds or even buying back certain benefits. Recently, Lincoln Financial introduced a new series of investment options, called LVIP Protected Asset Allocation, that use a short equities-futures strategy to reduce the volatility of returns. Earlier this year, Transamerica filed a prospectus that offers to buy back, with a cash bonus, particular in-force non-annuitized guaranteed minimum income benefits (GMIBs) that it had previously sold. Another company, Achaean Financial, customized its IncomePlus+ immediate variable annuity for insurers to offer to certain GMIB owners. These buy-back programs will help reduce the insurer’s long-term risks and the ongoing accounting issues associated with in-the-money GMIBs.
#2. Fixed indexed annuities lead the way in new product development across the industry.
The majority of companies that have not participated in this market before have either recently entered it or are assessing an indexed annuity entry approach. For example, both Hartford and Genworth, two companies that recently exited the variable annuities market, have joined the fixed indexed annuities market. Many other variable annuities carriers also view the fixed indexed annuities marketplace as a way to generate growth in their businesses in a less risky way to manufacture retirement income products. In some cases, their established distribution networks are also valuable assets to a market-entry strategy. In addition, traditional fixed annuity carriers are considering whether the additional complexity of offering fixed indexed annuities products is offset by the increase in the competitiveness of the credited rate when compared against those of traditional fixed annuities and bank CDs.
The increase in fixed indexed annuities market entrants has led to greater innovation and better choice in the fixed indexed annuities market. Guaranteed lifetime withdrawal benefits (GLWBs) have grown in prominence and complexity on fixed indexed annuities, with more than 20 companies now offering a GLWB on its fixed indexed annuities. Fixed indexed annuities writers are able to offer a slightly richer GLWB for a slightly lower cost than variable annuities writers due to the lower volatility in the account value of the base contract. New benefit design that merges the index and rollup features has recently hit the market.
Companies continue to search for more efficient uses of capital, with some companies modifying the features and/or limitations of their GLWBs to eliminate large reserve strains similar to the variable annuities market.
#3. Super mutual fund wraps: Contingent deferred annuities back on track.
Contingent deferred annuities have been developed and touted as a solution to wealth management firm issues around the incorporation of variable annuities into managed money programs. Typically, these firms face infrastructure, administrative capability and cost issues when trying to wrap a variable annuity into a managed solution for their retail clients. Contingent deferred annuities can help overcome such difficulties and help protect against longevity risk.
These products usually provide guaranteed lifetime income payments, even if an investment account is exhausted through allowable lifetime withdrawals and/or poor investment performance. The investment account contains the covered assets, typically mutual funds or managed accounts. The covered assets are not owned by the insurance company but remain under the control of the contract owner. The products operate very much like GLWBs on variable annuities. However, contingent deferred annuities have faced both regulatory and tax hurdles, and they continue to face some issues that may delay their mass deployment in the market.
The potential size of the contingent deferred annuities market is significant and attractive to the insurers that would underwrite the solutions. But it remains to be seen whether contingent deferred annuities can be effectively marketed and sold in a market where many buyers would not otherwise consider a variable annuity.
#4. Location, location, location (or product, asset and taxation) for income allocation models.
Annuities will play a more significant role in retirement planning exercises and in client portfolios in the post-financial crisis environment as demand continues to grow for efficient ways to meet desired outcomes and to maintain those outcomes during volatile markets. Because the risks in retirement are different from the risks an investor may have faced while accumulating retirement assets, the optimal solutions are different, and retirees will need help understanding and evaluating the differences. Retirement portfolio theory is in its infancy and appears to be focused on outcomes rather than investment returns, which we view as a positive development.
These outcomes may be efficiently achieved by combining investment products, insurance products and annuities (including a single-premium immediate annuity, an immediate variable annuity and variable annuities or fixed indexed annuities with a guaranteed minimum withdrawal benefit). The resulting portfolio models create an optimal mix of product categories based on a client’s financial situation and can be adjusted to help meet individual retirement goals and maximize the sustainability of retirement income over a client’s lifetime.
#5. Encouraging a qualified longevity insurance solution.
Encouraging a qualified longevity insurance solution is part of a broad bipartisan effort on the use of annuities to help fund retirement. Technical regulation is necessary to clarify the treatment of a longevity annuity under the required minimum distribution rules. The broad policy is to have self-managed assets in a 401(k) plan to age 85, with guaranteed income thereafter. This may be the precursor to mandated annuitization, as well as to lowering 401(k) deferral by limiting risk.
It is clear that the insurance industry will continue to focus on the safety of annuities and the unparalleled levels of guaranteed income that they offer for clients in retirement. However, the industry needs to continue to innovate so that product lineups remain vital and sustainable in light of global economic uncertainty with less-than-confident consumers. All of this looks like a lot of change to those in the industry.
To clients, it will be a challenge to make informed decisions. The demands on financial advisors to help clients understand the products available to them today, the value of what they may already hold in their portfolios and the way to think about the value of annuities going forward will certainly be high. Advisors who meet these demands head-on will earn and retain their clients’ trust.
Over the next few weeks, we’ll dive deeper into the continuing change and innovations in each of the areas that we’ve just discussed. Next month, we’ll cover the variable annuity space and how some of the innovation to maintain the product in a company’s lineup may make for simpler conversations and, in some cases, may require new ways to talk about the guarantees.
Check out Rethinking Annuities, a Special Report landing page at AdvisorOne.