Against a backdrop of improving economic conditions in the U.S. and the stock market reaching an all-time high, insurers continue to reposition and reinvent their products, strategies and services.
These changes enable insurers to offer advisors and investors a broad range of products despite the challenges of the continuing low-interest rate environment. For advisors, staying up-to-date with the changes in the market and the characteristics of the products currently available is critical to ensuring that you can serve the needs of your clients.
In recent months we have seen John Hancock exit the annuity business altogether, while other companies have limited the amount of annuity business they accept to help actively manage their risk. Some companies have even offered to buy out the guarantees in exchange for adding a lump sum to the client’s account value. On the other hand, a few companies have made the strategic decision to add variable annuities (VAs), fixed indexed annuities or fixed annuities to their platform. These companies hope to take advantage of the unmet marketplace need for higher rates of return and guaranteed income.
At Ernst & Young, we continuously monitor the product and solution landscape to help organizations and advisors keep abreast of the ever-changing market. We have identified five trends that will influence the annuity marketplace in 2013.
Record low interest rates and the costly price of hedging are causing insurers to continually evaluate whether they want to remain in the variable annuity business. Several companies will continue to curtail sales of variable annuities by lowering the benefits, while others will manage sales volumes by no longer accepting 1035 exchanges. Additionally, insurers will continue to drop aggressive investment options on their variable annuities and move customers into funds that are less volatile. It remains to be seen if additional buyout offers to contract owners will be made or expanded to other GMXB benefits.
Companies have started to file and introduce products that are hybrids of variable annuities and fixed products. These products have an upside for both the company and the client due to the lower capital requirements for the company and the downside protection offered to the contract owner. As with any new offering, it is yet to be seen how these products will be received and how product designs will evolve. However, the initial designs appear to provide an attractive option for customers. Potential regulatory headwinds exist.
Even though several companies have exited the annuity business, other carriers are adding annuities to their platform. In some cases, when exiting a line of business or market, the books of business, operations and distribution are often available for sale. This availability enables aggressive entrants to quickly build operational scale and capacity, and ultimately market share. Acceptance by channel and product will likely vary, with fixed annuities by independent marketing organizations (IMO), broker-dealer and bank platforms leading the way.
Over the last two years, many companies have introduced variable annuity products targeted to Registered Investment Advisors (RIAs) with features that offer guaranteed lifetime income. However, the growth in the RIA variable annuity marketplace has been slower than anticipated and significant obstacles exist that will limit future growth in this space. Given that many RIAs have a preference for other methods of generating retirement income, it is likely that placement rates may remain low for some time. New products and features will attempt to reverse this perception.
We are now starting to see some effects of FINRA’s new suitability and know-your-customer (KYC) rules that took effect in July 2012. In response to the new regulations, many firms have established procedures for gathering client information, record-keeping and product training to ensure that advisors understand their new KYC and suitability obligations. Challenges include capturing the right data, asking for more information, if necessary, and proper documentation. Firms are trying to anticipate regulators’ inquiries and challenges and are setting up internal governance structures. Many firms are setting up structures to regularly monitor third-party distributors.
Annuities offer clients predictability and security in any market so we will continue to see the insurance industry focus on them. Manufacturers will look to diversify their product lines, products and features so that they are not overconcentrated in any one area. The industry will seek to achieve the optimal balance of what is best for the client, advisor and shareholder.
The opinions expressed in this article reflect the opinions of the authors and are not necessarily those of Ernst & Young LLP.
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