Annuity industry growth can be expected to remain in step with a stagnating equity market, but it will be harder for it to recover and reach higher sales, predicts a new report by the Boston research firm, Cerulli Associates.
The report, The State of the Annuity Industry, contends that the industry has nearly reached its full market potential and must now develop fundamentally new products and sales strategies.
In 1986, there were 25 companies offering 45 different annuity contracts, the report points out. Today, about 65 companies compete with more than 450 products. Net sales reached an all-time low in 2000 at 22.3% of total sales.
To achieve greater scale, larger insurers are gobbling up smaller rivals in an effort to become full-service financial providers, Cerulli observes.
On the distribution front, insurers can offer tiered levels of investment advisory services to financial intermediaries, Cerulli says. This can range from simple guidance to a full range of services, such as private banking, brokerage and investment advisory services.
The tiered approach would enable advisors to offer a broad range of products and services, depending on a client’s needs and assets. Offering a scalable pricing structure would position insurers to provide banks, broker-dealers, career agents, financial planners and other advisors with the right financial products at the right prices, Cerulli advises.
Another opportunity the report points to is the emerging IRA rollover market. Cerulli cites a dramatic growth in total IRA rollover assets from $20 billion in 1980 to $2.47 trillion in 1999, a compound annual growth rate of 28.7%.
IRA assets in annuities will grow to $690 billion by 2010, and the portion of these assets from rollovers will grow from 60% to almost 78% over the same period, Cerulli estimates.
Cerulli also estimates that broker/dealers will capture nearly 40% of annual rollover contributions in the next five years as investors seek financial advice at a critical juncture of their lives. Because insurance companies rely heavily upon broker/dealers, they will most likely participate in the rollover market as product providers.
Independent broker-dealers have about 25% of VA sales, and VAs account for 13.7% of their product asset allocation, Cerulli reports. Wirehouses and regional broker-dealers have about 12% of VA sales.
Banks remain a promising distribution channel for annuities, although more for fixed-rate than for variable products. Banks’ share of total annuity sales, including fixed, is between 25% and 35% of total annuity sales, Cerulli estimates, while VAs in that channel remain steady at about 12% of total VA sales.