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.
As insurers have begun to offer high fixed annuity bonus rates, VAs that once accounted for 75% of annuity sales in some banks have dropped to just 45% of their annuity sales, Cerulli says.
Despite a decline in captive agents, the career agency system has potential for growth, he says. The captive agent accounted for about 55% of total VA sales in 1995, but this fell to 37% by the second quarter of 2001.
Career agents still account for more VA sales than any other channel. They had their best year in a decade last year, when they rolled up $46.8 billion in VA sales, according to estimates by the Financial Research Corp., Boston.
The career agency system can improve its position by capitalizing upon the needs of future retirees seeking planning advice, Cerulli believes.
In an effort to reach various intermediaries for selling VAs, insurers have increased their wholesaling forces, making wholesaler territories smaller to increase efficiency. One reason is to better serve brokers, who demand more expert sales support beyond the traditional transaction-oriented relationship, the report says.
Wrap programs present another growth opportunity, although few VA providers currently offer their products within such platforms. Wrap accounts offer a variety of mutual funds, all covered by a comprehensive fee, and can include a VA component.
Among companies offering VAs though wrap programs and third-party vendors are Hartford and American Skandia, the report observes. Each has a mortality and expense fee of .40% and an administration fee of .15%, plus an optional death benefit costing .15% of the asset.
Cerulli predicts progress in this area will be slow. Many independent financial advisors who might like to offer wrap accounts with a VA component out of a need for simple, one-stop offerings are cautious, awaiting a proven product, the report suggests.
Controlling annuity redemption rates will also be important to the growth of VAs, the report suggests.
Between 50% and 80% of an insurer’s annuity book of business aged greater than five years will be exchanged to another insurance carrier or surrendered for another financial product, Cerulli estimates. Trying to keep an insurer’s net sales growing requires it to increase new sales and decrease redemptions at the same time.
Cerulli also urges insurers to look for new sales in the offshore annuity market. Total assets in select global retirement markets as of 1999 represented more than $5.71 trillion in both private defined contribution plans and individual retirement accounts, the company notes.
Reproduced from National Underwriter Life & Health/Financial Services Edition, November 5, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.