Fixed Annuity Sales: The Money Is Moving Like Water

Without any help from the financial world media, people are discovering that “boring” fixed annuities are safe and pay higher rates than CDs, Treasury bonds, and the like.

As one of my clients told me, “You know, my annuities arent sexy and they arent as much fun to talk about at the country club, but every night when I go to bed, I know that my annuities are earning interest, and I will wake up richer than I was the day before. I just love em!”

In the past, FA sales have plummeted when rates fell below 6%. But, that hasnt happened this time. Sales have actually exploded. The big question now is what will happen to sales when rates go below 5%?

Most of the agents I talk to feel that lower rates will slow down FA sales with longer durations, just like it will with CDs. But they also feel that, if we offer our clients a rate period ladder with durations of one day to five years in length, FA sales will continue to thrive–because the amount sold is directly related to the lower rates paid at the local bank.

In the past 10 years, when FA rates fell below 5%, people would move their money to equities. But now that weve been through two-and-a-half years of negative equity experience, I dont think thats going to happen this time around. People will stay liquid while they shop for the best rates available.

As a result, we sell a lot of FAs paying 3% to 4% without any surrender charges. Huge sums of money are moving from money market accounts into these new “liquid flexible” annuities while they wait for rates to go up.

The public wants CD-type annuities while insurers prefer floating rate annuities. Thats the Catch-22.

The dilemma for insurers is that CD-type annuities require higher reserving than non-guaranteed rate annuities and therefore limit the amount of premium that a company can write. Also, by guaranteeing the rate, companies cannot afford to make a mistake in setting the rate (making their spreads), nor can they afford to buy bonds that are called or downgraded.

These two investment problems have led to a ceasing of FA production at several companies and/or to A.M. Best downgrades in the last two months. I dont know how some insurers have avoided these investment issues, but a handful have consistently had higher rates and commissions for CD-type annuities than most other insurers.

The CD annuity is great for the buyer, but has more risk for the insurance company. With rates below 5%, most reinsurers are not willing to coinsure these FAs because the small margin between current rates and the 3% guaranteed floor is too risky. Therefore, smaller insurers that have less capital are restricted in the amount of CD annuities they can write, if they want to keep their Best ratings.

Regardless of how you feel about CD-type versus floating rate annuities, there is a huge opportunity for agents and companies to utilize marketing skills to meet market demand for safe money havens.

Money, like water, may sit still for a while, but it will eventually move. Are you in the right position to catch all you can?

, CLU, ChFC, is the publisher of Fisher Annuity Index, Dallas. E-mail him at [email protected].

Reproduced from National Underwriter Life & Health/Financial Services Edition, October 7, 2002. Copyright 2002 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.