Fixed Annuity Sales: The Money Is Moving Like Water
“We just had the biggest fixed annuity sales month weve ever had, at the lowest interest rates in our companys history. Its incredible, but true!”
Ive been hearing that comment a lot over the past couple of months from an assortment of insurance company executives. The money is flowing into fixed annuities.
From my vantage point, there are two primary reasons for fixed annuity sales being so hot:
1) The largest increases are coming from CD-type annuities, where the rate guaranteed period matches the length of the surrender penalty period.
In the past couple of years, companies that saw the future developed CD-type annuities. These turned out to be the right product at the right time. They are “right,” because todays clients and agents are trusting insurers less and less to pay a fair floating interest rate. Through experience, theyve learned that renewal rates on traditional designs dont generally float up, only down. Thats why CD-type annuities are pushing annuity sales up.
2) Fear is driving money to guaranteed safe investments.
A lot of people have lost all the money in the market they care to lose and are moving their money to where they can earn a guaranteed return without risk.
For example, a lady recently came to my office and said, “I invested $80,000 with my stockbroker two years ago and he made it grow all the way to $50,000. It may not be his fault, but Im having bad dreams about him making it grow to $30,000. At my age, I cant afford to lose any more money. Can you invest my money for me and guarantee a good rate and that my money will be safe?”
In one form or another, I hear those comments every day.
A general consensus of opinion from financial advisors is that client portfolios are far over-weighted in stocks. A lot of rebalancing is going on.
In short, investors believe the outlook for stocks in the next five to 10 years may be only single-digit returns. “If thats true,” they reason, “why subject my money to risk when I can earn a competitive return in a guaranteed safe fixed annuity?”
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 Danny@MrAnnuity.com.
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.