Whats In The Way Of Expanded Income Annuity Sales?
By Timothy C. Pfeifer
Stand-alone payout annuities are showing evolutionary growth. Also called immediate annuities and income annuities, these products do sell. The question the industry is exploring is how to sell more of them.
Best estimates of 2002 calendar year sales for retail single premium immediate annuities are approximately $4 billion. (This does not include approximately $6 billion in sales from structured settlement annuities, which pay income under legal settlements.) Fixed payout products dominated SPIA sales for the year, while variable SPIAs suffered along with the equity markets.
On a percentage basis, SPIA sales have been encouraging in recent years. But in absolute dollars, they still represent well under 5% of total annuity sales. For both fixed and variable SPIAs, sales are dominated by a few carriers (maybe five for fixed SPIAs, and two for variable SPIAs).
Still, most industry leaders agree tremendous opportunity exists for future SPIA sales, given the needs of aging baby boomers and the favorable tax treatment of non-qualified SPIAs. Hence, eyes are on the factors that are preventing accelerated growth. These factors fall into four categories:
Weak Marketing Commitment: As a whole, the life insurance industry has yet to focus substantial marketing time and dollars on the SPIA business.
Though certain exceptions do exist and more carriers are increasing their SPIA focus, most carriers have not crafted SPIAs with a unique marketing brand. This creates a textbook Catch-22: Sales cannot increase without more capital investment, and more capital investment cannot be justified without some confidence in future sales levels. On a positive note, creative new uses of SPIAs have emerged for specialized situations (e.g., funding long term care insurance premiums and life insurance premiums).
Rep Compensation: SPIA sales compensation has been cited as a drag on sales for two reasons.
First, the level of SPIA compensation has traditionally been lower than compensation paid on deferred annuities. The SPIA range is 3.5% to 4.5%, and lower on shorter period benefits. By contrast, the typical deferred annuity compensation range is 5% to 7% (though fixed deferred annuity levels have fallen recently in many channels). A number of insurers have responded to this disparity, however, by modifying upfront compensation on SPIAs to levels more consistent with deferred annuities.
Second, reps have cited the inability to receive subsequent compensation after issue as a negative loss-of-control on SPIAs. One carriers producers have coined the phrase “annuicide” to refer to the loss of future control on SPIAs and annuitizations. In response, a few carriers have begun to make available future commission opportunities via asset-based trail compensation and renewal commissions expressed as a percentage of benefit payments.
Liquidity: SPIAs have been criticized for lacking liquidity.
Although many period-certain benefit payouts allow policyholders to take a lump sum present value in lieu of receiving the remaining periodic benefits, most SPIAs with life-contingent benefit structures do not. This is because of the potential disruption to the mortality assumption embedded in the SPIAs pricing if mortality anti-selection occurs with these liquidity requests.
The lack of liquidity on life-contingent SPIA payouts has been a difficult problem to solve. Some carriers allow for lump sum benefits to replace periodic life-contingent benefits provided the insurer reserves the right to request a health assessment at issue or time of lump sum request. Others allow for the commutation of future benefits only during a limited initial period of the policy (say, the first 18 to 24 months). Still, others calculate the present value of future benefits payable upon request of a lump sum based upon conservative (i.e., poor) mortality assumptions.
Additional liquidity alternatives include permitting lump sum commutations only upon the occurrence of specified events or only permitting a portion of a life contingent benefit to be paid in a commuted lump sum. In all cases, the tax implications of early cash-outs from non-qualified SPIAs need to be addressed.
Perceived Lack Of Benefit Competitiveness: SPIA benefits are occasionally critiqued as being uncompetitive.
A closer look, however, suggests SPIA pricing has tended to be aggressive for market leaders. Although existing nonforfeiture laws allow for no specific interest crediting floor on fixed SPIAs, most carriers specify a 3% minimum credited rate while actually investing in longer, less liquid assets. This enables them to credit embedded interest well in excess of 3% annually.
For life-contingent SPIAs, both fixed and variable, the benefit mortality assumptions are usually based upon the Annuity 2000 Basic Mortality Table, the industrys most recent individual annuity mortality table.
However, the amount of future mortality improvement applied to this table, which is a key pricing element, varies considerably by company. Some carriers assume no future mortality improvement, while others assume mortality improves for only five to 10 years. Either assumption may be aggressive for life-contingent benefit calculations.
In sum, many life carriers are attempting to enhance appeal of SPIAs to distributors and customers. Still, the short-term answer probably still lies in strengthening education and training, being sure to note that lifetime income is a unique product capability only offered by life insurers. Further, pension plan sponsors need to accept that their fiduciary duties include education about de-accumulating, not just accumulating, assets.
Timothy C. Pfeifer, FSA, MAAA, is a principal in the Chicago office of the Milliman USA actuarial consulting firm. You can e-mail him at [email protected]
Reproduced from National Underwriter Edition, February 3, 2003. Copyright 2003 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.