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February 02, 2003 at 07:00 PM
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.
