By Kent C. Scheiwe
The premium dollars flowing into single premium immediate annuities in 2002 reached over $5 billion, but this represents only about 2.5% of the premiums that went into their deferred counterpart, single premium deferred annuities.
Can the industry expect this percentage to increase? How might SPIAs change in the next few years? This article examines both questions.
Traditionally, SPIAs have been an unattractive product for insurance representatives and companies to sell.
For reps, the drawback is that SPIA commissions are generally less than SPDA commissions, and SPIAs lock up the clients funds for life with little, if any, liquidity.
For insurers, lack of profitability is a key problem with the SPIA. Two primary reasons account for this. First, insurers have been required to set up SPIA reserves that are often much greater than initial premium received. For example, a company may have to set up a reserve in excess of $110,000 for a $100,000 SPIA. This results in surplus strain to the company and a drag on profitability of the SPIA.
The second reason is that mortality improvement has hampered profitability. With improvements in medical care, annuitants are living longer. This has resulted in additional SPIA payments to annuitants, thus curbing profits.
In the next few years, however, two environmental changes will help make SPIAs more popular. One is the large balances that people hold in defined contribution pension plans and IRAs. At retirement, many of these individuals may want to invest a portion of their accumulated funds in SPIAs in order to receive a guaranteed monthly income for life.
The other change is the aging of the baby boom population. The closer boomers come to retirement, the greater will be their concern about outliving their investments. Again, SPIAs answer this concern by providing a guaranteed monthly income for life.
In view of these coming changes, insurers may want to consider changing the overall commissions they pay on SPIAs. By increasing first-year commissions or adding trailer commissions, for example, insurers might help SPIAs become more attractive to insurance representatives.
Regarding the strain on surplus, this should be less of a problem. As a result of the current low interest rate environment, insurers are experiencing little, if any, surplus strain when issuing SPIAs. This should make SPIAs more attractive for insurers to sell.
Concerning mortality improvement, a few companies are beginning to underwrite SPIAs, placing annuitants into risk classifications much as is done with life insurance. Proper classification may provide a more equitable payout for annuitants.