Why Are Life And Annuity Sales Going In Opposite Directions?
Statistics from LIMRA International, Windsor, Conn., show that, in the first half of 2003, life and annuity sales went in opposite directions where fixed and variable products are concerned.
The question is, why?
In the life insurance arena, fixed product sales were up for the six-month period. For instance, universal life annualized premium rose 26% and whole life climbed 9%, says LIMRA. But annualized premiums for variable products were down–by 38% for variable universal life and 50% for variable life. (See Table I.)
Meanwhile, in the annuity sector, the fixed/variable trend went the other way. That is, total fixed annuity sales fell 10% for the half compared to the same year-earlier period, while variable annuity sales were up 12%, says LIMRA. Specifically, total fixed deferred sales dropped to $46.8 billion from $51.9 billion, while total variable sales rose to $64 billion from $57.1 billion. (See Table II).
(Note: Fixed immediate annuity sales did rise in the period, but LIMRA staff believes this may reflect a unique large-ticket sales program, not a major uptick in retirement funding purchases.)
Overall, U.S. individual life sales for the half were down 4% in annualized premiums and down 6% in number of policies sold. But total annuity volume was up 2%, according to the LIMRA reports.
With the stock market now into a several-month rebound, the VA sales upswing is expected. But why havent VUL and VL sales also shot up?
Historically, there has been a lag in the market, particularly in VUL sales, once the stock market starts rebounding from a downturn, says Elaine Tumicki, corporate vice president, products research for LIMRA. She tracks life insurance sales.
Part of the reason is that variable life policies are not issued immediately, she says, explaining they must first go through underwriting. By contrast, variable annuities have no underwriting and can be issued immediately.
In market recoveries, the insurance component in variable life definitely slows down sales growth compared to variable annuities, agrees Eric Sondergeld, corporate vice president, retirement research for LIMRA. He tracks annuity sales. “The insurance benefit is the primary reason people buy variable life in the first place,” he explains. “They dont buy the policies just to buy stock.
“By contrast, the variable annuity is much more of an investment product.” Therefore, in the past, in terms of swings in sales, VAs have been much quicker to respond to market changes, he says, alluding to trends observed in LIMRAs quarterly sales reports.
Right now, says Tumicki, the figures show consumers continue to prefer fixed life products. Overall life sales are essentially flat, she allows, but UL now represents nearly 33% of new premium, up from 22% two years ago. Meanwhile, VUL now represents only 17% of new premium compared to 33% in 2001.
Even the mix in survivorship life insurance shifted from VUL to UL, says Tumicki, noting that UL now accounts for nearly 60% of new survivorship premium compared to a little over 33% in the first half of 2002. (In general, survivorship sales have continued their decline of the past few years, reflecting uncertainty about estate tax issues. However, the declines are moderating, Tumicki says, noting second quarter 2003 survivorship premium fell just 5% from the year-earlier second quarter.)
Looking forward to the second half of 2003, Tumicki is not making any predictions. Given the length of the recent bear market, it is difficult to say how soon VL sales will recover, she explains.
The annuity business is also dealing with a unique trend. That is, interest rates declined throughout the bear market, says Sondergeld. A down stock market and a falling interest rate environment dont usually happen at the same time, he says. But even with the falling interest rates during the bear market, fixed annuities had three years of record sales, he adds.
Now, though, fixed annuity sales are slowing, and variable annuity sales are increasing. “I am not sure how long this will continue,” Sondergeld says, noting that trends in the bond market are affecting the interest rates that fixed annuity insurers are able to offer.
In response to bond trends, many fixed annuity companies have pulled products or stopped issue of certain guarantee periods or fixed buckets, he explains. Many insurers will re-enter the market with new designs, Sondergeld says, and “tons” of fixed annuity choices are still available. So the impact on fixed annuity sales going forward, due to product availability, should be “relatively modest.”
As for the first-half increase in VA sales, Sondergeld notes that a lot of the money is going into fixed accounts inside the variable products. In fact, fixed account deposits rose to $27.3 billion in the first half of 2003, from $20.3 billion in the same year-earlier period, he says.
Also, he says, there is “no question” that variable annuity guarantees are accounting for much of the increase in VA sales. The election rates for the guarantees are very high, he explains.
In sum, says Sondergeld, “it looks as if people are buying time right now.”
Reproduced from National Underwriter Life & Health/Financial Services Edition, September 26, 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.