Interesting Times Now And Ahead For Annuities
The old Chinese saying– “May you live in interesting times”–seems to have been conferred on todays annuity insurers. The market is active on a great many different fronts, with substantial opportunities available in a variety of market segments. We will look at some of the trends here.
First, the industry currently enjoys an environment of sales growth. This growth is showing up in variable annuities, declared-rate fixed annuities, equity-indexed fixed annuities and immediate (payout) annuities, all at the same time. It seems that the federal tax changes enacted in calendar year 2003, which appear to work against annuities (at least for now), have yet to make a large negative impact on sales.
The variable annuity market has rebounded with the U.S. equity markets. This resurgence came none too soon for some carriers, which are facing additional large deferred acquisition cost write-offs, potentially impacting GAAP earnings.
During the recent bear market, variable annuity sales largely held their own, helped by large contributions to the fixed subaccounts. Now, as life insurers have closed down and/or restricted usage of the fixed subaccounts, the rebounding market has motivated policyholders to return to variable (equity) subaccounts.
Despite the comeback of the financial markets, the major components of variable annuities gaining attention are still the benefit guaranteesspecifically, guaranteed living benefits and guaranteed minimum death benefits.
The “guaranteed minimum withdrawal benefit” (GWMB) is a form of guaranteed living benefit that is attracting the greatest attention right now. These benefits offer the appeal of no-annuitization and modest prices.
The “guaranteed minimum income benefits” (GMIBs) are being re-tooled with some price increases and benefit scale backs, but they remain an important feature in many sales channels.
As for death benefit guarantees, these have stabilized relative to the benefits offered, but prices have increased. And some companies have introduced sweetened death benefits of many kinds.
For all forms of guarantees, reinsurance availability is limited in the market. This trend, combined with certain accounting issues, has driven many companies to employ dynamic hedging of these risks. This hedging promises to become the next great risk management frontier for variable annuities.
Other variable annuity trends include the introduction of gains-based living benefits; the trimming back of investment options available inside the products; and second- and third-generation L-share products, which are supplanting C-share introductions.
What about fixed annuities? They have enjoyed a sizeable run-up in sales over the past few years, with a continuation of sales growth in the first half of 2003. Declared rate fixed annuities have taken advantage of the steep yield curve to compete successfully against CDs and other fixed instruments.