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.
However, even with the steep yield curve, the minimum credited rate requirements of the annuity nonforfeiture law have caused carriers to do some or all of the following: drop credited rates to the minimums, stop selling certain products and refile new products which allow for lower minimum credited rates.
Commission reductions have been implemented across the board, too. However, some distribution channels have seen compensation lowered more than others. If interest rates bounce back, which some indicators point to, it will be interesting to see if commissions rebound.
Multiple-year current interest rate guarantees, both with and without market value adjustments, have enjoyed a strong run-up in sales over this period. Specifically, the five-year rate guarantee product has experienced strong popularity. Over the past quarter, however, some signs point to sales recovery of one-year current rate products.
Other fixed annuity trends include stair-step current rate guarantees (e.g., a 15 basis point rise in credited rate each year), higher surrender charge designs (paired with much lower commission percentages), and rate credits linked to an external interest rate index.
Equity-indexed annuities have shown significant growth in the past two or three years, although the market continues to be dominated by six to eight insurers. Annual reset ratchet products have dominated.
However, many other carriers (including successful variable annuity carriers) are revisiting the subject of offering EIA products. These carriers are looking to create EIAs that are simple and that would pay more modest compensation than historically paid on these products.
Such EIAs would not replace the carriers variable annuity products. Instead, they would be offered as a supplement to the products. Further, the hedging performed by many EIA carriers can complement nicely some of the dynamic hedging being implemented on variable annuity guaranteed benefits.
Finally, the immediate annuity market continues to show steady but unspectacular growth. Recent successes have been seen in the fixed benefit payout market, while new immediate variable sales have been stagnant.
Key issues in this market are new forms of liquidity while in payout mode and increased compensation.
However, new uses of immediate annuities are starting to appear. These include products for impaired life risks. Market potential is still viewed as immense for payout annuities, and recent sales growth and demographics justify some of the enthusiasm.
The annuity world is indeed “interesting” and multifaceted. This article has only scratched the surface of the current dynamics of a market that is vital to a persons financial security and retirement planning.
Timothy C. Pfeifer, FSA, MAAA, is a principal in the Chicago office of the Milliman USA actuarial consulting firm. His e-mail is firstname.lastname@example.org.
Reproduced from National Underwriter Life & Health/Financial Services Edition, October 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.