The Direction For Index Annuities Early In 2004? Up
For one-year periods ending since mid-January 2004, the index annuity yield-to-buyer generally capped out for products using annual reset crediting methods. That is to say, whether the maximum interest ceiling in place a year ago was 6% or 11%, almost all of these annual reset structured annuities hit their ceiling and credited the maximum possible interest to the annuity.
Even better performers were index annuities that did not have a cap. These deducted a (in some cases, relatively large) yield spread or asset feeand still many of them credited over 20% interest on their anniversaries occurring in the first 3 months of 2004.
Due to the general rise of financial indices used in index products during 2003, the typical index annuity annual reset buyer has received a real return that is 3 to 10 times greater than the average bank account for the same period. And, unlike bonds or bond funds, the buyer is assured the index annuity return credited cannot be lost if interest rates rise.
A consumer buying an index annuity a year ago reaped very competitive rewards and was well positioned for the future. However, the reward to the producer for suggesting the index annuity one year ago was probably less than it had been in the past. That is because average index annuity commissions have fallen.
In the spring of 2002, the average index annuity yield-to-producer (agent commission) was 10.4%. By the end of 2003, the average had dropped to 7.7%.
Agent commissions paid reached their zenith in 2001 and 2002 with over 4 out of 5 sales derived from index annuities paying commissions of 9% or higher. Indeed, over a third of the sales were in index annuities with agent commissions higher than 11%. By the end of 2003, however, only 2 out of 5 sales involved an index annuity with a commission of 9% or more and fewer than one in 20 sales paid 11% or more.
Why the decline in commissions? Part of the decrease was due to a changing product mix. The surrender period of the average index annuity sold got shorter, and usually the commission decreases along with a shortening of the surrender period.
Also, part of the decline might be that the carriers passed lower commission costs along to annuity buyers in the form of higher caps or lower spreads.
The major reason for lower commissions, however, was falling interest ratesand the outlook for more of the same.
Commissions chiefly fell in 2003 because insurers didnt have the interest income to cover the minimum guaranteed rate, insurer expenses and commissions, and still provide competitive index participation.
To put a face on it, assume it takes 2% to cover insurer costs (and profits) and the minimum guarantee is 3%. In that case, a long-term portfolio yield of 5.5% or 6% does not leave a lot of room. Many insurers did realize some relief by re-filing products with lower minimum guarantees. Still, a commission once paid cannot be rescinded, and insurers were more reluctant to commit to a high initial commission cost in an environment where future rates are likely to stay low.
The good news for agents is, by the end of 2003, many carriers changed their view and presumed rates would eventually rise. Although the initial 100 days of 2004 have cast aspersions on that presumption, interest rates, at least as of this writing in mid-April, are going up. The result is higher commissions.
Carriers have raised commissions, or rescinded reductions, and average commission rates have modestly rebounded. The insurers current hope is that this modesty prevails.
The company executives with whom I have spoken hope that the future index annuity commission landscape will not reach the stratospheric heights of the past. They want commissions to remain in a range that allows the insurer to credit meaningful index participation.
is president of Advantage Compendium, Ltd., a St. Louis, Mo.- based research and consulting firm. His e-mail is email@example.com.
Reproduced from National Underwriter Edition, April 30, 2004. Copyright 2004 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.