Index annuity sales hit yet another record in the 2nd quarter of 2004, reaching nearly $5.3 billion, according to Advantage Compendium, a St. Louis, Mo., index annuity tracking and analysis service.
That is up 26% from the 1st quarter 2004 sales and up 42% from the 2nd quarter one year ago, says Jack Marrion, Advantage Compendium president.
The 2nd quarter figure represents results from 35 companies, or an estimated 99% of industry sales. Results of 3 carriers were estimated.
Total sales for the first half of 2004 reached over $9.4 billion, says Marrion, predicting that the year-end 2004 figure will likely reach $20 billion.
Why the continued rise in IA sales? Consumers and their advisors are viewing the products as a better alternative than traditional fixed annuities and variable annuities, contends Marrion.
When compared to traditional FAs, the IAs interest rate potential looks better, he says. The appeal is the floor rate guarantee plus the possibility of earning a “significantly higher” return over the next few years, he adds.
“By contrast, the 5-year traditional FAs are, at best, paying rates that are competitive with 5-year CDs, and some are paying slightly less.” And although traditional FAs currently are offering interest rates that are 1%-2% higher than one-year CD rates, Marrion says consumers have been telling him they do not see that as a strong advantage”because they think one-year CD rates will rise in the coming year.”
When comparing the IA to variable annuities, even VAs with several fixed accounts, the issue is security vs. uncertainty, continues Marrion. “The index annuity buyer doesnt see the VAs as offering a growth story; rather, these buyers view VAs as offering the uncertainty of the stock market, without certainty of growth. Further, some buyers are concerned about the bad press that VAs have received in the past year and the Securities and Exchange Commissions actions regarding them. “Theyre trying to size them up, but for now have decided that the IA looks like a better alternative” because of the interest rate guarantee.
The low interest rate environment is affecting IA carriers as well as FA carriers, Marrion points out. For example, because rates have dropped a little in recent months, some index carriers have imposed caps on market-linked returns on products that previously had no upside caps.
In the past year and a half, a number of index insurers have dropped commissions on many of their IA products. The average agent commissions were 7.81% in the 2nd quarter of 2004, for example, as compared to 10.60% in the 3rd quarter of 2001 (see chart). The lower commissioned products tend to have shorter surrender charge periods, Marrion notes, adding that the 2nd quarter results indicate the percentage of IA sales involving surrender periods of 10+ years has now dropped to 42.49% compared to 66.36% in the 2nd quarter of 2003.
“Still, producers are finding it easier to sell the potential of IAs, because the reality of the other products isnt that great,” he says.
The top 5 sales leaders, accounting for nearly 62% of 2nd quarter market share, were Allianz Life, Old Mutual, Sun (Keyport) Life, American Equity, and AmerUs Group, according to the Advantage Compendium report.
The average IA premium was $42,138 among 62% of the carriers who responded to the survey. These same carriers reported an average traditional FA premium of $37,240 for the period.
Currently, about 150 IA products are on the market, says Marrion. But several carriers are planning to enter the IA market this year, he adds. The new policies will probably pay commissions in the 6%-8% range, which is comparable to traditional FA commissions, Marrion says. Index annuities are becoming mainstream products, he explains, “so the carriers believe there is no longer a need to pay higher commissions to attract sales.”
Reproduced from National Underwriter Edition, September 9, 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.