It has been said that there needs to be a revolution in the immediate annuity world to produce products that meet the needs of future retirees. One insurer already has fired a shot in this area by developing a fixed annuity where income is not solely dependent on interest rates and where the consumer has liquidity and choices.
Otherwise, the index annuity world in 2004 was generally a return to the rising commission, illusionary bonus and obfuscated crediting formula environments of earlier years. New product offerings simply were tweaks of earlier designs or creative copying.
And although there will be a couple of interesting and innovative crediting methods introduced in 2005, the real cutting edge next year will not be innovative new products but meaningful penetration of new markets.
Index annuity sales were over $7 billion for the third quarter of 2004 and the estimated year-end total for the industry should hit $22 billionmore than triple the sales of 2001.
However, the index annuity arena always has been a sideshow in the greater annuity carnival. Over 88% of the agents actively selling fixed rate and variable annuities have never sold an index annuity.
Even though index annuities only represented 3% of all annuities sold in 2002 and have risen to capture a projected 10% of total fixed and variable annuity sales in 2004, the question for IAs always has been: “Is this a niche product for a niche market, or is it a mainstream annuity designed to compete in a long-term low interest rate environment?” Next year may decide that question.
Nineteen out of 20 index annuity sales currently are and have been derived from annuity salespeople. These are independent producers that make most of their income from selling fixed annuities to one consumer at a time. Banks, stockbrokers and captive agents have represented less than 4% of this market.
Today, many entities seriously are looking at index annuities. Here is one indication: From 1999 through 2003, no bank called me inquiring about IAs. However, in 2004, Ive already had meetings with 10 banks interested in offering the product.
Similarly, in the last few years, major variable and fixed annuity writers have ignored or attempted to counter inroads made by index annuity carriers. But, this fall, I have been told by 6 insurance carriersnot currently in the marketthat they plan on introducing index annuities within the next 6 months. Two major wirehouses are on the verge of kicking off registered index annuities with their stockbrokers (if the pricing environment improves). And, for better or worse, at least one call a week comes in here from reporters asking about the pros and cons of IAs for a story they are writing on the topic.
All of these new entities are intending to target the 88% of agents who do not or will not sell index annuities. Whether index annuities become a mainstream product depends upon the success of the industry in penetrating this 88%. These new entities will not be competing for the 12% of producers currently selling the products. The new IAs being discussed have shorter surrender schedules, simpler designs and much lower compensation than todays top selling products.
If the entrants are successful, the view a year from now could be an index annuity market with todays products and producers at one pole and the new players at the other end of the world. And this new world could well represent the new fixed annuity world in the years to come.
is president of Advantage Compendium, a St. Louis-based research and consulting firm. He can be reached at [email protected]
Reproduced from National Underwriter Edition, December 3, 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.