When looking at fixed annuity trends, its important first to acknowledge the differences in the 4 primary distribution channels. They are summarized in the accompanying list (see box). Well review them here and then see where the headwinds in this market are blowing.
As new annuity products are developed, trends in each channel follow the same path: Annuities sold by professional agents and wire houses tend to improve yields and options to policy owners when compared to annuities sold in other channels.
The bank group tends to copycat more. If Company A offers a particular type of annuity and Company B doesnt, then Company B will copy the product from Company A and try to increase its market share by selling the copy. There seems to be very little creativity in this group.
The companies that develop annuities for the commission hounds tend to think more is better. Their attitude seems to be, “If the commission is already extremely high, then lets increase the commission to an absurdly high level and get more agents to sell our products. We can pay higher commissions by extending the surrender penalty period and pay lower yields to the policy owner.” These annuities contain lots of “snakes in the woodpile.”
You may ask, “Why are so many of these bad annuities sold?” The answer is that the annuities are very profitable to the insurer and agent at the expense of the policyowner. In economics, theres no such thing as a free lunch.
Now for the trends. Consumers desire (and are more likely to purchase) the Multi-Year Guarantee (MYG) annuities. In these products, the length of the rate guarantee period matches the length of the surrender penalty period. These annuities are also known as CD-type annuities.
MYG contracts may come with or without a first-year rate bonus, market value adjustment, and a “Renew, Remove or Rollover” (RRR) clause. A RRR clause simply means at the end of the rate period, clients are forced to Renew for another period, Remove the money from the annuity, or Rollover to a new annuity.
Rather than having a RRR clause, some MYG annuities convert to a portfolio-type annuity, where the rate is free to float up or down and the funds are 100% liquid for as long as the policyowner owns the contract.
The trend in MYG contracts is to do away with the first-year bonus. For example, 4.20% guaranteed for 5 years is much easier to explain than 5% for 1 year and 4% guaranteed in years 2 through 5. Although the 5-year average yield is still 4.20%, clients tend to forget they knew the rate was going to drop in year 2and they get mad when it changes.
As for new annuity design, 2 trends are prevailing today, as follows: