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:
More annuities are being developed with a Market Value Adjustment (MVA). In todays economic environment, an MVA clause is almost mandatory to protect the insurer from rising rates.
New contracts are more likely to be owner-driven as opposed to annuitant-driven. (The owner-driven annuities trigger death proceeds at the death of the owner, not the annuitant. If owner and annuitant are different and the annuitant dies first, the owner names a new annuitant. Annuitant-driven annuities trigger death proceeds at the death of the annuitant.) In my view, no company should design a new annuity that isnt owner-driven, as these contracts are easier to understand, provide more flexibility to the policyowner, solve lots of commission problems, and most importantly, conform more easily to the tax code.
Another important trend to watch in the future is for contractual minimum guaranteed rates to increase as rates rise. Due to the extremely low current rate environment, many companies have lowered the minimum rates, but as rates rise, the higher minimum rate contracts will be reintroduced to the market. Not because insurers want to do so, but competition will demand it.
Due to the low rate environment, most of the shorter-term MYG annuities, with guarantees running 3 years and less, were removed from the market but will reappear as rates rise.
Still another trend: Annuity applications are becoming much longer and more complicated, with more insurers requiring signatures on disclosure statements.
As an agent, I believe disclosure statements are good. I want the client to sign a statement that he/she understands the key features of the contract, which helps to protect the insurer and me from groundless lawsuits. On the other hand, there is such a thing as overkill. Ive seen disclosure statements that require the policyowner to sign 2 or 3 times, plus initial up to 15 different times. That is totally unnecessary.
One of the most difficult ideas Ive tried to convey to insurers is: The easier an annuity is to explain, the easier it is to sell. The easier it is to sell, the more is sold. The more sold, the higher the profits.
That sounds simple enough. Then why are there so many problems? The answer lies in a nutshell, egos! The belief that “we know more than the other companies and agents and we dont want to hear any other ideas” does a lot of harm to the business and growth opportunities.
Its refreshing when a company asks for ideas from clients and agents on how to make products and forms better and easier to understand. Unfortunately, that doesnt happen very often and thats a trend that needs to change.
, CLU, ChFC, is publisher of Fisher Annuity Index, Dallas. You can e-mail him at Danny@MrAnnuity.com.
Reproduced from National Underwriter Edition, February 25, 2005. Copyright 2005 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.