Non-Annuity Income Products Start To Bite

Some consumers who otherwise would have bought VAs could opt for fund-based solutions because of their flexibility and lower costs. And non-annuity products may end up appealing to individuals who would not have purchased VAs.

In terms of influence on the long-term VA industry outlook, a majority of the surveyed insurers believe the VA industry’s market share will decrease as the new products attract potential VA customers (see Figure 1). The remaining insurers tend to believe that, rather than cutting into VA market share, these new products will expand the retirement income market to include customers who wouldn’t otherwise buy VAs; this would present new sales opportunities for companies in this market and their distribution partners.

Despite expecting some loss of VA market share due to these new non-annuity income products, only a few of the responding companies predict that there will be a loss of dominance in the retirement income marketplace (see Figure 2). Of the 20 surveyed VA insurers, 9 said they expect VAs with guaranteed living benefits (such as guaranteed living withdrawal benefits or guaranteed minimum income benefits) will capture the largest market share within the next 5 years. Just over one-third believe it is still too early to determine which products will control the marketplace. Only 3 companies think mutual funds will dominate.

Many issues need to be addressed when evaluating prospects for offering non-annuity income products. The surveyed companies cite as examples the tax treatment of withdrawals and insurer capacity limitations for taking on additional risks. While most mutual fund or brokerage account distributions that result from capital gains are taxed at the appropriate capital gains tax rate, distributions from annuities are taxed at ordinary income rates, which can sometimes be substantially higher.

Several surveyed insurers believe the Internal Revenue Service’s capital gains tax treatment is not fully resolved and thus may be holding up development efforts.

Sales of VAs with lifetime income guarantees account for an increasingly large portion of deferred annuity sales. Currently, the guaranteed lifetime income risk assumed by VA insurers is managed through hedging programs and reinsurance agreements. If these insurers also underwrite lifetime income guarantees on non-annuity products, which could have much larger inflows than VAs themselves, then the industry may face volume limitations.

In addition, a company offering a guarantee on another company’s products will need to address issues such as how to link administrative systems and how to offer guarantees that are profitable.

Consumers will benefit as more retirement income options are made available to them. However, VA companies will need to manage this situation carefully as more companies offer non-annuity income products and compete for retirement income dollars.