Overall sales seem slow, but there are pockets of high activity
Sales of fixed immediate annuities have not increased significantly from 2003 through the first half of 2005, despite the approaching retirement of the oldest baby boomers and the rapid disappearance of defined benefit pensions.
But that is the overview. In particular, some markets actually are seeing increased immediate annuity sales.
There are several reasons for the slow overall sales numbers. From a consumer standpoint, immediate annuities are clearly a postponable purchase. Those now entering retirement often don’t think of themselves as “retired” and tend to underestimate their longevity risk. For someone in their early to mid-60s, age 85 or 90 is far into the future.
Also, immediate annuities generally represent an irrevocable commitment, which tends to be somewhat intimidating to many buyers.
In addition, many object to disappointing payouts in today’s low interest rate environment, lack of liquidity or protection against inflation, and dissipation of their legacy.
Given all that, predictions have surfaced that the long-awaited boom in fixed immediate annuity sales never will materialize. However, trends in some distribution channels suggest the opposite–that a steady increase in sales is achievable and even probable.
For the last 10 quarters, independent producers and captive agents have dominated the fixed immediate sales of participants we have studied. These two channels accounted for about 70% of sales in the first half of 2005 and 2004, up from 63% in the first half of 2003. But sales patterns of these and other channels do differ, as follows:
Independent producers. While independent producers have outsold captive agents in seven of the 10 previous quarters, sales in this channel have fluctuated considerably.
It is interesting to note that fixed immediate sales by independent producers are negatively correlated with interest rates. Perhaps these producers and their customers are reluctant to lock in a payout when rates are rising.
There also has been less effort to educate advisors in the independent producer channel. The widespread view is that these producers tend to be more familiar with how to use immediate annuities to provide retirement income and for other purposes, such as funding premiums for life insurance or long term care policies. Their success in selling fixed immediates generally has been a function of competitive payouts and long-established relationships with distributors.
Captive agents. By contrast, captive agent sales of fixed immediate annuities have increased steadily over the last 10 quarters, more than tripling from first quarter 2003 to second quarter 2004.
Captive agents tend to be specialists in permanent life insurance, which is generally a relationship-oriented sale that involves considerable trust.
It may well be that fixed immediate annuities are particularly well-suited for this channel because the sales process is closer to that of permanent life insurance than to deferred annuities, which are often sold with more of a transaction orientation.
What is more certain is that various firms and organizations have made considerable long-term efforts to educate, provide tools for, and market aggressively to captive agents and that those efforts are paying off. Also, some of the most innovative carriers have focused on this channel; these carriers have introduced new product features designed to overcome the limitations of a traditional fixed immediate.
Broker-dealers. As a group, broker-dealers accounted for about 19% of fixed immediate sales in the first half of 2005, up from 16% in first half 2004 and 18% in 2003.
Broker-dealers represent a distinct challenge as a distribution channel for sales of this product.