Equity-indexed annuities have been the hottest product in the annuity market for the last four years. Sales have grown from $6.5 billion in 2001 to $23.3 billion in 2004 and will possibly reach $30 billion in 2005, according to Advantage Compendium, St. Louis.
What will it take to continue this torrid pace? Will the forces that drove the growth enable it to continue?
During this period, EIA purchasers anticipated index growth while enjoying the comfort of downside protection. (That growth is something they did not anticipate in the years immediately prior.)
Low interest rates also boosted EIA sales, as purchasers often found declared-rate fixed annuity interest too low, but found the upside index-based potential of an EIA an attractive addition.
Declining commissions added value to the product, too.
If the stock market avoids a sharp drop, the optimism that helps EIA sales will continue.
Interest rates always are unpredictable. If they stay low, they will continue to give EIAs an advantage over declared-rate fixed annuities. If interest rates rise, particularly if long-term rates are noticeably higher than short-term rates, EIAs could become even more attractive.
But there are challenges in the increased scrutiny now going on concerning sales methods and the possible treatment of EIAs as securities.
For example, guidance from the National Association of Securities Dealers is causing some structuring and tightening of suitability and disclosure procedures for some agents. However, this should not detract from sales.
The SEC’s addressing of securities registration issues will have an unknown result. If EIAs are considered to be securities, one-third of the agents now selling the product will have to decide whether they want to take the step of becoming a registered representative.
On the other hand, if the product is registered, it will become more attractive to broker-dealers.
Even without SEC involvement, the industry should expect more registered products in the market in the near future.
Creative product development and product management will add to the opportunity to keep sales growth healthy.
Guaranteed lifetime withdrawal benefits (GLWBs)–the lifetime version of guaranteed minimum withdrawal benefits–are helping to drive the sales of variable annuities because of their ability to function both as an accumulation guarantee and as a lifetime income guarantee.
Because GLWBs may become the leading tool to address retirement income needs of baby boomers, they should be expected to become a significant feature of EIAs in the competition for retirement savings dollars.
EIA sales have not been strongly established in either banks or regional brokerages or wirehouses, but that should change.
Just as variable annuities were added to the fixed annuity offerings in banks, a similar trend is starting to take place with EIAs.
In the brokerage environment, EIAs provide an ideal product to manage the transition to more conservative investing and, with a GLWB, can continue the transition into receiving a structured income.
Many designs include return caps, which limit the ability to benefit from high index growth years. An emphasis on designs that include participation in all parts of the growth can increase the attractiveness and customer satisfaction with the product. The S&P 500 price index has increased by more than 15% in approximately half of all years, and this is too big of a phenomenon to ignore.
Finally, insurers may take steps to add more value for the customer through more efficient index-benefit hedging techniques. Benefit hedging costs can be reduced 10% or more by managing the hedging on a more active basis, similar to the methods used for guaranteed benefits on variable annuities. Such techniques, developed in the last few years, also can be applied to EIAs.
The higher participation, higher cap or other improved features can help to improve the competitiveness of EIAs in the annuity marketplace.
Although nothing is ever certain, there are many reasons to expect EIAs to continue their strong growth and become an even more significant piece of the individual annuity market.
Noel Abkemeier FSA, MAAA, Williamsburg, Va., and Tim Pfeifer, FSA, MAAA, Lake Forest, Ill., are consulting actuaries and principals at Milliman. Their e-mail addresses are, respectively, firstname.lastname@example.org and email@example.com.