Money moves like a river. Although it may “pool” for a while in a savings or investment account, at maturity, the money will move towards higher rates.
Sales of deferred fixed annuities (FAs) come from “new” money applications and exchanges of existing contracts. In 2006, the ratio of “new” money sales to exchange sales was down dramatically from 2001 levels.
In 2001, the average 5-year “CD” type FA rates were higher than the average 5-year certificates of deposit at banks or 5-year Treasury bonds. This is based on data tracked by the Fisher Annuity Index.
As shown in the chart, new money FA sales were about 70% of a company’s business, and 30% were internal or external exchanges. But new money FA sales fell when banks and Treasury bonds paid higher rates than FAs.
With most insurance companies, then, the trend has been that the mix of new money sales and exchanges starts to invert when interest rates change.
Currently, the ratio of exchanges is much higher than new money sales.
Although total FA sales remain brisk with many insurers, with some posting increased sales, there is more cannibalization going on now than in the past.
New money sales are down for a number of reasons. Historically, FAs have paid higher rates than banks or Treasury bonds; however, for the past couple of years, it has been the banks and Treasurys that have paid higher rates. And, because “moving” money seeks higher rates, it has naturally flowed to banks and Treasury bonds.
This should clear up any questions about what is the key factor in new FA sales. The key drawing factor is rate.