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Life Health > Annuities > Fixed Annuities

Beacon: Flatter Rate Curve Hits FA Market

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Recent interest rate shifts may be decreasing consumer interest in contracts with relatively short, 1-year rate guarantee periods.

Buyers of both book value fixed annuities and market-value adjusted fixed annuities seem to be moving away from 1-year guarantee periods, according to Beacon Research Inc., Evanston, Ill.

Overall FA sales dropped 18% between the fourth quarter of 2004 and the fourth quarter of 2005, Beacon estimates.

In the book value FA market, contracts with 1-year guarantees accounted for 85.7% of sales in the fourth quarter of 2005, down from 87.9% in the fourth quarter of 2004.

In the market-value adjusted FA market, contracts with 1-year guarantees accounted for 38.7% of sales in the latest quarter, down from 42.8%.

During the latest quarter, 1 of the top 5 fixed annuities was an indexed annuity and the other 4 were book value annuities. During the fourth quarter of 2004, 3 of the top 5 fixed annuities were indexed annuities and 2 were book value annuities.

Issuers of short-term fixed annuities are having a harder time offering consumers attractive rates, because short-term interest rates have been rising while long-term rates have been holding steady, according to Jeremy Alexander, chief executive of Beacon.

Normally, insurers could increase short-term rates by buying long-term notes and bonds to back the short-term products. This year, the flatter yield curve is keeping insurers from following that strategy, Alexander says.


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