The business environment usually drives change. In the life insurance world, for instance, years of rising interest rates that negatively affected cash value life sales drove insurers to create universal life products.
The millennium bear market resulted in an explosion of variable annuities offering risk reduction riders.
And, the fixed annuity world decided to make index-linked annuities available when the developers’ crystal ball foresaw a prolonged low interest rate period that would penalize stated-rate annuity returns.
However, aspects of today’s environment are limiting the development of truly cutting edge products in the index annuity world. The result is that carriers are now merely tweaking existing concepts.
Which aspects present hurdles?
For one thing, interest rates did not act like they were supposed to. Usually in an economic recovery, short-term rates rise first followed by a period of increasing long-term rates, but this time the second part didn’t happen. Short rates went up; long rates were stagnant.
This is a problem because higher long-term interest rates would have given index annuities more income to fund the flexibility to experiment with new crediting methods.
Yes, there were a few attempts to introduce new crediting strategies this year. However, the low-rate environment meant these attempts were not able to become sufficiently competitive and were not copied by the industry.
Low long-term interest rates retarded development of new products.