It has been said that immediate annuities are number 4 on every life insurer’s annual “to-do” list, but that most companies only have time for the top 3.
A few insurers seem to have decided to move immediate annuities up a notch, but more should join in.
Consider the landscape: Fixed immediate annuity sales in 2006 were $5.9 billion, according to LIMRA International. In the first quarter of 2007, fixed immediate annuity sales totaled $1.5 billion, a 7% increase over the first quarter 2006. Although those first quarter sales represented only 2.6% of the total individual annuity market, the coming waves of baby boomer retirements suggest this will likely be a growing segment in the years ahead. For that reason, establishing market share in this market, now, could create significant sales down the road.
Innovations are slowly surfacing, as can be seen from a recent Milliman, Inc. survey of 25 carriers (see chart).
For the industry to embrace this product and give it the attention it deserves, a number of challenges must be overcome. Examples are highlighted below:
Mortality data and longevity risk management: The life insurance industry is flush with mortality data and the reinsurance marketplace is well established and readily available to help manage the risk of insureds dying too soon. Longevity data is a different story. There is a considerable amount of Social Security Administration and other population-type data, but these do not include the self-selection aspects of purchasing an immediate annuity.
The thought is that the typical purchasers of immediate annuities will be fairly confident about their health and will likely expect a longer life expectancy than the general population. Major reinsurers are talking about providing longevity coverage and the capital markets have suggested a few instruments, but the market is far from well established.
The Milliman survey found no clear consensus on mortality assumptions used to price immediate annuities. The industry uses nearly every combination of annuity mortality rates and mortality improvement rates to price these products.
Investment returns: Investment return expectations are a critical component in pricing immediate annuities. The historically low 10 and 20-year Treasury rates and the compression of corporate spreads have put pressure on the investment return expectations that insurers use to price immediate annuities. Increased rates at the long end of the curve have begun to relieve some of this pressure, however.