There are two words we don’t see in the same sentence every day: “annuities” and “sexy.”

Yet, the latest trend in the index annuity market aims to change that. This is a new type of crediting strategy, commonly referred to as a “rainbow method,” and it is turning heads.

Initially only 2 carriers (under the same parent company) offered this innovative interest crediting formula, but other carriers quickly duplicated it in the wake of heavy marketing by independent marketing organizations.

Theoretically, the rainbow method can be used on any of the 21 different crediting strategies found in index annuities today. But to date, it is available only on 2 strategies–the monthly averaging and annual point-to-point strategies.

Here’s how it works: The index annuity carrier offers a choice of 2 or more indices on a single crediting method during a term. This is different from traditional index annuities which typically offer only one index per crediting method during a term. (Note: In the rainbow products, the policies currently credit their interest in anywhere from 1-3 years.)

The so-called rainbow products now on the market tend to credit interest by using one of the following 2 approaches.

1. The policy applies a stated percentage weighting to each index; these percentages stay the same over the stated term of the crediting method. Potential indexed gains will be credited based on those weightings at the end of the crediting period, in view of each index’s performance.

Example: An insurer offers indices A, B, and C on a monthly averaging crediting method in an index annuity with a 3-year period. Index A will receive a weighting of 40% over the 3-year period; Index B will receive a weighting of 35%; and Index C will receive a weighting of 25%. The carrier then deducts a spread from any potential indexed gains at the end of the term, and then applies the remainder to policy’s account value.

2. After the end of the crediting period, the carrier does a look-back on the performance of the indices. Then, it ranks the best performing indices for that term. From that ranking, the carrier applies a stated percentage per index, and then credits any potential index interest accordingly. (These calculations can vary; some will use participation rates, while others may use caps or spreads.)

Example: An insurer offers indices A, B, and C on an annual point-to-point crediting method on an index annuity with a 1-year term. The best performing index over the one-year period gets 75% weighting in the crediting calculation; the next-best performing index gets 25% weighting; and the least-best performing index gets zero credit. The carrier then applies a participation rate to any potential indexed gains to determine the amount to credit to the policy.

Many agents are drawn to the appeal of a “we’ll give you the best performing index” approach.

After all, in today’s heightened regulatory environment, many producers are confused over which strategy to suggest to clients–that is, which will perform the best. If the producer advises the client inaccurately, there could be unwanted consequences. But with a look-back rainbow method, these fears are reduced; hence, its appeal.

Another reason agents are drawn to both types of rainbow methods has to do with the indices being offered on the chassis. Never before has the index annuity market seen so many international indices.

The DJ Euro Stoxx 50, an international index, was first offered on an indexed annuity in October 2005. The next international index to debut in the market was the FTSE 100 in November 2006. Then a snowball effect occurred when the Heng Seng showed up in December 2007 and the Nikkei 225 in March 2008.

Which index will be next is hard to say. However, the appeal of the index annuity has never been stronger.

Naysayers who have argued about lack of diversification in the product line may now have difficulty finding an argument not to sell these fixed products.

Producers who have longed for a benchmark other than a domestic index now can find 7 carriers that offer index products with international indices.

Not all carriers with rainbow methods offer international indices, and not all international indices are offered on rainbow methods. Lately, however, the two do seem to go hand-in-hand. This makes for an innovative trend in the index annuity market and a new way to make index crediting sound “sexy!”

Sheryl Moore is president and chief executive officer of AnnuitySpecs.com, an indexed product resource in Des Moines, Iowa. Her e-mail address is