Over the past decade, fixed and variable annuity designs and benefits have become very similar in a number of notable ways.
This convergence may be part of the reason why the Financial Industry Regulatory Authority is urging broker-dealers to supervise indexed annuities–and perhaps fixed annuities. It may also be part of what motivated the Securities and Exchange Commission to issue Rule 151A. This article examines the convergence and its potential direction, Rule 151A or not.
In looking at today’s variable annuities, it can be surprising to see how stable and “fixed-like” the delivered benefits have become. Likewise, when looking at today’s fixed interest and fixed indexed annuities, it can be surprising to see how “sophisticated” the products have become.
What this portends for the future of annuity product design can only be more of the same–and better.
Let’s consider variable annuity conditions and benefits first. VA in-force assets fall into the broad subaccount strategies shown in the table. The table reveals this startling fact: At least 45% of all VA assets today (plus some portion of the allocation strategies) are invested in fixed interest and fixed income subaccounts. This might mean that VA sellers and buyers are seeking to obtain the diversification, low volatility, and guarantees of fixed annuities.
In addition, the entire VA living benefit “arms race” that has so characterized VA competition and sales this past decade has been all about various insurance-based features and benefits.
Examples: The guaranteed lifetime withdrawal benefit (GLWB) and guaranteed minimum income benefit (GMIB) both insure against longevity risk–the risk of outliving income-generating assets. The guaranteed minimum accumulation benefit (GMAB) assures at least a fixed multi-year-guarantee-like outcome for the VA value. And the guaranteed minimum death benefit (GMDB), while not a “living” benefit, delivers a death benefit more like the accumulation value of a fixed annuity.
Simply said, VAs are using insurance benefits and guarantees to bridge the gap between variable and fixed annuities.
What about fixed indexed annuities? The products are offered in order to deliver a market index-linked interest return–higher than a traditional fixed interest annuity. That has moved their expected return closer to (but not matching) VA returns.
To be more competitive still, fixed indexed annuities now offer GLWB riders very similar to those offered by VAs. The GLWB delivers additional longevity-based income insurance by providing a lifetime income withdrawal payment amount regardless of the underlying deferred annuity accumulation value.
Lately, GMDBs have been showing up on both fixed indexed and fixed interest annuities. These deliver the remaining GLWB income value as a death benefit. This operates very much like a variable annuity GMDB.
Indexed annuities have been serious competitors to VAs, and this will surely continue. In the past, the products added variable-like features, such as the fixed interest account with annual reallocation and a higher interest possibility with a monthly point-to-point strategy. Developers also added GLWB riders–to traditional fixed annuities, too–and delivered more sales success than most expected. Now, work continues on new and better insurance benefits for these products as well as on interest strategies that are inside and outside SEC Rule 151A.
Simply said, fixed and indexed annuities are also using interest strategies and insurance benefits to bridge the gap between fixed and variable annuities.
In sum, deferred fixed annuities and VAs were once each their own thing. Today, both annuity types use very similar insurance-oriented guarantees in order to deliver to clients more return (indexed) or more security (variable).
With the development of more indexed interest strategies, the expected return advantage of indexed over fixed annuities may be maintained and extended for a fixed-type annuity.
If SEC Rule 151A is upheld, the industry will see strategies with more expected interest without being “indexed” under the rule. And regardless of the outcome of Rule 151A, the industry will add more insurance benefits to both indexed and fixed annuities (e.g. long term care riders and better GMDBs).
For its part, the VA industry will certainly not abandon its living benefits competition. Despite heightened FINRA supervision and insurance benefit costs today, the VA industry will find more and better ways to deliver “guarantees” to clients.
It will be an exciting next couple of years, no matter the annuity type.
Paul McGillivray is senior vice president advanced marketing, and Kevin Cloud, FSA, MAAA, is vice president product actuary for Creative Marketing International Corporation, Leawood, Kan. Their respective e-mail addresses are: email@example.com and firstname.lastname@example.org.