The future of annuities

Garth Bernard has been around the annuity business long enough to have developed a keen eye for trend-spotting. And these days, when Bernard, founder and president of Sharper Financial, a Boston-based consulting firm specializing in retirement income strategies, surveys the annuity landscape, he sees strong indications of a shift from a product-centric to a solutions-oriented mindset, especially among suppliers.

No longer are insurers preoccupied with developing new bells and whistles within the annuity contract itself, observes Bernard, an actuary and former senior executive at MetLife, where he helped guide the carrier’s annuity department. Instead, he says, insurers are bent on simplifying their annuity offerings, particularly on the variable side, so they are sustainable from a risk standpoint, and so they can be more readily packaged in an integrated retirement solution that addresses clients’ multifaceted needs entering, and during, retirement.

“From a product standpoint, it’s not so much about new products and features but about new methods and processes for bringing multiple products together to create very flexible, very customizable solutions for the client,” explains Bernard, who is also a partner in a new, proprietary income distribution system called Thrive (developed by advisor Curtis Cloke) that relies heavily on deferred-income annuities.

To that end, Bernard predicts more alliances between insurance companies and entities such as mutual fund companies and banks to develop multifaceted solutions with an annuity component.

The rise of income annuities
In that context, Bernard isn’t alone in envisioning a growing role for income annuities — contracts that provide investors with guaranteed income, either immediately (via a single-premium contract) or (as with the aforementioned deferred-income annuity), at some point in the future. With the latter, the value of the contract grows at a fixed rate for a period of time, during which withdrawals aren’t permitted. Once that period ends, the contract-holder has the right to begin taking payments, or to postpone those payments further. Some deferred annuities are designed to provide income for a specified period of years and others for a lifetime.

New annuity alternatives that provide guaranteed fixed income for life are gaining resonance with consumers and insurance companies alike, according to Joe Montminy, research director at LIMRA, a Connecticut-based organization that tracks the life insurance and annuity markets. “Once interest rates start increasing, I think you’ll see more interest in these pay-out annuities, including deferred pay-out products, where there’s a deferral period before a person starts receiving payments. I don’t think demand for them will be huge in the next few years, but 10 or 15 years from now, I can see them being used more in the retirement planning process.”

The consumer craving for annuity guarantees continues to grow, largely as a result of the investment community being “traumatized” by recent equity market turbulence, according to Bernard. “People want insured solutions.”
Recent sales figures from LIMRA support that contention. According to Montminy, close to 90 percent of new variable annuity contracts are purchased with some form of accumulation, withdrawal or income benefit. Of these so-called living benefits, guaranteed lifetime withdrawal benefits are most popular, with a 60 percent election rate on new VA contracts, he notes.

Montminy says he expects demand for living benefits riders to remain strong in the near term, despite moves by many carriers to increase the cost and scale back the benefits associated with those riders. “Our data shows [consumers] are willing to pay extra for these kinds of guarantees.”

Back to basics for living benefits
On the supply side, meanwhile, there’s been an abrupt halt to the so-called living benefits arms race. “In terms of product features, I don’t think any stone was left unturned, and the result was that products became extremely complex. You almost needed a degree in mathematics to figure out how they worked,” says Bernard.