In 2009, two big stories dominated the index annuity business: The Securities and Exchange Commission’s proposed Rule 151A and capital constraints.
Both had a significant impact on product development, sales, and distribution.
Product development was at an all-time low for the industry. But sales are projected to set a year-end record. Meanwhile, distributors waited with bated breath to find out if their companies would make changes in their business.
Concerning IA products, never has this industry seen such dramatic stagnation in product development. The elusive Rule 151A is what directly impacted this.
On December 17, 2008, the SEC issued Rule 151A, declaring IAs to be securities. If implemented, this would require insurance companies to spend millions to change fixed insurance products, filings, distribution and sales materials to function in a world of registered products.
The costly rule was slated to take effect on January 12, 2011, but earlier this month the SEC agreed to two-year stay of Rule 151A’s effective date, to run from the date of publication of a reissued or retained Rule 151A in the Federal Register.
Still, because of the pending status throughout most of the year, the 45 companies in the IA market held off on developing new products.
On the flip side, there have never been so many changes to existing IAs as in the past year. Annuities are capital-intensive products and capital became scarce when the United States economy hemorrhaged. The result was that all annuity insurers (fixed, indexed, and variable) retooled their portfolios to be viable in a capital-anorexic environment. In the IA market specifically, companies took the following measures to stay viable in 2009:
–Exit the IA market: 7 companies.
–Suspend IA products: 9 companies.
–Reduce issue ages: 5 companies.
–Change/increase minimum premiums: 7 companies.
–Discontinue sales of all guaranteed lifetime withdrawal benefits: 3 companies.
–Increase GLWB rider charges: 3 companies.
–Reduce GLWB accumulation benefit rollup rates: 2 companies.
–Restrict or discontinue uncapped crediting methods: 5 companies.
–Reduce premium bonuses: 7 companies.
–Reduce commissions: 7 companies (twice for two companies and three times for a third company).
–Terminate agents: 2 companies.
–Stop all new agent appointments: 4 companies.
–Stop accepting 1035 business temporarily: 2 companies.
–Stop accepting all business temporarily: 2 companies.
Concerning sales, many predicted that the SEC’s 2011 implementation date for Rule 151A spurred the record sales in 2009. Some speculated that distribution would rush to get as much business issued prior to the 2011 deadline as possible. However, the sales surge was a direct result of something else–the failing economy.
When the economy took a nosedive, consumers panicked and began to look for “safe money places” for their retirement dollars. Those who had lost money in the market, mutual funds, or variable annuities were suddenly looking to fixed annuities and IAs for their retirement solutions.
The result was record-setting IA sales– an all-time high of nearly $8.5 billion in second quarter, and just over $23 billion year-to-date as of third quarter. Projected sales for the year are near a record high of $30 billion. Quite simply, 2009 was a great time for IA sales.
On the other hand, it was hard for insurers to offer annuities in the capital crunch. For the first time, there was a mismatch between supply and demand of annuities. Some companies responded by intentionally reducing sales by nearly 70%.
When the dust settled, there was a new top carrier in the IA market and the former king had fallen to fifth place in terms of sales. There were many shake-ups in the rankings of the top 10 companies, including one company that advanced to the top 10 in third quarter 2009 from 29th place in 2008.
Concerning distribution, it has never been more difficult to be an independent agent in the insurance market.
IA agents were particularly challenged with the impending 151A. Will they need to become registered reps if IAs become securities? To what product(s) could they divert their sales in lieu of IAs? They also were concerned about how product changes would affect their business. Will insurers with which they are contracted limit the amount of IAs they can sell? Will their favorite product still be available for sale tomorrow?
By year-end, consumers still wanted a “safe money place” for their retirement dollars. Neither regulation nor product pricing hindered their need for IAs.
Sheryl Moore is president and chief executive officer of AnnuitySpecs.com and LifeSpecs.com, an indexed product resource in Des Moines, Iowa. Her e-mail address is email@example.com.