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An era of annuity innovation

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They can’t control the interest rates that dictate fixed annuity returns, nor can they control the equities markets where variable and indexed annuities derive much of their value. So what can annuity providers do to reinvigorate sales after a down year?

They can innovate.

And that’s exactly what they appear to be doing in 2010, on the heels of a year in which overall sales sagged due in large part to an unfavorable interest rate environment (a drag on traditional fixed annuity sales) and equity market volatility (which didn’t help variable annuity sales–see the sidebar for fresh sales figures for 2009). From newfangled living benefits and income guarantees to revamped compensation structures, here’s a look at some of the key trends that annuity experts say are worth watching:

Variable annuities with sub-accounts dedicated to funding income guarantees. Companies such as The Hartford and AXA have recently rolled out VAs with a fixed deferred investment option designed specifically to generate an income stream. The Hartford dubs it a “personal pension account.” The contract holder decides how much to dedicate to that fixed account, based on desired income level and the targeted term of income payments, then the annuity company “tells you how much you need to put into that fixed bucket right now” to hit those targets,” says Kevin Loffredi, senior vice president at Advanced Sales & Marketing Corp., a firm based in Oakbrook Terrace, Ill., that provides variable annuity research data and wholesaler productivity tools. The trade-off for income security is a lack of upside within that bucket, he notes.

Restructured withdrawal benefits with growth rates tied directly to economic factors. First came the GMIB, then the GMWB and the lifetime GMWB. AXA’s new Retirement Income variable annuity could represent the next evolutionary step in income and withdrawal guarantees, says Loffredi, with two-stage living benefits whose growth rates are pegged to the 10-year Treasury average.

One thing that stands out about the AXA product is its linkage to the Treasury rate, says Joe Montminy, research director at LIMRA International, an organization that tracks the annuity market. The income guarantee is based on a “roll-up” rate that is declared annually at one point above an average of the 10-year Treasury rate. It’s the kind of feature that more annuity providers are likely to incorporate into their products to manage risk, Montminy says.

A simpler annuity chassis. The number of variable annuity product changes peaked in May 2009 and has fallen off sharply since, according to John McCarthy, Loffredi’s colleague at Advanced Sales & Marketing. That, he says, illustrates a move within the industry to make annuities more straightforward for consumers and less risky for insurers. To do so, providers are taking steps such as building living benefits into their base variable annuity contracts. Case in point: John Hancock’s AnnuityNote lifetime income VA, which comes with a built-in 5 percent withdrawal guarantee for life. “There are restrictions on it, but they’re keeping it simple and fairly conservative, and they’re keeping the cost down,” says Loffredi.

Commissions and compensation. There’s a move afoot to branch out from purely front-loaded annuity compensation structures. That makes sense, according to Nolan Baker, CSA, co-founder of the Retirement Resource Center in Maumee, Ohio, because it more closely aligns advisors’ financial interests with those of their clients, while also meshing better with fee-based compensation structures.

Instead of paying commissions on the front end, some providers are moving to a trail-based compensation system, in which advisors are compensated over time, based on assets invested in the contract. Certain fixed index annuities from Allianz come with trail-based commission options, notes Baker. And it’s about time, he says. “There needs to be a structure where current clients come first and potential clients come second.”

Friendlier fixed index annuities. Consumer-oriented innovations such as built-in income guarantees and 100 percent return-of-premium features are making indexed annuities an easier sell, says Baker. Some, like the Allianz Pro V1, come with a bond index allocation strategy, plus principal protection and an annual reset.

Annuities inside retirement plans. The groundswell of lifetime income products is spreading from the retail annuity market, into the retirement plan segment. Take Sun Life Financial’s new guaranteed retirement income solution, which comes with an optional feature that plan members can apply to all or some of the group plan investments held in a retirement plan. It works like this: The initial amount, plus any future contributions, represents the benefit base. The annual income guarantee is equal to 5 percent of that base and is payable annually for life starting at age 65, with no waiting period to receive income. The annual income guarantee will never decrease as a result of market declines.

Contracts with a long term care component. Annuities that allow contract-holders to tap into annuity value to pay for long term care could find broader appeal in 2010, observers say. This is thanks to tax provisions that begin this year and allow the cost of qualified long term care to be covered using the cash value of life insurance and annuity contracts on a before-tax basis. Baker says new “doublers” payout features on some linked or combination contracts make them especially appealing.

While most combination products introduced to date come on a fixed annuity chassis, Lincoln National is set to introduce a variable annuity with an LTCI benefit component, according to Loffredi.


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