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.