The fact that two major carriers in recent weeks have announced their exit from the annuity business should tell us all we need to know about the health and viability of the industry heading into 2012. If only it were that simple, as the industry, like the product itself, is a bit more complicated.
Hedging issues, suitability, baby boomer retirement, the living benefit “arms race” and … oh, yeah, the worst global financial crisis in the history of the world are issues the industry has dealt with in recent years; issues that seem to be coming to a head as the New Year begins.
“The need for guaranteed lifetime income strategies is unquestionably stronger, and that’s putting upward pressure on companies to deliver them,” says Matt Greenwald (left), president and CEO of annuity research firm Mathew Greenwald & Associates. “But it’s coming at time where it is much more difficult and expensive to hedge those strategies, and the volatile stock market will only make it more difficult.”
A new report from Ernst & Young titled “Global Insurance Center US Outlook” backs Greenwald’s view noting that “the life and annuity insurance industry will be challenged to find ways to manage both capital and risk in an economically and politically uncertain year, while continuing to lay the groundwork for future growth.”
“Pressures such as low interest rates, volatile equities markets, and a political and regulatory environment in flux will continue to impact the industry, making it difficult for insurers to boost earnings,” Doug French of Ernst & Young says in the report.
Even Cathy Weatherford (right), president and CEO of the Insured Retirement Institute, an advocacy organization dedicated to promoting the use of annuities among advisors and consumers, notes that in 2012 there will be a “settling out” of product changes as insurers move from development to distribution.
And, of course, the aforementioned carriers exiting the business don’t help.
“You’ve got more need and less players to fill that need,” says Mark Cortazzo, senior partner with MACRO Consulting Group in Parsippany, N.J. “In 2007, you had 30 ladies and 100 companies looking to dance. Today, you have the opposite; 100 ladies looking to dance and only 30 companies available for their card.”
Cortazzo (left), a top rep with SII Investments who is well-versed with annuities, recommends advisors consider either a product with a short surrender period or something that is completely liquid. He notes that interest rates are low and volatility is high, which he calls a “double whammy.” If investors believe the situation will change, he adds, then they shouldn’t be locked into something long-term where they are unable to take advantage of potential market upside.
“In 2007, we could get something that would give us 90% of equity market gains and 90% of the bond market risk mitigation,” Cortazzo says. “Compare it to the straight bond market at the time, and of course we would take that deal. But those advantages are no longer available. Costs are rising to the point that where we’re looking at alternatives to annuities to get needed income and protection.”