This is the third in a series of articles that will be published on the annuity space.
Unlike the variable annuity market, multiple insurers entered the fixed indexed annuity (FIA) market in 2011 or are actively developing their initial FIA offering. These carriers are positioning their product in one of two ways: as a vehicle to generate attractive levels of guaranteed retirement income or as a product with more upside than a fixed annuity in this interest rate environment.
With the former, the company’s target customers are baby boomers who are anxious about retirement planning. They are seeking ways to protect their nest eggs and thinking about how they will generate income in retirement. A FIA with a guaranteed lifetime withdrawal benefit (GLWB) appears to be a match made in heaven for these target customers. The policyholder’s account value has the potential to earn returns indexed to the market, with downside protection of the nest egg. The GLWB rider provides guaranteed income for life, the level of which will increase until the policyholder elects to begin taking withdrawals under this benefit.
A company that is positioning its FIA as an alternative to a fixed annuity may either omit the GLWB rider or offer one with modest guarantees. Even without the rider, the policyholders have a chance to earn larger returns than they would with a traditional fixed annuity, but with some added risk (but less risk and less potential upside than a traditional variable annuity). Some carriers that have traditionally distributed their products through broker-dealers and banks had avoided making FIA products available due to concerns about product complexity and customer value; some companies are now re-evaluating whether a FIA product can be designed to address these concerns.
Trends we expect to see continue through 2012 and beyond:
1. New carriers will look to enter the market.
Before they commit to offering FIAs, variable annuity carriers are considering whether FIAs really are a safer way to manufacture retirement income products. FIA writers typically offer a slightly richer GLWB for a little less than variable annuity writers because the account value of the base contract isn’t as volatile.
Fixed annuity carriers are considering whether the additional complexity of offering FIA products makes sense in light of the relatively low rates they can offer on fixed annuities in this interest rate environment. FIA products may make it easier for these carriers to find a happy medium between providing attractive benefits to policyholders while maintaining acceptable product profitability.