Are you ready carriers, insurance agents and advisors? You’ll want to be on the front lines of the next big boom in the industry—ANNUITIES are poised to take a big bite out of the retirement income pie—but there are risks as well as rewards.
The rewards in terms of revenue generation and returns are potentially large and lucrative. But before anyone takes a bigger dip into the retirement income well, beware. Risks lurk in many corners. For insurers, the stakes involve concocting sophisticated hedging strategies to combat a volatile equity market and low interest rates as well as ever-present regulatory scrutiny.
For advisors, they face a skeptical public soured on financial products in general and annuities in particular.
But for carriers that can meet those challenges and advisors who can market annuities properly, the growing retirement income market is ripe for the taking.
The opportunity of a lifetime
There is some $9.5 trillion sitting either in IRAs, defined contribution plans or non-qualified mutual funds that may soon be looking for an investment option that provides a lifetime of guaranteed income. And annuity insurers are well-positioned to capture that burgeoning market, says a new report by Conning Research & Consulting, “The Big Payout: Growing Individual Retirement Income Opportunities.”
Breaking down the numbers further, Conning estimates that individual and group annuities accounted for 46 percent of all defined contribution (DC) plan assets as of the end of 2011. A nice percentage, but Conning says there is even more in play. It calculates there was another $7.3 trillion parked in IRAs and DC plans not invested in annuities, with an additional $2.2 trillion held in non-qualified mutual funds that were earmarked as retirement income.
What does that mean for annuity insurers? It underscores an enormous opportunity to move those dollars into their products, says Scott Hawkins, vice president of insurance research and consulting for Conning in Hartford, Conn.
As he sees it, annuity insurers have two chances to bite into that marketplace. The first is when people turn 65 and look to liquidate a portion of their accumulated funds to support their retirement. As the Conning reports points out, 2.7 million baby boomers reached age 65 in 2011.
There are the retirees who turn 70-and-a-half and must start taking required minimum distributions from their DC plans or IRAs. Last year, 2 million members of the so-called Silent Generation turned 71.
“Not only are insurers responding by marketing to this emerging group of retirees, but they are actively enhancing their existing products lines,” Hawkins says. “They are developing variable annuities that are aimed to capture that IRA rollover market.”
More than just devising new products, annuity insurers have a distinct advantage over mutual funds in their quest to grab a higher share of the retirement income market. “Only insurers can guarantee you get a steady income that you cannot outlive,” Hawkins says.
A recent report from Standard & Poor’s RatingsDirect entitled, “Annuities’ Share of the Retirement Market May Be Set to Grow” pretty much seconds Conning’s assertions.
One of the report’s authors, Li Cheng, a New York City-based director in North American Insurance Ratings for S&P, says this untapped market for individual annuity sales is potentially quite enormous. In comparison to the U.S. life insurance market, which she terms “saturated,” annuities have yet to make a noticeable dent in the retirement income arena. Citing statistics from the Investment Company Institute, the S&P report highlighted that as of the first quarter, only 9 percent of total U.S. retirement assets were held in individual annuities.
“Only insurers can guarantee you get a steady income that you cannot outlive.” ~ Scott Hawkins, Conning Research
The selling process
Tempting as those numbers may appear as a potential sales opportunity, selling annuities can be a daunting tasks for many reasons. Perhaps first and foremost is the price.