(This was the first of a series of LifeHealthPro articles published in the summer on the annuity space.)
Many financial advisors are still seeing the insurers with which they do business raise prices, decrease benefits and features, discontinue products and, in some cases, even exit the business. Despite the somewhat steady growth of the US economy in early 2012, the global economic outlook looks less certain. And, unfortunately, an extended period of historically low interest rates and increased pressure on insurer profitability looks more certain. These concerns will continue to have a negative impact on annuity writers and will send companies in search of sustainable, yet profitable, product designs. As a result, we expect to see an ongoing revamp of products, features and investment options during the remainder of 2012 and into 2013.
For an advisor, agent or wholesaler in this environment, this means there is a heightened need to understand not only what product suites your providers are offering, but also to understand the changes that competitors are making to those product suites and how they affect your clients and their financial decisions. At Ernst & Young, we have identified five trends that we believe will significantly impact the annuity and retirement landscape over the next 12 to 18 months.
#1. Continuing change and innovation in the variable annuity space.
During the first quarter of 2012, Hartford Life announced that it will no longer sell variable annuities. This follows the exit of Sun Life, Genworth and ING in 2011, and the scale-back by MetLife throughout 2011 and 2012. Consequently, distributors are now very sensitive to the possibility that a company may not offer variable annuities in the future.
Product trends in 2012 continue to focus on restructuring living benefits on variable annuities. Some companies have decreased the withdrawal percentages (the amount of the income base that a policy owner can withdraw each year) and bonuses, increased the charges or made the investment options more restrictive. Others have introduced new, less-competitive benefits and pulled the richer ones from the market.
Source: Ernst & Young’s Retirement Income Knowledge Bank®
Insurance companies continue to look for new ways to de-risk, such as managing volatility within the funds or even buying back certain benefits. Recently, Lincoln Financial introduced a new series of investment options, called LVIP Protected Asset Allocation, that use a short equities-futures strategy to reduce the volatility of returns. Earlier this year, Transamerica filed a prospectus that offers to buy back, with a cash bonus, particular in-force non-annuitized guaranteed minimum income benefits (GMIBs) that it had previously sold. Another company, Achaean Financial, customized its IncomePlus+ immediate variable annuity for insurers to offer to certain GMIB owners. These buy-back programs will help reduce the insurer’s long-term risks and the ongoing accounting issues associated with in-the-money GMIBs.
#2. Fixed indexed annuities lead the way in new product development across the industry.
The majority of companies that have not participated in this market before have either recently entered it or are assessing an indexed annuity entry approach. For example, both Hartford and Genworth, two companies that recently exited the variable annuities market, have joined the fixed indexed annuities market. Many other variable annuities carriers also view the fixed indexed annuities marketplace as a way to generate growth in their businesses in a less risky way to manufacture retirement income products. In some cases, their established distribution networks are also valuable assets to a market-entry strategy. In addition, traditional fixed annuity carriers are considering whether the additional complexity of offering fixed indexed annuities products is offset by the increase in the competitiveness of the credited rate when compared against those of traditional fixed annuities and bank CDs.
The increase in fixed indexed annuities market entrants has led to greater innovation and better choice in the fixed indexed annuities market. Guaranteed lifetime withdrawal benefits (GLWBs) have grown in prominence and complexity on fixed indexed annuities, with more than 20 companies now offering a GLWB on its fixed indexed annuities. Fixed indexed annuities writers are able to offer a slightly richer GLWB for a slightly lower cost than variable annuities writers due to the lower volatility in the account value of the base contract. New benefit design that merges the index and rollup features has recently hit the market.
Companies continue to search for more efficient uses of capital, with some companies modifying the features and/or limitations of their GLWBs to eliminate large reserve strains similar to the variable annuities market.
#3. Super mutual fund wraps: Contingent deferred annuities back on track.
Contingent deferred annuities have been developed and touted as a solution to wealth management firm issues around the incorporation of variable annuities into managed money programs. Typically, these firms face infrastructure, administrative capability and cost issues when trying to wrap a variable annuity into a managed solution for their retail clients. Contingent deferred annuities can help overcome such difficulties and help protect against longevity risk.