The headline on a recent Bloomberg news story was eye-catching: “Low Rates May Be ‘Devastating’ to Annuities, Group Says.”
The article centered on a speech by LIMRA Chief Executive Officer Robert Kerzner at a Chicago conference in October. Kerzner minced no words while speaking in, appropriately, the Windy City about the headwinds our industry faces when interest rates are at near-record lows.
“If long-term rates stay where they are, it would be devastating for our industry,” Kerzner said. “For now, there is no relief in sight, and if this is the way it’s going to stay, it’s a game changer.”
I couldn’t agree more that the game is changing. But change can be good.
Sometimes a challenging environment fosters innovation. Experienced insurance carriers that are committed to this product will transform the annuity marketplace to adapt to current economic conditions.
We all know what the headwinds are. The 10-year U.S. Treasury yield was a frighteningly low 1.72 percent as of Halloween. Couple that with the Federal Reserve pledging in September to keep interest rates at historic lows through at least mid-2015 to spur economic growth, and it obviously puts the squeeze on a spread-based business like annuities.
In the midst of this, consumers are looking for potentially higher income streams from annuities, which have become increasingly attractive in the wake of several years of market volatility. There is a discernible shift from the days when consumers sought purely accumulation; consumers, particularly retirees and pre-retirees, are now looking for a guaranteed income stream, too.
The feasibility gap
What we face in the annuities industry is a feasibility gap—the difference between what consumers want and what carriers can provide, given market conditions.
That’s where the innovation comes into play. Market conditions are spawning new income rider designs that combine an indexing approach to interest credits with a slightly lower guaranteed lifetime income benefit, creating products with greater flexibility and opportunity for the consumer.