New year, same as the old year

When asked by financial representatives why annuities are more expensive and provide less bountiful benefits today than four years ago, Douglas Dubitsky, vice president, product management and development for retirement solutions, at Guardian Life Insurance Co. of America, has a simple answer: “The world is different today. I can only design a product that is relevant to the market I’m selling in and relative to the economic and competitive environment.”

The current landscape he refers to is dotted with nagging low interest rates, a roller-coaster stock market and uncertainty on the carriers’ part over regulations and capital requirements. Those forces, in turn, are shaping new annuity policy constructs and remaking existing products.

Unless that landscape changes drastically, many industry experts predict the same trends that dominated in 2012 will continue in 2013namely, indexed and income annuities will prove popular consumer choices, while fixed-rate and variable annuity providers will continue to adjust their product designs to cope with low interest rates and an erratic equity market

What’s a carrier to do?

Echoing Dubitsky’s remarks, Bruce Ferris, head of sales and distribution for Prudential, says carriers like Prudential are simply trying to adapt their product offerings to new economic realities.

“That’s a balancing act,” he says. “We need to offer a value to the client that resonates relative to other choices for their retirement income needs. But at the same time, it also needs to work for our distributors. And equally important, it needs to work for the shareholders of our companies.”

That balancing has led several variable annuity providers to raise fees, trim benefits and, in some instances, offer policyholders the option of a higher account balance or death benefit if they forego lifetime income riders.

In the fall, Prudential did suspend additional purchase payments into several of its variable annuities. While declining to comment on the actions of other companies who have made buyback offers to holders of their variable annuities, Ferris says that Prudential has no intention at this time to do the same.

“We have no plans to offer any buybacks of existing in-force business at this point in time,” he says. “We think that creates challenges relative to the offerings we have made and the commitments we have made to advisors and their investors. Again, that is as I sit here today. I won’t make any forward looking statements about the future, but that’s current state of Prudential’s view.”

Christopher Raham, a principal in the Insurance Advisory Services practice with Ernst & Young, LLP, declines to make any predictions on whether more buyback offerings will come to the fore next year. From his understanding, he says the “take-up rates have not been what the carriers had hoped.”

One bright spot

While uncertainty haunts the annuity industry, there is one thing for certain in the annuity world: indexed annuities are showing increased sales as other varieties, like the broader fixed market and variable annuities, continue to slide.

With interest rates stuck in low gear and consumers still tentative to venture into the stock market, fixed indexed annuities provide an appealing option, says Shawn Sparks, vice president of marketing for Advisors Excel.

“People are looking certainty, and they are looking for income,” he says. “They’re not finding it on Wall Street, or in a low interest rate bearing account like a CD, savings account or fixed annuity. So they are looking for something that is going to give them the safety net, but also upside potential, leading to fixed indexed annuities taking more of the market share.”

Yet grabbing more market share could come with heightened risk management practices. Raham predicts that some fixed indexed annuity manufacturers will become “more measured” in how they design the base product and the riders, possibly dialing back some of the income guarantees in an effort to manage risk. Further, just as some variable annuity providers have done, indexed annuity insurers will limit their sales a bit, Raham says. “They will become much more conscious of the amount they are willing to issue as an organization,” he says.

On the variable annuity side, Raham says, 2013 will look pretty much like 2012: carriers continuing to modify the guarantees in their products; increased usage of volatility managed funds; tighter oversight of sales volumes; and perhaps a “resurgence” of variable annuities with no lifetime guarantees.