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Top 10 trends in the retirement income industry

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With 2013 off and running, we at the Insured Retirement Institute (IRI) have compiled a comprehensive outlook for the insured retirement industry covering all aspects of the business — from public policy to product changes to the financial health of the industry itself. IRI forecasts that many of the trends and dynamics that marked 2012 will continue in 2013, including financially sound insurers, ongoing innovation, and increasing consumer demand for retirement income driven by demographic factors. Here’s a snapshot of our outlook with 10 things to look for in 2013.

Industry trends

1. Strong balance sheets, capital and liquidity

Much has been written about record low interest rates, yet less attention has been focused on the strong balance sheet fundamentals across the industry. Rating agencies and analysts continue to report that the industry is in a financially stable position and continue to note insurers’ solid capital and liquidity positions. We expect this sound bill of health to endure throughout 2013.

2. Private-equity firms entering the annuity business

While some companies slowed down or eliminated new annuity sales in 2012, there was an influx of private-equity firms entering the annuity market, specifically by purchasing interests in fixed-indexed companies as well as variable annuity blocks. Their presence in the market should help to support industry-wide sales in 2013.

Product and distribution innovation

3. More innovation and growth awaiting DIAs

Deferred income annuities (DIAs) experienced their first year of significant sales in 2012 roughly $1 billion and there’s no sign of slowing down. Sometimes referred to as “longevity insurance,” DIAs are a form of fixed annuity that allows the owner to defer the start of the guaranteed income stream until a later date. We anticipate that innovations and new offerings in this class will contribute to DIAs becoming the fastest growing product in 2013 on a percentage basis.

4. Innovation in distribution as FIAs and SPIAs expand into non-traditional sales channels

For fixed-indexed annuities (FIAs) and single premium immediate annuities (SPIAs), ongoing innovation has been taking place on the distribution side of the business, with both product classes expanding into non-traditional sales channels in 2012. Look for this expansion into outside distribution channels to continue during 2013.

5. New products without a living benefit

Within the variable annuity market, while living benefit elections during the past few years have reached about 90 percent, many companies are aggressively developing new products without a living benefit to cater to consumers interested only in tax deferral or diversifying into different asset classes. Expect companies to continue to innovate in 2013 and bring to market new products to offer consumers a wide array of solutions to meet their individual needs.

Public policy

6. Addressing the nation’s debt problems will remain the primary focus

Despite a fiscal cliff compromise, America’s debt problem remains a pressing issue. The national debate will continue in 2013 as policymakers will need to negotiate raising the debt ceiling amid calls for broader tax reform and federal spending cuts. While there are no proposals at this time to reduce or eliminate the tax-deferred status of annuities and retirement savings plans, doing so would negatively impact retirement savings and have vast repercussions for the industry. Protecting and preserving tax deferral for annuities and retirement savings must and will be a priority for the industry so that these important incentives will remain available to Americans.

7. DOL fiduciary rule re-proposal

In 2011, the Department of Labor (DOL) withdrew its initial proposal to revise the rules that determine when a person is considered a fiduciary under ERISA. With the elections behind us and President Obama remaining in the White House, it is expected that the DOL will issue a modified proposal of this rule in the next several months. The industry consensus view is that the proposed rule would lead to increased costs and complexities, limit consumer choice regarding retirement plans and individual retirement accounts, and present a barrier for middle-income Americans to obtain affordable services to make informed decisions regarding their retirement plans.

8. Increasing concerns over Social Security and Medicare

The trustees of Social Security and Medicare projected in 2012 that the combined Old Age and Survivors Insurance and Disability Insurance Trust Fund will be exhausted in 2033, and that the Medicare Hospital Insurance Trust Fund (Part A) will be exhausted in 2024. Given these long-term financial challenges, there is tremendous uncertainty regarding what Americans can count on from these retirement programs. The only thing that is certain is that these programs require changes to keep them financially viable and that these changes may potentially reduce the cumulative amount of benefits that future retirees will receive from them. Absent any action from policymakers to address these challenges, concern will continue to grow as projected exhaustion dates near.

Demographics

9. Aging of the population and increased longevity

More and more Americans will retire in 2013, with an estimated 10,000 baby boomers turning 65 every day, each year until 2030, according to the Pew Research Center. And the actuarial projections show that they will live longer than any other prior generation. With an aging population, increasing longevity, and fewer employers offering their workers defined benefit plans, the burdens and risks associated with saving for retirement will continue to mount. Given this demographic perfect storm, it is not surprising that Americans will continue to fear outliving their assets. In fact, IRI’s research has found that only 36 percent of boomers are confident they will have enough assets to live comfortably throughout retirement.

10. Strong demand for insured retirement products

The risk of outliving assets and the quest for certainty during volatile times will continue to drive demand for insured retirement strategies and balance the headwinds from macroeconomic challenges including low interest rates. In a recent study, IRI and Cogent Research found that the number of investors who say that annuities are a critical part of a retirement strategy increased significantly in 2012. We anticipate that changing demographics will lead to only more consumer demand and believe the industry is financially sound and well positioned to increase its share of the retirement market in 2013.

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