Just because fixed indexed annuities (FIAs) shine in an otherwise lackluster annuity sales market doesn’t mean developing these suddenly hot products are without their challenges. Ask any annuity executive and he or she will cite the usual suspects: an erratic market and sustained low interest rates.
Those two forces, says Lance Sparks, senior vice president for annuity IMO sales and distribution for Aviva USA, have pushed one-year point-to-point caps to “the low threes,” thereby limiting the upside potential these products can offer to consumers.
However, carriers have responded and are designing products that allow for higher growth potential with new indexing methods. For example, in Aviva USA’s just-launched annuity, TargetBenefit, the company has partnered with S&P to offer a no-cap option. “It’s brought back some of the original appeal for someone getting ready to enter retirement, which is downside protection of their nest egg but still long-term upside potential tied to equities,” Sparks says.
When the capacity for growth within a FIA waned in recent months, consumers looked to the product to provide a steady stream of income in retirement. But when those income guarantees proved costly for carriers to fund, the industry was, once again, forced to come up with new strategies.
So what is becoming more prevalent todays is the option to take a smaller guaranteed income amount but with the chance to participate in more upside potential – and therefore, more income – in the base contract in the future. In that way, both the carrier and the policyholder shoulder some of the risk, Sparks says.
“The carriers like that from a reserving standpoint because they have a reserve that is more tied to the performance of the base contract,” Sparks explains. “The clients still get a guarantee, although a bit smaller, but they have a lot more upside potential. I think that is really driving the industry today how can we develop products that the carrier and the client and the distribution channel can live with.”
When developing its new annuity, Aviva USA canvassed consumers and advisors. What it found was that although it may be muted now, inflation is a major concern for pre-retirees and retirees who envision rising costs to depress their spending power sometime during a retirement that could stretch 20 or 30 years. Therefore, Aviva USA’s latest annuity gives policyholders the option of choosing an income stream that could increase by the CPI index every year.
Further, many annuity contracts, notes Sparks, now give owners the ability to boost their income stream if the policyholder is confined to a health-care facility, something Aviva USA’s latest annuity does as well. The company also simplified the benefit statement so it’s easier for policyholders to understand exactly what their monthly income will be.
New distribution channels
Hard numbers may be difficult to come by, but certainly anecdotally, FIAs newfound popularity can be attributed in part to the product’s inroads in less traditional distribution channels, like broker-dealers, RIAs and registered reps. Sparks says that the traditional insurance producer “is now a much smaller percentage of our overall distribution.”
Some of that shift can be traced back to the debate over 151A, which “scared a lot of producers,” Sparks says. Consequently, many insurance agents got their securities license.
But it’s also because registered reps now view FIAs more favorably, particularly as they service an accelerating number of baby boomers. “They have to find a solution and in the past, they’ve been somewhat hesitant to offer indexed annuities as that solution,” Sparks says. “But as the industry changes and the products continue to get better in this interest rate environment, I think they’re seeing what a good product it is.”
VAs vs. FIAs
If the stock market takes flight, will there be a mass migration back to variable annuities? Sparks thinks it’s possible, especially since consumers usually have short memories.
But who won’t have short memories are the carriers that sold variable annuities and who had to content with the wide gap between income guarantees and base account values. “It’s a bigger differential for a variable annuity because their contracts can lose money, which means [carriers] have to put more reserves into the product to support the income guarantees,” Sparks says. “You’ve seen a lot of carriers get out of that market because the guarantees are riskier.”
Yet if the equity markets rise in tandem with interest rates, FIAs will remain a popular choice, Spark contends. “Fixed indexed annuities have more yield in their product so they can still offer more upside if the market grows.”