Against a backdrop of improving economic conditions in the U.S. and the stock market reaching an all-time high, insurers continue to reposition and reinvent their products, strategies and services.
These changes enable insurers to offer advisors and investors a broad range of products despite the challenges of the continuing low-interest rate environment. For advisors, staying up-to-date with the changes in the market and the characteristics of the products currently available is critical to ensuring that you can serve the needs of your clients.
In recent months we have seen John Hancock exit the annuity business altogether, while other companies have limited the amount of annuity business they accept to help actively manage their risk. Some companies have even offered to buy out the guarantees in exchange for adding a lump sum to the client’s account value. On the other hand, a few companies have made the strategic decision to add variable annuities (VAs), fixed indexed annuities or fixed annuities to their platform. These companies hope to take advantage of the unmet marketplace need for higher rates of return and guaranteed income.
At Ernst & Young, we continuously monitor the product and solution landscape to help organizations and advisors keep abreast of the ever-changing market. We have identified five trends that will influence the annuity marketplace in 2013.
1. The reshaping of the VA market: Opportunities remain for advisors who can navigate the new landscape.
Record low interest rates and the costly price of hedging are causing insurers to continually evaluate whether they want to remain in the variable annuity business. Several companies will continue to curtail sales of variable annuities by lowering the benefits, while others will manage sales volumes by no longer accepting 1035 exchanges. Additionally, insurers will continue to drop aggressive investment options on their variable annuities and move customers into funds that are less volatile. It remains to be seen if additional buyout offers to contract owners will be made or expanded to other GMXB benefits.
2. Hybrid products – are they good for clients, good for advisors?
Companies have started to file and introduce products that are hybrids of variable annuities and fixed products. These products have an upside for both the company and the client due to the lower capital requirements for the company and the downside protection offered to the contract owner. As with any new offering, it is yet to be seen how these products will be received and how product designs will evolve. However, the initial designs appear to provide an attractive option for customers. Potential regulatory headwinds exist.
3. Can new entrants fill the gap?
Even though several companies have exited the annuity business, other carriers are adding annuities to their platform. In some cases, when exiting a line of business or market, the books of business, operations and distribution are often available for sale. This availability enables aggressive entrants to quickly build operational scale and capacity, and ultimately market share. Acceptance by channel and product will likely vary, with fixed annuities by independent marketing organizations (IMO), broker-dealer and bank platforms leading the way.