Since the global financial crisis, many of the largest insurers in the United States have exited the annuity market entirely, or limited production due to capital constraints and the ongoing impact of the low interest rate environment. Throughout 2012 and the first part of 2013, advisors have continued to cope with these changes in the annuity landscape. While some companies have added variations of annuities to their platforms in an effort to fill the void left by the exodus of the traditional annuity manufacturers, the overwhelming trend has been fewer choices and uncertainty for advisors as they try to meet their clients’ growing demand for retirement solutions. As demographics and memories of market volatility continue to drive baby boomers’ needs for stable accumulation and guaranteed income provided by this product segment, the question remains, “How will the product provider gap be filled?”
Rise of the new entrant
Over the last 12 months, we have observed a trend worth watching closely. The acquisition by “new entrants” of unencumbered product development functions, new business operations and distribution relationships from existing insurers is creating new launching pads for the next generation of annuity manufacturers. These new entrants have reacted to and leveraged lessons learned by prior players and are positioning themselves to quickly capitalize on traditional providers’ changes in strategic direction. New entrant management teams and their partners recognize the value of distribution relationships, operational scale and intellectual capital that accompanies these acquisitions. These actions today allow them to quickly build product, operational scale and provide capacity to market.
Some new entrants are piloting their new capabilities and products in a few states, giving them an opportunity to work with existing advisor networks and marketing organizations to get everything right before their products are introduced nationally. In the majority of these cases, platform acceptance is not an issue; advisors are already familiar with the benefits of annuities and thus require less training. The new offering is an additional option for advisors to offer their clients.
Old providers – new capacity
The increased pace of private equity-backed acquisitions in the annuity industry is a trend that we also believe will have a beneficial impact on new product availability, albeit on a longer timescale. As existing back books of business move off the balance sheets of traditional annuity providers and create some “headroom” in capital availability for annuities, the stage will be set for new designs from traditional providers. Burned by recent experiences, however, the return will be gradual and slow in nature, driven by “sustainable manufacturing approaches” particularly in the variable annuity (VA) marketplace. Simpler or non-traditional offers supported by those with big-name recognition are the dominant approaches we see emerging under this model. Those with access and acceptability on bank platforms have the advantage of being able to build on their existing relationships and attractively position annuities as alternative investments to clients in the current low interest rate environment.
Focus on new areas
At the most basic end of the scale, selected new entrants are focusing on offering very simple, low-cost annuities, concentrating on investment flexibility and tax advantages to capture 1035 exchanges or as alternatives to IRA rollover vehicles.
Fixed indexed annuities have evolved significantly from a product development standpoint and appear to be gaining acceptance on bank and broker-dealer channels. New entrants have developed simpler fixed indexed products with shorter surrender-charge schedules to counter the criticism that these annuities are complicated because of complex crediting strategies and sizeable surrender charges. Advisors are seeing more transparent products in the market that their clients can more easily understand. Of course, complex strategies wrapped with guaranteed income benefits remain popular.
VAs are more sustainable than ever, driven by the many large-scale changes that have been made to the base products and living benefits. The embedded portfolios on variable annuities with particular living benefits offer more stability around account value to clients, and insurance companies are more comfortable with managing the guarantees as a result. In some cases, features of fixed indexed guarantees, including participation rates, are appearing in this lineup.
Stay the course
Most certainly, there are challenges that new entrants must face to gain both producer and client acceptance, build share in their chosen space and successfully fill the gap. Similarly, traditional providers who plan a return to the space “at the right time,” or are entering the fixed indexed annuity market in lieu of participating in the VA market will face challenges driving by historical “in then out, then back in again” approaches to managing risk at the expense of continuity in the minds of advisors and customers. In either case, manufacturers must adopt a management approach that will allow them to stay the course when their books are tested by the persistent conditions of a slowly recovering economy and the potential for severe market events in the future. Whether that means practicing consistent, prudent risk management, or finding a balance of business to avoid the historical lessons of over-concentration in any one feature, product or product line, steady as she goes must be a management imperative. Companies must work together with advisor and customer groups to develop and offer valuable products based on the reasonable expectations of all parties.
Partner with advisors and channels
It is our belief that advisors should have a clear understanding of just how valuable these benefits are to their clients, given the market over the last few years, and the value of having their partner companies continue to offer annuities. Under this belief, we see advisors becoming an increasingly important collaboration partner to positively influence product design and distribution models supported by rationale, but valuable guarantees and appropriate compensation. Filling the gap successfully in a sustainable way depends on it. New annuity entrants would be wise to pursue this approach as a differentiator.
The views expressed herein are those of the authors and do not necessarily reflect the views of Ernst & Young LLP.