Annuities: 4 predictions for 2014

Will annuity sales continue their upward track in 2014? How will an uptick in interest rates impact insurers? What’s brewing on the regulatory front?

Recently, the Insured Retirement Institute (IRI) took a look back at 2013 and peered ahead to 2014. Here are four predictions the organization ventured for the coming year.

1. Annuity sales likely to increase

After enduring four years of slumping sales, 2013 was a turnaround year. Sales stabilized, led by fixed annuities. Through the third quarter, fixed annuities booked an 8 percent rise in sales, although variable annuity sales dropped 3 percent, according to statistics from Beacon Research and Morningstar, respectively. However, IRI points out, sales remain below the level seen prior to the 2008 financial crisis.

Though IRI stresses that annuity sales are impacted by a variety of external economic factors, such as the direction of interest rates and the equity markets, demand for the product should remain healthy as consumers’ preference for guaranteed income in retirement strengthens. Other factors underlying the attractiveness of annuities are an aging population (read: the baby boomers) that is expected to live longer as well as the products’ ability to guard against market volatility.

According to IRI research, 44 percent of advisors predict their annuity business will increase in the next year, and three quarters report that their clients are receptive to annuities, overwhelmingly because of the guaranteed income in retirement and principal protection features.

Nevertheless, annuities sales could be negatively impacted by falling equity markets and/or a drop in interest rates, IRI stresses. Yet, strong consumer demand and new product innovations nudged the organization to conclude that “it is reasonable to expect sales to increase in 2014.”

Baby boomers Debbie Schwartz and Marcy Imperi enjoy a game night. AP Photo/Bonnie Gruttadauria

2. DIAs on track to reach $2 billion in sales

One of the new innovations IRI singles out is the development of deferred income annuities (DIAs). These products permit policyholders to access a stream of guaranteed income payments at some future date, typically five to 15 years from when the contract is issued.

In 2012, DIA sales reached $1 billion, and in 2013, sales are projected to rise to $2 billion. That increase is fueled, no doubt, by the doubling of carriers now offering DIAs since 2012. State regulators have taken notice: In 2013, the NAIC adopted a new Buyer’s Guide for Deferred Annuities.

But DIAs weren’t the only product innovations introduced in the marketplace. IRI points to the emergence of growth-oriented variable annuities that do not offer living benefits; and structured variable annuities whose account value growth is tied to an equity index. More carriers are forecast to enter those submarkets, IRI predicts. In addition, variable annuities with living benefits that policyholders can turn on immediately and receive a higher payout made the scene.