Outlook 2015: Annuity trends

Admittedly, $2 billion out of total year-to-date annuity sales of almost $178 billion isn’t going to set the world on fire, but DIAs’ emergence marks an important shift in retirement advisors’ thinking, says Montminy. Until recently, advisors focused largely on wealth accumulation. That’s still important, but the boomers’ transition to retirement has made retirement income planning more important for advisors’ businesses. DIAs and single premium immediate annuities (SPIAs) are the most efficient way to maximize income, he notes, so they continue to gain importance. SPIA sales support his contention: Year-to-date sales increased 30 percent from 2013 to $7.4 billion and could surpass annual sales records.

DIAs’ design is likely to evolve, as well, says Dan Herr, vice president of annuity product management for Lincoln Financial Group in Hartford, Connecticut. The products could be packaged with VAs, for example, which he sees as “a natural package of combining a variable annuity with the back-end certainty of a DIA product.” Such a combination would allow retirees to distribute their investment allocation over a certain period and manage their other assets over a defined period, such as to age 75, 85, and so on.

A smoother ride

The usual investment advice for retirees is to view their investments holistically by following a unified investment approach that considers all their holdings so they maintain the desired asset allocation and risk level.

VAs’ guarantees allowed investors to skew their VA portfolios toward higher risk investments, however. When the markets tanked in 2008, those portfolios dropped significantly, and insurers found themselves facing benefit promises that were much larger than the accounts’ values.

Managed volatility VA portfolios address that problem. With these investment strategies, investors’ accounts don’t go up as much as unconstrained accounts, but they don’t drop by as much, either. Approaches for implementing managed volatility portfolios vary. With a tail-risk strategy, for instance, the goal is to eliminate investment results that are far above or below the statistically likely outcome.

Less volatile results can help improve investors’ behavior by generating reduced volatility, says Herr. “So, [you] take out the highs and the lows and try to get a smoother ride for the investor so they are more likely to stay invested into the equities rather than getting out at the wrong time and in at the wrong time.”

The strategy hopes to accomplish this by managing to a volatility target. Volatility typically is a predictor of downswings in the market, he explains. The investment manager can use that information to reduce equity exposure in periods of high volatility or increase it when volatility is low. Managed-volatility VAs are gaining popularity. According to research firm Strategic Insight, assets in these strategies grew from $30.9 billion at year-end 2006 to $360.9 billion in June 2014. That translates to an annualized growth rate of 36 percent, and VAs account for 72 percent of managed volatility funds. That growth is likely to continue in the fixed index annuity market, as well, says Dana Pedersen, head of annuity product and development and pricing at the Phoenix Companies in Hartford, Connecticut. She estimates that roughly 30 percent of indexed annuity deposits are going into volatility-controlled accounts and believes that number will increase.

In a low interest rate environment, one way to provide consumer value, especially when it comes to living benefits, is to offer indexed accounts linked to volatility-controlled funds, she says. The dampened volatility gives the carrier more flexibility, she says. “That allows the insurance company to offer more attractive guarantees when it comes to guaranteed benefits or more attractive potential credited rates, caps and participation rates when you’re talking about an indexed annuity,” she says. “So I definitely think we’ll see further development in that space. 

Tell me more

The annuity business has been criticized, unfairly in some instances, for being a bit behind the times when it comes to business analytics and customer service. For example, consider the use of big data in the wealth management industry. Investment firms and banks are spending large sums to implement big data-based changes in their businesses. It goes beyond number crunching; these efforts are aimed squarely at improving customer service and capturing a greater share of clients’ wealth.

The annuity industry is beginning to use more sophisticated technology to improve its service, as well, says Elizabeth Forget, executive vice president, MetLife retail retirement and wealth solutions in Charlotte, North Carolina. She cites MetLife’s recent hiring of a new analytical team to help analyze the client base, improve cross-selling and ensure that clients have the right types of coverage. “We, as an industry, have a ways to go, but I think there’s a lot of opportunity there,” she says. “Now that we’ve kind of shaken out from the financial crisis and the product pricing changes, I think people can turn their focus to that customer experience aspect and efficiency, and I think that will serve everybody well.”