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July 23, 2015 at 06:41 AM
Indexed annuities (IAs or fixed index annuities [FIAs]) continue to produce solid business results. LIMRA Secure Retirement Research reported that the products’ sales reached $48.2 billion in 2014, a 23 percent increase over 2013.
For the first time, FIAs accounted for more than a 50 percent market share for all annuity sales. The strong sales have continued into 2015, with a 3 percent sales increase marking eight consecutive quarters of higher sales.
FIAs are also gaining in other sales channels, according to the Insured Retirement Institute (IRI). In a July 20, 2015 press release, the IRI reported that FIAs made up 10 percent of total broker-dealer annuity sales in 2014 and half of broker-dealers expect that share to grow.
Understanding hybrids
Insurers are adopting new FIA designs as the market grows. Consulting actuary Simpa Baiye, FSA, CFA discusses the growing use of hybrid indices in an article titled, “Hybrid Indices in Fixed Index Annuities: The New Wave,” in the June, 2015 issue of the Society of Actuaries Product Matters! newsletter.
Advisors and investors are familiar with the mainstream equity market indexes, such as the S&P 500 or the Russell 2000, which are used to calculate FIAs’ crediting rates. Baiye refers to these as passive indexes, by which he explains that their weightings that are “generally driven by company market capitalization.” While these traditional indexes are still used by most FIAs, hybrid indexes are gaining market share and now account for almost a third of premium allocations.
Baiye points to two key differences between traditional and hybrid indexes. First, hybrids’ weights are driven by quantitative algorithms using “market signals such as realized volatility, short-term returns and price/earnings ratios in determining formulaic short-term weightings for each component of the hybrid index.”
