At first glance, the annuity industry may not appear to have much in common with Major League Baseball (MLB). Yet with Q1 well under way, and pitchers and catchers slated to report to spring training on February 18, observers in both fields are offering their prognostications for what the coming year will bring. From my vantage point, the two are not entirely unrelated.
Like every baseball season these days, the large market teams like the Red Sox, Yankees, and Dodgers are spending money this offseason to find the right combination of free agents to propel themselves to the World Series. The annuity market for carriers in 2016 will be no different as the industry is likely to continue seeing capital spent on development across the spectrum, from new products and riders in the traditional VA space to products in growing markets, such as the indexed space. Yet with potentially major changes on the horizon for baseball and the annuity industry, the question is: will this be money well spent?
In an effort to boost teams’ offensive production and, in turn, fan attendance, MLB’s American League adopted the designated hitter (DH) rule in 1973. Pitchers, who are typically the worst hitters on the team, were no longer required to bat, drastically changing the contours of the game. Yet while colleges, high schools, and little leagues across the country quickly followed suit, the National League stood fast. Now, however, there are rumors that the DH could be coming to the National League in 2017, creating uncertainty among team executives who must build for the future without knowing exactly what it will look like.
In 2016, annuity carriers and distributors face a similar level of uncertainty about the future of their own business. While it’s clear that pending regulatory changes will have a major impact on the industry, it’s unclear just what that impact will be. Given the uncertainty, 2016 is likely to be a transitional one in the sector, with few significant changes in sales trends for many of its markets, including traditional variable, indexed, and investment-only products. The real changes will come in 2017, once we know the new rules of the game and, especially, how advisors and distribution firms have elected to operate under them.
In addition to uncertainty about the regulatory environment, carriers are also waiting to see what 2016 will mean for interest rates. The Fed bumped up rates 0.25% in December and had a plan to continue raising rates in 2016, but now that the equity markets have had a tumultuous start to the year and concerns are growing about China’s economy, there’s likely only a small chance we’ll see a rate increase at the next Fed meeting in March. For fixed annuities, that means another year of slow, perhaps slightly increasing sales as interest rates remain at historically low levels. Most advisors won’t be willing to lock their clients into a rate when there’s a perception that rates could go up in the near future. Additionally, the continued low interest rates and market volatility to start the year will likely keep guarantees on VA products at their current levels. Carriers are unlikely to make significant changes until hedging costs improve, which will require rates to move upward and volatility to stabilize.
So what does this all mean? Chances are we’ll see the same trends of the last few years in the annuity industry continue in 2016 until there’s greater clarity for what the future holds from both a regulatory, overall economic, and interest rate perspective. Not that there’s ever complete clarity on any of those topics, but 2016 certainly isn’t the year to expect the unexpected. Look for steady sales and few drastic moves, but get ready for a wild ride in 2017.