One of my most memorable years in the annuity business was 2008. So much was happening: the ‘Dateline Debacle,’ SEC’s proposed rule 151A, the market’s collapse. It was a challenging year! Many are predicting that 2017 will be just as challenging. The Department of Labor’s (DOL’s) proposed fiduciary rule alone threatens to weaken the annuity business.
So, what can we expect in the year ahead?
One cannot discuss the future of annuities without addressing regulation, and the top regulation facing the industry today is the DOL’s fiduciary rule. While traditional fixed annuities will fall under the DOL’s less-onerous 84-24 Exemption, indexed and variable annuities will fall under the Best Interest Contract Exemption (BICE). In order to qualify for the BICE, indexed and variable annuity salespeople need to work with a Financial Institution (FI). This isn’t a huge deal for the variable annuity industry, as banks and Broker/Dealers (B/Ds) already have Financial Institution status. However, the primary distribution channel for indexed annuities — Field Marketing Organizations (FMOs) and Brokerage General Agencies (BGAs) — do not have FI status today.
The DOL just released their “Proposed Best Interest Contract Exemption for Insurance Intermediaries” for FMOs and BGAs. While this document provides some much-needed guidance before the April 2017 implementation date for the DOL’s rule, it is unworkable. In the document, the DOL dictates that the among other things, the following would be needed of FMOs and BGAs seeking FI status:
- Average annual fixed annuity sales of $1.5 billion for each of the preceding three years; (Less than a dozen of the 350 FMOs in operation today could meet this threshold.)
- Insurance or cash reserves, or both, equal to 1 percent of their fixed annuity sales in the past three years, with a maximum 5 percent deductible to cover violations of the exemption; (Less than half of that dozen have this much money “sitting in the bank.”)
The DOL is giving interested parties 30 days to comment on this document, which hit the Federal Register on January 18. With just a little more than two months before the implementation date for the rule, there is industry-wide commentary that the much-needed DOL guidance is too late and unworkable. Time will tell what impact this rule has on the industry, and whether the rule will be delayed, modified, or remain in its current form.
Interest rates on fixed money instruments have continued to plummet since 2008. Prior to the market’s collapse, the average fixed annuity rate was 3.10 percent; today it is a mere 2.71 percent. Indexed annuity caps, on the other hand, have dropped from an average 6.86 percent to 4.03 percent over the same period. Historically, low rates on annuities have translated to innovation in products.
However, many insurance manufacturers have chosen not to focus on fixed annuity product development over the past decade, as they feared that their efforts wouldn’t translate to sales in the current interest rate environment. So instead, they focused their product development efforts on indexed annuities. That is no longer the case, given that traditional fixed annuities will continue to fall under the 84-24 Exemption of the DOL’s fiduciary rule. As a result, we will begin to see a flurry of new traditional fixed annuity products in 2017. While fixed annuities with Guaranteed Lifetime Withdrawal Benefits (GLWBs) have been sparse over the past decade, these will be a focus of product innovation in the new year. Count on seeing more fixed annuities with unique riders and ancillary benefits such as bailouts, return-of-premium provisions, and index-linked kickers as well.
On the indexed annuity side of the house, innovation will also continue. Persistent low interest rates have translated to all sorts of new ways of calculating indexed gains on these products. Increased creativity when it comes to the indices used for the indexed interest benchmark will continue. And while we won’t see a flurry of new crediting methods being created, manufacturers will find more ingenuity with how they are presenting the rates on these products (caps are no longer the norm!). In addition, GLWBs will continue to evolve, allowing insurance companies to differentiate themselves when the annuity purchaser is looking for an income solution. Lastly, there will be an ongoing trend of fee-based indexed annuity product development, for those manufacturers looking for post-DOL annuity solutions.
… and now we get to the bad news. Sales of fixed and indexed annuities will drop in 2017. My estimates are not nearly as severe as some firms’. Assuming that the insurance industry doesn’t get a reprieve on the DOL’s rule from The Donald, sales will decline about 15 percent. Does this mean that annuity sales are doomed? No. It just means that everyone is having to adjust to a new normal. Changes in administrative procedures alone are enough to disrupt business. Complicate the matter with new products and you’ve got even more delays. Then consider salespeople having to deal with moving FMOs/BGAs, or getting additional appointments, and you can COUNT on sales declines.
But someone is going to figure out the recipe for success in a post-DOL annuity world. When they do, I’ll be there, smiling, and waiting for the sales to come back.
Sheryl Moore is President and CEO of Moore Market Intelligence, an indexed product resource in Des Moines, Iowa, as well as the market research firm of Wink, Inc. She has over a decade of experience working with indexed products and provides competitive intelligence, market research, product development, consulting services and insight to select financial services companies. She may be reached at [email protected].