Every trend that puts shadows and mist over the life insurance market puts the same shadows and mist over the annuity market.
Annuity issuers, meanwhile, face two additional opposing forces of hostility.
On the one side, portfolio diversification lovers ask why anyone, ever, would pay anything for an income guarantee. For the diversification lovers, the universal answer to all problems, from the possibility of running short of assets in retirement, to bad breath, is a target date mutual fund.
On the other side, doomsayers wonder how well an insurance company can make good on guarantees, given how uncertain the future always is. For the doomsayers, the only good annuity issuer would be one that quietly accumulates Treasury bills and never does anything scary, such as agreeing to pay a stream of income to an annuity holder.
The annuity writers, meanwhile, soldier onward, stunned by the realizing that the wave of boomer retirements they have been musing about since, say 1955, is now upon us.
Here are five questions we may use to try to make some sense of what’s going on in the annuity market in the coming year.
1. How will annuity crediting rates compare with bank certificate of deposit (CD) rates?
One of the bread-and-butter issues in the annuity market is whether annuities will look like a good deal for consumers when compared with CDs. In the past few months, bank CDs have been looking like a better deal, according to Wink.
Analysts at Fitch Ratings have a related question: Whether fierce competition between indexed annuity issuers will lead some to take on too much risk.
“While competitive pressures may affect individual insurer’s sales, Fitch is more concerned about pressure on pricing and a potential ‘arms race’ with the introduction of more aggressive product features, including income riders,” the Fitch analysts write in a 2018 outlook report.
2. Will anyone buy, or sell, the new fee-based annuity contracts?
In 2017, insurers prepared for the DOL fiduciary rule by rolling out many fee-based products. LIMRA reported in November, however, that fee-based products accounted for only about 0.1% of U.S. individual annuity sales in the third quarter.
DOL headquarters (Photo: Mike Scarcella/ALM)
3. How well can issuers buy their way out of benefits obligations guaranteed when interest rates were much higher?
Publicly traded long-term care insurance (LTCI) issuers are starting to open up and talk to securities analysts about a painful truth: They now see increasing LTCI premiums, or persuading the policyholders to accept reduced “landing spot” benefits, as an important activity for keeping a block of in-force LTCI business stable.
Annuity issuers are starting to be about as forthright about efforts to persuade contract holders to accept cash now in exchange for giving up part or all of some difficult-to-support future benefits guarantees.
Some issuers have had good luck with guarantee buyouts. Will the annuity guarantee buyout trend accelerate?
4. Will the aging of the boomers increase society’s overall awareness of annuities?
The United States is still a country dominated by people who think they are investing for a bigger, brighter future.
Now that the boomers are getting less young, and buying annuities, will that start to change the country’s financial services culture?
5. Just how dead is the U.S. Department of Labor’s fiduciary rule?
The Labor Department says it dislikes the compliance framework the Obama administration created, but officials there, and at state insurance departments, still seem to like the idea of making retirement advisors put the interests of customers first.
That ambivalence could give rise to new compliance challenges for companies that write, distribute and sell annuities.
The Fitch analysts cite “regulatory uncertainty” in the individual annuity market as one of the top credit concerns for companies operating in the life insurance sector in 2018.
The Insured Retirement Institute, a group for players in the annuity market and other, related markets, said in its 2018 outlook report that it’s watching out for many federal and state regulatory projects, includng new sales standard and disclosure rules.
IRI said it’s still trying to get the U.S. Securities and Exchange Commission to ease up on past efforts to make issuers of indexed annuities, buffered annuities and structured annuities comply with the same filing rules that apply to issuers of variable annuities.
—Read 3 Things to Know About the Fiduciary Rule’s Little Brother on ThinkAdvisor.