A year ago, annuity issuers faced three towering problems:
- The possibility that the U.S. Department of Labor’s fiduciary rule could still be… moving.
- Regulators’ quiet worries about how well issuers can manage investment market guarantee risk.
- Stock and mutual fund hawkers’ hostility toward suggestions that stock prices could go down, and stay down, and that rate guarantees might be worth something.
All of those questions are still out there, throbbing in the background, like the cellos in a horror movie.
Now, stock market volatility is back, with a snarl.
One guiding question for participants in the annuity market in 2019 should probably be: “If this were a scene from a movie set in a dark and scary cave, what would I tell the characters to do about that slithering sound?”
Here are five other new questions that could shape our annuity coverage in the coming year.
1. Will volatility change how consumers see annuity product guarantees?
Issuers of variable annuity contracts often talk about the income and withdrawal guarantees available with the products.
But analysts at Cerulli Associates suggest in a 2019 annuity market review that indexed annuity guarantees still tend to be better than the optional guarantees available with variable annuities.
“Although a few carriers have increased the attractiveness of their optional guarantees, Cerulli does not see the sales trend reversing unless a greater of VAs follow,’ Donnie Ethier, a Cerulli director, says in a summary of the market review.
2. How exactly are life insurers supporting their annuity guarantees?
A new volatility stress test could lead to greater clarity about how life insurers’ derivatives arrangements work.
3. Will financial professionals with roots outside the life insurance sector ever warm up to guarantees?
Maybe not, but there’s nothing like a sharp drop in stock prices to get people to wondering if a well-diversified portfolio is the only protection consumers need against market volatility.
(Related: The Outlook For VAs In 2009)
4. How well will the new, proprietary investment indexes available in some indexed annuity products work in a year of increased investment market volatility?
It’s possible that the performance of the derivatives arrangements supporting older, plain vanilla indexes will be different from the performance of the arrangements supporting the newer indexes.
5. Will interest rates continue to increase, and, if so, will that change the relative appeal of annuities when compared with bonds?
Eric Henderson, a senior vice president at Nationwide, says in his company’s 2019 outlook commentary that higher rates will increase guaranteed crediting rates on annuities.
Higher rates “will also increase the potential downside risk of bonds,” Henderson says.
That increase in potential downside risk could make indexed annuities more attractive, Henderson says.
How We Did Last Year
Here are the questions we came up with a year ago, and how we think those questions look now.
1. How will annuity crediting rates compare with bank certificate of deposit (CD) rates?
The annuity data streams we’re seeing these days don’t give us a clear picture of what’s happening with the spread between fixed annuity rates and bank CD rates.
Grade: Not Available.
2. Will anyone buy, or sell, the new fee-based annuity contracts?
Yes: LIMRA reported in November that, in the third quarter, sales of fee-based variable annuity sales were 43% higher than in the third quarter of November 2017.
3. How well can issuers buy their way out of benefits obligations guaranteed when interest rates were much higher?
The list of companies that have offered to buy back variable annuity guarantees in the past year includes AXA Equitable and Ohio National. Details about the percentage of annuity holders who take up guarantee buyback offers have been scarce.
4. Will the aging of the boomers increase society’s overall awareness of annuities?
At this point, probably not.
5. Just how dead is the U.S. Department of Labor’s fiduciary rule?
OVERALL GRADE: INCOMPLETE
— Read 5 Big Questions About Annuities for 2018, on ThinkAdvisor.