A top annuity designer says annuities have to change along with the times.
Don Dady, co-founder of Annexus, said, in a recent interview, that interest rates are much lower than they used to be, and that the gap between what insurers pay holders of fixed annuities and what insurers earn on their own investments has narrowed.
Because investment spreads have narrowed, “no one can afford to offer the types of products we sold 10 years ago,” Dady said.
But Dady said there are still ways to create useful new products.
“It’s been a really interesting age in product innovation,” Dady said.
Dady got his start as an executive at Legacy Financial Group.
He then helped Ron Shurts start Annexus, a Scottsdale, Arizona-based retirement income product design firm, in 2006. Annexus has helped companies like American International Group, Athene, Nationwide, Securian and Transamerica create products.
Recently, for example, Annexus helped AIG’s AIG Life & Retirement unit develop the X5 Advantage indexed annuity contract. One contract feature can double the amount of any interest credited to the annuity. Another feature can double the annuity income of a contract holder who keeps the annuity for at least 10 years and then becomes confined to a nursing home or other long-term care facility.
Here are five things Dady said about the annuity market, drawn from the interview
1. Hedging is important.
When a life insurer uses a “hedging arrangement” to manage annuity risk, that means it uses derivatives contracts or some other arrangement from an investment company to limit the amount of investment risk associated with the annuities it’s selling.
In the 1990s and early 2000s, many life insurers tried to support annuities with ordinary pools of investments.
“The insurance companies had no effective way to hedge their risks,” Dady said.