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Indie BDs Are the Next Growth Channel for Annuities: Cerulli

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The outlook for growth in annuities sales is fair to middling, with independent broker-dealers being the best potential outlet.

And though total annuity sales are forecast to drop about 13% in 2020, according to a Cerulli Associates study, the worst hit will be for fixed indexed annuities, falling about 28% in sales. In 2019, FIAs made up 56% of total fixed annuity sales, setting a new sales record, the report states.

The drop largely is due to the Federal Reserve interest rate cuts late in the first quarter that “caused insurers to lower fixed indexed annuity and fixed annuity crediting, participation rates/caps, and guaranteed living benefit reductions on the variable annuity side,” states the report.

Better positioned are Securities Exchange Commission registered index-linked annuities (RILAs), which should grow more than any other annuity type in the next five years, the report states. RILAs generated $4.9 billion in sales in Q4 2019 — a record — and 72% of insurers surveyed believe RILAs will grow by more than 10% over the next three years.

“RILAs offer the client participation in the returns of mainstream market indices, while protecting the client on the downside, reminiscent of a guaranteed living benefit though not as risky for the issuer,” according to Donnie Ethier, director of Cerulli’s Wealth Management practice.

The study also outlined these key findings:

  • 57% of insurers believe variable annuity sales will have more than 10% growth in the RIA channel, and 50% of insurers expect more than 10% growth in the IBD channel over the next three years.

    However, Cerulli stated insurers should focus on the needs of IBDs, as 93% saw at least some growth in VAs in that channel. Further, the insurers see IBDs generating more VA sales as well as reducing reliance on guaranteed living benefit (GLB) riders, which have become more problematic to insurers due to low interest rates.

  • As noted above, low interest rates weigh on FIAs, but other obstacles insurers saw were states enacting their own fiduciary standards (48% saw this as a major obstacle), social distancing (33%) and the probability that the Labor Department will issue a new fiduciary rule (21%).

Cerulli “encouraged” insurers to bring back rate-sensitive contracts and rider designs, such as fixed annuities whose credit is linked to Treasury rates, and GLBs that move in a similar manner.

  • Insurers believe asset managers will be directing their VA efforts over the next three years into passive investments (79% saw high potential), ETFs (60%) and global equities (50%).

Cerulli notes that insurers like ETFs especially because “they are easier to hedge for GLB-related risks than actively managed funds.” The firm’s recommendation was that “managers seek to offer VA carriers index, ETF, ESG and certain bond fund types.”

  • Assets in VAs will decline by 5.5% in 2020 from 2019 levels, while sales will decline by 11%, Cerulli projects. Assets will remain roughly level through 2025.

To deal with this limited growth, Cerulli recommends insurers continue transitioning out of risky GLBs toward RILAs. And they should design products with IBDs in mind as this channel has “the most scalable opportunity,” according to the report. “If successful, adoption should carry over to many banks and national BDs as well as some hybrid RIAs.”

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