3 Ways to Capitalize on Annuities' Surging Popularity: Cerulli

With annuity sales surging amid higher interest rates, the industry should consider various steps to further expand the market, including developing new product concepts such as long-term care hybrids and pushing for more annuities in employer retirement plans, a new report from Cerulli Associates suggests.

If fixed annuity rates remain high enough, advisors and clients will likely continue to opt for a predictable return with full principal protection versus annuities that offer upside potential while risking principal, according to the firm, which released the latest edition of Cerulli Edge on Thursday.

Different types of annuities — fixed annuities, fixed indexed annuities (FIAs) and registered index-linked annuities (RILAs) — will likely compete more aggressively with each over the next five years if current market conditions hold, Cerulli said.

While RILAs have led all other annuity types in sales for several years, FIAs and traditional fixed annuities have become more competitive as interest rates have climbed, Cerulli noted. “In contrast, traditional variable annuities are having a rough time, achieving the lowest sales in 2022 since Cerulli started tracking this product,” the report said.

Looking Ahead

As interest rates decrease over time, market share for FIAs as a percentage of total annuity sales will increase and reach 26% by 2027, followed closely by RILAs at 23% and traditional fixed annuities at 20%, Cerulli predicted.

“With financial markets and economic news remaining unsettling for many investors, annuities that provide predictable outcomes will remain a hot commodity,”  said Donnie Ethier, senior director, Wealth Management Research & Consulting at Cerulli.

Forty-four percent of retired households consider a comfortable standard of living their top financial goal, according to Cerulli, which reported that assuring a comfortable standard of living in retirement and wealth protection have consistently ranked as investors’ top two financial goals.

Cerulli sees three potential avenues for growth of the annuity market in the coming years:

1. Insurers that remain committed to the variable annuity marketplace should expand their focus on guaranteed lifetime withdrawal benefits (GLWBs).
2. Insurers should also participate in recent efforts to bring more annuities to defined contribution plans.
3. The industry should help with long-term care costs by developing concepts that include in-plan annuities, income-taking solutions, LTC hybrids and inflation-protection features.

Insurers should use this favorable environment for annuities to push the industry’s “concepts” conversation, Cerulli suggested.

“Understandably, the industry is focused on principal protection right now, but the income story of annuities will return and grow in importance,” Ethier said, adding that the industry would benefit from more studies comparing the pros and cons of different strategies.

Cerulli believes there is “ample room for annuities to penetrate the financial market further, as just 17% of households own a fixed annuity and just 10% own a variable annuity,” adding that “An encouraging sign is that many households say they purchased an annuity for income, and Cerulli urges insurers to prepare for more clients electing to annuitize or take systematic withdrawals.”

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