For several years following the global financial crisis, annuity market dynamics remained relatively static, consisting of a fairly stable set of companies leading in product sales year over year, a relatively quiet merger and acquisition (M&A) scene, and most product development action aimed at de-risking and reducing product risk profiles.

In the last 12 to 18 months, however, significant catalysts for change have come forth, shaking up the market. New entrants have emerged and have taken market share, product rotations have commenced, sales leaderboards have been reshuffled and a spate of M&A activity has taken place.

At EY, we continuously monitor the product and solution landscape to help manufacturers and distributors keep abreast of the ever-shifting market, and we have identified the top five things to watch for in the annuity space, all serving as catalysts for market change.

 

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private equity impact1. Private equity firm impact. 

Private equity firms have made a significant splash in the annuity market over the last few years with a slew of major annuity block acquisitions.

Their entrance led to an almost immediate impact on the annuity space, with several of their branded products taking considerable market share away from established leaders, leveraging lesser regulatory compliance requirements and more aggressive investment portfolios. But going forward, private equity firms could face some headwinds in preserving competitive advantages.

The prospect of increased disclosure and capital requirements (on a case-by-case basis), as proposed by the New York Department of Financial Services, lingers.  Competitors in the annuity space, already likely to have significant investment and capital markets discipline, should over time begin to narrow the gap on the performance of their general account portfolio and, subsequently, to increase the competitiveness of their products.

Nonetheless, despite the headwinds, we still expect private equity firms to continue as a major factor within the annuity market and to provide traditional annuity writers a continued competitive challenge.

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block management2. In-force block management.

Several annuity writers, variable annuity writers in particular, have developed over time large legacy in-force annuity blocks whose inherent risks warrant very careful management going forward.

Options to mitigate risks proved minimal coming out of the financial crisis in 2008, but several industry and market trends suggest new avenues opening up to these writers that will make the management of the blocks potentially less onerous.

A more robust M&A market now exists for companies looking to exit the space or divest specific blocks of business, fueled by new market entrants on the reinsurance and private equity side. Product features that have applicability on a retrospective basis, such as target volatility funds, have been introduced to lower the volatility and risk profile of the block. From an operations perspective, some have explored outsourcing or offshoring solutions for annuity blocks in run-off to execute actuarial functions at a lower cost base.

With the right mix of product, operations and market-based solutions, companies should remain vigilant about exploring all alternatives to better manage the associated cost and risks of their legacy in-force variable annuity blocks.

 

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A large number of insurance providers have gone through, or are in the process of going through, actuarial and finance transformations focused on updating existing technology and process infrastructure to optimize internal operations. 

As the use of digital technology and social media continues to expand, we expect carriers also to transform the advice and fulfillment models that support the delivery of annuity-based savings solutions to the market. 
 
These outlets provide a cost-effective approach to reaching consumers that has the potential to engage the next generation of retirement income buyers in a more effective way than traditional approaches.
 
Annuity providers that remain confined to traditional distribution and fulfillment models run the risk of a rising cost base and a less engaged set of consumers as time goes on.

 

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There are a number of factors that suggest a continued rotation of premium dollars away from variable annuities and into fixed annuity products. 
 
Variable annuity market leaders continue to face capacity constraints and reduce the richness of product feature to control sales levels as a result; at the same time, the number of remaining active providers continues to shrink. 
 
Fixed indexed annuities continue to set sales records and are offering a compelling alternative to variable annuities for retirement income via lifetime withdrawal benefit riders.
 
With interest rates rising, the book value fixed annuity market could begin to reverse its sales slump as credited rates become more competitive. 
 
While variable annuity products are not going away any time soon, these developments seem to be turning the heads of providers by offering alternative avenues to growth.
 

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  deferred income5. Deferred income annuities. 

With sales now reaching the US$2 billion mark and several providers having recently brought new products to market, deferred income annuities are igniting a new-found spark in the previously stagnant immediate annuity market.
 
These products are offering consumers another savings-vehicle alternative for retirement income needs, with more flexibility than traditional single-premium immediate annuities and more simplicity than competing fixed indexed and variable designs.
 
Providers have also addressed initial product concerns by including liquidity options that provide payoffs in the event of death and inflation-protection options.
 
Given the success of fixed indexed annuities, the potential for rising interest rates and the swelling tide of a widening retiree pool, deferred income annuities should continue to build on their early market success.
 

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