Variable annuity net sales are reaching new lows, causing U.S. insurers to innovate toward retirement income opportunities, says Cerulli Associates.
The industry is poised for product transformation that will satisfy the consumer demand for annuities that provide guaranteed monthly payments in retirement, potential for account growth, tax deferral on the earnings, and asset protection by insuring a minimum value of payments from the account, according to a report from the global analytics firm, “Annuities and Insurance 2014: The Evolution to Sustainable Retirement Income Solutions.”
The annuity industry is still rebounding from a period of decline when the living benefit wars resulted in a number of companies—including Hartford Life, Sun Life, Genworth, and ING (now Voya)—exiting the space in 2011. In 2012, the industry suffered a $20 billion sales decrease.
After two years of industry upheaval, insurers believe the availability of variable annuities with living benefits remains relatively stable. In fact, nearly 70% of all insurers surveyed by Cerulli believe the availability of living benefits will remain the same as it is today over the next three years. Only 19% believe there will be an increased number of offerings.
In 2013, in contrast, 50% of both insurers and asset managers believed the number of living benefit offerings would dip. In 2014, that figure dropped to below 13% for insurers, but remained high at 31% for asset managers. Cerulli believes the difference in industry forecasts stems from the extensive list of safeguards insurers put in place between 2012 and 2014 as they worked to lower their costs of risk mitigation and hedging to achieve an appropriate risk profile.
Following a dip in supply of traditional variable annuities that offer rich guaranteed living benefits, the annuity marketplace is undergoing significant fragmentation, says Chris Nadai, senior analyst at Cerulli.
Cerulli forecasts that the market will double its segments from three—traditional variable annuities, fixed-indexed annuities, and fixed annuities—to six by 2019. These segments will be: investment-only variable annuities, guaranteed variable annuities, fixed-indexed annuities, single-premium immediate annuities (SPIAS), deferred income annuities (DIAS), traditional fixed annuities.
“Given the recent restrictions and reduction of benefits for traditional variable annuities, the adviser and investor have shifted the demand curve to buying these benefits in separate products from insurers to reduce annual fees and risk of future benefit changes,” Nadai says. “The products also have greater appeal in their simplicity, given that traditional variable annuities are too complex for some advisers and many consumers to understand.”
Cerulli suggests that the industry consider creating an educational advertising campaign that focuses on how only annuities can provide the guaranteed retirement income that retirees need for their financial security. In 2014, client requests for annuities dipped by 6%, according to Cerulli’s data, showing that the insurance industry needs to invest in a public awareness campaign in the near future.
“The annuity industry must tap new sources of assets to increase net sales, whether it is accomplished by enticing fee-based advisers, younger generations, or constructing in-plan guarantees (e.g., defined contribution plans),” Nadai adds. “While this recommendation aids in boosting the industry’s asset base, it would also assist the industry in overcoming the negative perceptions of relying on 1035 exchanges.”
The report focuses on three key areas of the annuities and insurance markets: distribution, product development, and the asset management of core products, including variable annuities, fixed annuities, equity-indexed annuities, and life insurance. The report leverages continuous analysis of the variable annuity, insurance, and insurance sub-advisory marketplaces.
More information on “Annuities and Insurance 2014: The Evolution to Sustainable Retirement Income Solutions,” including how to purchase a copy of the report, is here.