Innovation is the name of the game in today's annuity industry.
The market crash of 2008 caused consumers to reconsider their financial needs, especially with regard to products that are tied to the fluctuating market, such as indexed annuities. But as the market begins to stabilize, many clients are asking for a little more risk, more interesting riders, and the next generation of annuity products.
And all of this has insurance producers very excited.
The fifth annual Annuity Market Study, conducted in January 2010 by Agent Media* in partnership with the National Association for Fixed Annuities (NAFA), offers insight into the past -- and future -- of annuities. Producers' responses to the study show the challenges they've faced in the past year, the hopes they have for the next year, and where they think the industry is headed.
One indicator of potential success is the optimism that producers have for future sales. Fortunately for the industry, agents seem confident about the annuity market's potential over the next 12 months. Although just 36 percent of agents reported an increase in overall annuity sales over the past 12 months, 67 percent of producers said they believe that their sales will increase in the next 12 months. (Charts 1 and 2)
NAFA Executive Director Kim O'Brien said she doesn't think that agents were necessarily pessimistic last year, so much as they just didn't have much reason to be optimistic.
"I think because of the severity of the crisis at this time last year -- we were just coming off the September 2008 crash, and it was so uncertain out there -- people were just frozen," O'Brien said. "That goes for sales personnel as well as consumers. This year, we're starting to see positive signs. There's still instability in the market, but we're starting to see the signs that the crisis will not repeat itself."
O'Brien attributes a lot of the producer optimism to product innovations and new takes on old products.
Innovation and product popularity
Craig Hemke, president and founder of Buyapension.com, said he can't predict what the terrain will look like five years from now -- but he is certain that there will be plenty of new product options. As he puts it, the annuity market is one of the only industries that can be as flexible as it is, he said.
One of the best ways for carriers to provide the flexibility that many consumers are looking for is through riders, and producers are taking advantage of the variety of options in this area. Guaranteed lifetime withdrawal benefits top the list of the most popular riders at 38 percent, followed by income riders (23 percent) and long term care riders (9 percent). (Chart3)
"Four million people a year are going to start turning 65 next year," Hemke said. "The industry is going to continue to adapt for that. The market's going to go through its ups and downs, but the insurance industry is the one industry that's really positioned to help people with guarantees for lifetime income, and I'm confident that we're going to continue coming up with products that meet their needs. And they're going to look very different from the products we saw 10 years ago, or even five years ago."
Another indicator of industry innovation is which products are selling best. Thanks to market fluctuations, variable annuities have enjoyed a steady increase in popularity since 2006, while fixed products have generally shown declines. (Chart 4 and 5)
Brian Appel, a financial professional with AXA Advisors and principal of The Appel Financial Group, thinks that variable products are more popular simply because people are living longer, and variable annuities (VAs) address long-term needs. He also believes inflation is a challenge holding fixed products back.
But O'Brien said the numbers are reflecting concern over industry issues -- particularly Rule 151A -- because, according to LIMRA research, variable annuity sales overall were actually down 23 percent in the third quarter of 2009 compared with the third quarter of 2008.
"I think this is all about agent perception," she said. "It's demonstrating the optimism in the market improving. Whenever the market starts improving, people start looking toward the variable annuity."
O'Brien also sees a lot of potential in the 8 percent jump in producers who are selling fixed income annuities, and said that matches what she's seen in terms of research and product innovation. She added that NAFA will focus on promoting and educating the public about income annuities in the coming year, driven by the product's guaranteed income for life.
Still, many people believe that variable annuities are the way to go. Allen McLellan, associate dean and assistant professor of insurance at The American College, has seen firsthand what VAs can do.
"I saw one article where the lady was embarrassed because she was talking with her friends and they were all crying over their 40 percent loss, and she was showing a 6 or 7 percent gain over the same period," McLellan said. "I've owned variable annuities myself. I think they do some things that other products cannot do. Let's face it: Variable annuities do have some expenses. The question is whether they're worth those extra expenses. And my answer is: absolutely, they are."
Editor's note: The print edition of this story incorrectly ranked the main challenges agents face when selling individual health insurance. This has been corrected in the online version - 40 percent of agents said one of their biggest challenges is that clients are skeptical due to negative media attention.
Despite the general optimism apparent in the industry, there are still plenty of roadblocks standing in the way of producers selling annuities. (Chart 6)
According to the study, the top five challenges for annuity producers are:
- Finding qualified prospects (40 percent)
- Clients are skeptical due to negative media coverage (40 percent)
- Clients don't want to tie up money (38 percent)
- Clients don't understand them (34 percent)
- Clients prefer other retirement savings vehicles (21 percent)
Appel was not at all surprised that so many agents were having trouble getting prospects; however, he admitted that it's not a problem that his firm often faces. Why not? At his company, he explained, the majority of prospects come from referrals.
"The trust needs to be built in," he said. "Do a good job with your clients, and people will refer you."
McLellan was equally unsurprised that so many clients are wary of tying up their money. But he thinks there is an easy fix -- agents should focus on the smaller sales and make sure the client has plenty of liquidity. That way, he said, you're also setting yourself up as a trustworthy advisor that the client can later turn to.
With respect to the idea that clients don't understand the products, Hemke believes this has a lot to do with how well the agents themselves understand the products and explain them to the client.
"I don't think the average agent takes the time to really understand how valuable these things are," he said. "If agents and advisors understood these products, they would sell a heck of a lot more of them, because people are going to live a long time in retirement, and they're going to need guaranteed income."
Want to know how to overcome your most common annuity sales challenges?
- How to build a steady stream of annuity prospects
- How to overcome annuity misperceptions
- Why your clients don't have to tie up money any longer
- Comparing annuities with other retirement savings vehicles
The road ahead
So where do we go from here? McLellan said he believes there are two possible futures for the economy.
One theory states that the market has bottomed out, meaning that we can only go up from here. A secure market, he said, bodes well for annuities. People are still going to retire, and annuities can help them reach their retirement goals.
The other possible future that McLellan sees is a double-dip recession, which would mean more layoffs and more trouble in the real estate market, and would set the nation back another year or two. But, he said, as long as producers stay true to the product, annuities will be just fine. Annuities are long-term products, he said. They're 20-year products, not two-year products -- so even in a bad economy there is opportunity for growth.
Either way, the grass -- for annuity specialists, at least -- appears to be green on both sides of the fence.
Heather Trese is the associate editor of the Agent's Sales Journal. She can be reached at 800-933-9449 ext. 225 or HTrese@AgentMedia.com.