When you’re anointed the latest hot product, others will naturally take notice and want to follow your lead. So it is with indexed annuities.
According to Conning Research & Consulting, between 2005 and 2010, indexed annuities charted a 9.3 percent compound annual growth rate in the number of in-force contracts. That compares to 1.9 percent for variable annuities and 2 percent for traditional fixed annuities. Since the compound annual growth rate for the target population of likely annuity buyers grew by 2 percent during that same time period, indexed annuities grabbed the largest share of that potential sales pot.
And that growth trajectory should continue. Scott Hawkins, (below right) vice president of insurance research and consulting for Conning in Hartford, Conn., recently authored a study entitled, “Indexed Annuities: New Growth Opportunities.” Last week, he detailed the opportunities and challenges indexed annuity providers face in today’s economy.
In this article, he speaks about how new distribution channels and methods are changing the indexed annuity landscape.
The return of the “captive agent?”
Over the past several decades, the life insurance industry has shifted away from the captive, or home office, agent prototype toward independent distribution networks. In that way, carriers avoid the human resources costs, and instead pay for production, Hawkins says.
So when Allianz announced its exclusive distribution channel for its fixed index annuity, Hawkins’s interest was piqued. In a sense, these are “virtually tied agents,” and represent something of a return to the captive agent model, he asserts
It’s not unusual for a carrier to require a distributor or agent sell a specified amount of its products, Hawkins says. The Allianz model goes further, however, in that the distributor/agent must submit its materials to the carrier for suitability review.
“There are examples of firms that have worked with distribution FMOs to set up a product, but not to that level of exclusivity. That was the new thing that made me want to write about it and say, hmmm, this may signal an emerging trend,” Hawkins says.
Only time will tell if other firms will emulate Allianz’s strategy, Hawkins says. “If Allianz can prove successful at it, you would certainly expect other companies to think about it and walk through the implications for their own business.”
Yet if others imitate the Allianz model, it could have implications for others who want to enter the field. “All else being equal, it creates certain barriers to entry for those looking to expand or enter this space if they can’t get distributor shelf space,” Hawkins says.
The Conning report highlights other distributions challenges. First, the cadre of agents is dwindling and aging. In addition to exclusive distribution agreements like Allianz’s, some distributors are partnering with insurers to develop distributor-designed indexed annuities. “Both virtually tied agents and distributor-designed products create competitive barriers indexed annuity insurers need to overcome,” states the report.
New players alter playing field
Established indexed providers may find their exclusive perch threatened by new entrants, specifically variable annuity players. Recently, Hartford and Genworth moved into the indexed annuity field.
VA providers bring several advantages to the market: They have established distribution networks and experience managing the hedging programs used for the living benefits and needed to generate the index-linked returns.
“Those players could pose a challenge to the concentrated market share of the major index annuity players, because you have large insurers coming in who have established distribution networks and the investment management capabilities to address the challenges of the back office of managing an index annuity,” Hawkins says.
Clearing the path for new entrants was the elimination of the threat of 151A, Hawkins notes, which has stabilized the regulatory environment around the product. “That goes to the heart of the whole distribution channel for the industry,” he says.