Much has changed in the annuity world in recent months. Several carriers have exited the variable annuity business, while new channels of distribution have opened up for indexed annuities. Shadowing all these shifts is a tenacious low interest rate environment that has forced providers to alter their products to maintain profitability.
Right in the middle of all those gyrations is ING, which halted VA sales in 2009 while still maintaining its position as a top seller of fixed annuities and indexed annuities (according to LIMRA, it ranked in the top 20 sellers of fixed annuities at $1.5 billion in 2011).
LifeHealthPro.com recently spoke to Chad Tope, president of ING’s annuity and asset sales distribution, about what’s going on in the industry overall and the fixed and indexed annuity fields in particular. Here’s what the Des Moines, Iowa-based executive had to say.
LHP: New distribution channels have opened up for indexed annuities. Broker-dealers are now beginning to sell them, something they hadn’t done in the past. Why is that?
Chad Tope: It is kind of new for the industry. When 2008 came, it changed the way that advisors looked at fixed products. It was a great opportunity because indexed annuities had really proven to fit the bill of outperforming traditional fixed products like CDs. We have dedicated our distribution to focus primarily in that marketplace, the banks and the broker-dealers.
LHP: Broker-dealers traditionally sold variable annuities. How are they responding to selling indexed annuities?
Tope: A lot of things happened. People saw their life savings or retirement savings chopped in half in a short period of time. The mindset of average investor shifted to being more conservative. The registered reps we worked with were also looking for ways to solve that need for their consumers. We used to have products with 4.5 percent minimum guarantees and we dropped it to 3 percent and we thought who’s ever going to sell a product that has a 3 percent minimum guarantee? Now if you have a 3 percent minimum guarantee that’s golden. People would love to put a lot of money in that. So the mindset of the investor has shifted and that’s opened the opportunity for people who are selling securities products to sell other alternatives, to diversify where they didn’t before.
LHP: ING did exit from the variable annuity market, yet it’s still selling fixed and indexed annuities.
Tope: We’ve always had a very strong fixed annuity and indexed annuity business. It just wasn’t identified because our variable annuity business was so large. It was the driving force of ING in the early to mid-2000s. The decision for us to move out of the VA business was one where we just felt that it wasn’t a business we wanted to be in because of the risks associated with it. It appears we shifted from variable to fixed, but we’ve always been in the fixed business. It gets highlighted more now because we don’t have the VA business anymore.
LHP: How can carriers manage risk in a low interest rate environment?
Tope: It’s not as easy as it used to be. We have made some changes to the products as interest rates have come down, reducing commissions, lowering our expectations for returns for a while, riding out some of the market turmoil till it comes back, really getting smart about how we price the products. The minimum guarantees on the products have come down. But the one thing we want to continue to focus on is making sure the consumer has the value in order to be able to sell the product. If that’s not there, you really don’t have a lot to offer.
LHP: What happens if interest rates rise?
Tope: That is what we are wrestling with now. Indexed annuities have captured a lot of positive attention because the design of the product works for what it’s intended to do, which is to get the best fixed interest rates you can. They are not designed to beat the market, they are designed to beat the bank. So with interest rates being so low, we’ve seen a shift toward selling more of the income benefits on the products.
We also focus on another segment of the market, which is the accumulation segment. There is still a large number of people sitting on a lot of cash, but don’t like interest rates today. People aren’t going into fixed products because they’re afraid that interest rates are going to rise. They don’t want to be locked in. We created an index benefit that uses LIBOR as the indictor. Most indexed annuities use the S&P 500 to determine how the performance is based. So we designed a strategy called “interest rate benchmark” so that if interest rates rise, we’re going to pay the client for that.
LHP: What product features are popular today? We hear a lot about lifetime income guarantees.
Tope: That’s really what’s dominated the market today, the income benefits that are on the products. Our interest rate benchmark is starting to get traction and rumor is that other carriers are looking at it and potentially designing similar type features because the accumulation market out there is very strong. The issue today is that the spreads are so thin. There are not a lot of creative things you can do today to design and develop products because there isn’t a lot of leverage you can pull to make that happen.
LHP: What trends are you seeing in surrender rates?
Tope: I don’t know so much about holding on after the surrender period lapses. We’re just getting to the first end of the tranche of money that went into indexed annuities because they are typically first-year surrender charges. That goes back to 2002, when there were massive sales of indexed annuities. I will say that we have seen a slowdown related to the moving of money around in products that are in the surrender charge. The sale of the products has become much more stringent and I say that in a positive way. Suitability is being looked at a lot more than in the past. Because of that we’ve seen a slowdown in the movement of money from contract to contract.