When asked by financial representatives why annuities are more expensive and provide less bountiful benefits today than four years ago, Douglas Dubitsky, vice president, product management and development for retirement solutions, at Guardian Life Insurance Co. of America, has a simple answer: “The world is different today. I can only design a product that is relevant to the market I’m selling in and relative to the economic and competitive environment.”
The current landscape he refers to is dotted with nagging low interest rates, a roller-coaster stock market and uncertainty on the carriers’ part over regulations and capital requirements. Those forces, in turn, are shaping new annuity policy constructs and remaking existing products.
Unless that landscape changes drastically, many industry experts predict the same trends that dominated in 2012 will continue in 2013‑namely, indexed and income annuities will prove popular consumer choices, while fixed-rate and variable annuity providers will continue to adjust their product designs to cope with low interest rates and an erratic equity market
What’s a carrier to do?
Echoing Dubitsky’s remarks, Bruce Ferris, head of sales and distribution for Prudential, says carriers like Prudential are simply trying to adapt their product offerings to new economic realities.
“That’s a balancing act,” he says. “We need to offer a value to the client that resonates relative to other choices for their retirement income needs. But at the same time, it also needs to work for our distributors. And equally important, it needs to work for the shareholders of our companies.”
That balancing has led several variable annuity providers to raise fees, trim benefits and, in some instances, offer policyholders the option of a higher account balance or death benefit if they forego lifetime income riders.
In the fall, Prudential did suspend additional purchase payments into several of its variable annuities. While declining to comment on the actions of other companies who have made buyback offers to holders of their variable annuities, Ferris says that Prudential has no intention at this time to do the same.
“We have no plans to offer any buybacks of existing in-force business at this point in time,” he says. “We think that creates challenges relative to the offerings we have made and the commitments we have made to advisors and their investors. Again, that is as I sit here today. I won’t make any forward looking statements about the future, but that’s current state of Prudential’s view.”
Christopher Raham, a principal in the Insurance Advisory Services practice with Ernst & Young, LLP, declines to make any predictions on whether more buyback offerings will come to the fore next year. From his understanding, he says the “take-up rates have not been what the carriers had hoped.”
One bright spot
While uncertainty haunts the annuity industry, there is one thing for certain in the annuity world: indexed annuities are showing increased sales as other varieties, like the broader fixed market and variable annuities, continue to slide.
With interest rates stuck in low gear and consumers still tentative to venture into the stock market, fixed indexed annuities provide an appealing option, says Shawn Sparks, vice president of marketing for Advisors Excel.
“People are looking certainty, and they are looking for income,” he says. “They’re not finding it on Wall Street, or in a low interest rate bearing account like a CD, savings account or fixed annuity. So they are looking for something that is going to give them the safety net, but also upside potential, leading to fixed indexed annuities taking more of the market share.”
Yet grabbing more market share could come with heightened risk management practices. Raham predicts that some fixed indexed annuity manufacturers will become “more measured” in how they design the base product and the riders, possibly dialing back some of the income guarantees in an effort to manage risk. Further, just as some variable annuity providers have done, indexed annuity insurers will limit their sales a bit, Raham says. “They will become much more conscious of the amount they are willing to issue as an organization,” he says.
On the variable annuity side, Raham says, 2013 will look pretty much like 2012: carriers continuing to modify the guarantees in their products; increased usage of volatility managed funds; tighter oversight of sales volumes; and perhaps a “resurgence” of variable annuities with no lifetime guarantees.
Some of those trends are evident in Guardian’s strategy. It has “scaled back” its distribution channel to primarily its agency sales force while at the same time being more aware of how much product it has in the marketplace.
“As more companies pull back, the opportunity for increased business beyond what you like is out there and therefore, we needed to be careful,” Dubitsky says.
That conservative tact is not just on Guardian’s part, but industry-wide, Raham contends. With so much uncertainty in the financial markets—will low interest rates linger or will they rise too swiftly and inflation becomes an issue?—overlaid with possible new regulatory and capital requirements, carriers are being more conservative, which is appropriate given the industry’s mission, he says.
“So people are going to pull back on how much they sell and growth becomes an issue,” Raham says.
Another avenue is to design products that do not create a lot of stress on the balance sheet, or a return to the basics like simple forms of life insurance, group benefits and voluntary benefits. “You see that as a common thread in several companies’ strategies,” Raham says, “solely because those are businesses that are much more manageable and predictable from a guarantee standpoint.”
It’s also a backdrop that creates a fertile environment for mergers and acquisitions. This past year, private equity firm Guggenheim Partners bought two annuity business lines, and Athene Holding Ltd. recently snapped up Aviva USA. “The economic environment is creating stress on balance sheets and anytime that is the situation there are potential transaction activities on the table,” Raham says.” Moreover, offshore-based insurers are weighing whether they would be better served deploying capital in emerging markets rather than the U.S., he added.
It’s all about the guarantees
But there is another sure thing annuity providers can bank on: Consumers are demanding guaranteed retirement income, a trend that will only increase. However, the format those are provided in will change.
“Companies will focus more on the guaranteed income products that are not tied to the equity markets, like single premium immediate annuities or deferred income annuities,” Dubitsky says. “The risk associated with income annuities and deferred income annuities is much more aligned with traditional life insurers.” Guardian plans to launch a deferred income annuity in the new year, he added.
From a distribution standpoint, Raham predicts there will be increased demand for annuities from broker-dealers. “Historically, I don’t think you would have heard a large wirehouse say, We’re going to sell an annuity because we’re helping somebody plan for income,” Raham says. “They would have said, Let’s sell you the variable annuity with the guaranteed living benefit because we need to tax shelter some assets.”
Now, the focus is more on an all-encompassing financial and retirement plan. “There is a growing awareness from the financial community that serves individuals thinking about retirement around the benefits” of annuities, Raham says.
Despite all the struggles the annuity industry faces, Ferris says their products are still the best available options for those looking for guaranteed income in retirement.
“As an industry, we’ve compared ourselves to ourselves, meaning the products that are available today are not as good as they were a year or two ago,” he says. “But the capital market environment is much different. If you compare the annuity products in today’s market versus other alternatives, they are as competitive or if not more competitive than some of the alternatives out there that people might be considering for retirement income.”