As we enter a new year and begin to focus on the months ahead, it is important to note the dynamics that will affect the annuity marketplace and how we do business. From public policy developments to macroeconomic factors, from innovation to demographic change, the industry will be shaped by numerous influences throughout 2014. To help monitor and understand these market-changing forces, IRI recently released its annual State of the Industry report, reviewing current trends and providing an outlook for the industry for the new year. Here’s what to watch for in 2014:
Congress is back in town and leaders of the tax writing committees are promising more tax reform drafts. The push for tax reform stalled late in 2013, but some influential lawmakers contend that it remains a priority. For any reform legislation to advance, it will need to pick up steam early in the year, as 2014 is an election year. As a wildcard, Congress will need to deal with the debt ceiling by approximately Feb. 7. The industry must closely monitor congressional action on these issues and continue to ensure that policymakers understand the importance of tax incentives for retirement savings. Protecting these incentives should be a top legislative priority for all those seeking to expand retirement security in America.
Janet Yellen will take the helm of the Federal Reserve on Feb. 1 as the first female Fed Chair. As head of the central bank, she will command considerable influence over interest rates, particularly at this conjuncture. The Federal Reserve announced at the close of 2013 that it will begin to unwind its quantitative easing program, in which Yellen was a leading architect. Yields on 10-year Treasury notes rose in anticipation of tapering. The rise in interest rates through most of 2013 was a benefit to the insured retirement industry, supporting the strongest fixed annuity sales since 2009 during the third quarter and generally leading to lower hedging costs and reserve requirements on the variable annuity side of the business.
Final 2013 sales results for the industry will be reported in March. Through the first three quarters of 2013, overall annuity sales stabilized as a result of more favorable macroeconomic conditions, continued product innovation, and ongoing demand. The final sales results will confirm if the industry is continuing to move forward and will serve as a barometer for 2014.
As we move into April, the National Association of Insurance Commissioners (NAIC) Spring National Meeting will be in full swing. The Federal Insurance Office’s (FIO) report on insurance regulation modernization was released days before the last NAIC meeting in December, providing state insurance regulators little time to digest and react to the report. The meeting will provide the first opportunity to learn how insurance commissioners nationwide plan to respond to the recommendations within the report. The FIO report embraced several recommendations put forth by IRI, including market conduction examination reforms – specifically the “lead state” concept and coordination among the states – and the creation of a national insurance licensing clearinghouse via the National Association of Registered Agents and Brokers Act (NARAB II). These reforms, if enacted, will lead to more efficient and effective regulation, ultimately reducing costs for insurance providers and Americans who rely on insured retirement strategies.
With the start of May most companies will file their annual prospectus updates with the SEC. This will serve as an indicator of current trends in variable annuity product design. The sheer length of these prospectuses, often 150 to 300 pages, should also serve as a reminder to the industry and regulators of the importance of pursuing a variable annuity summary prospectus. The SEC has indicated that this remains a top priority for the agency. Bringing forward and finalizing a variable annuity summary prospectus rule will better serve consumers and help facilitate more informed decision making.
First quarter annuity sales will be reported in June and will provide the first data on annuity sales in 2014. An IRI survey of financial professionals shows that 44 percent of advisors anticipate growing their annuity business in the months ahead, while half expect to maintain their current level of business. First quarter sales results should inform us if advisors’ bullish forecasts are translating into increased sales activity.
July and August
Anticipation for the Department of Labor (DOL) to re-propose its fiduciary rule will heighten during the summer. The DOL is now planning to propose a revised rule in August. The rule would change the circumstances under which a provider of investment advice is considered a fiduciary under ERISA. An earlier version of this proposal was withdrawn in 2011, and the industry will once again need to remain vigilant. The consensus view was that the withdrawn proposal would have led to increased costs and complexity, limited consumer choice regarding retirement plans and individual retirement accounts (IRAs), and deprived middle-income Americans of the opportunity to affordably access services to make educated decisions related to their own retirement security.
Sometime after the Labor Day weekend, the industry will have a chance to review second quarter sales. Among other takeaways, it will be interesting to see how the introduction of new annuity products to the market has affected overall sales. Products such as deferred income annuities (DIAs) are now being offered by more providers. As the number of offerings has expanded, so have sales – from about $1 billion in 2012 to an estimated $2 billion in 2013. But DIAs are not the only new product to hit the market in recent history. Several new forms of variable annuities have emerged, including: growth-oriented variable annuities that do not offer living benefits but have generally lower costs and more investment offerings; structured variable annuities, which are linked to an equity index and have caps and buffers to provide upside growth potential with downside protection; and variable annuities with living benefits designed for immediate income.
October and November
Campaign season arrives with the turning of the leaves. The industry must once again remain on alert to see what issues dominate the national dialogue, which in recent election cycles have included fiscal issues and the Affordable Care Act. Ballots will be cast and counted on Nov. 4, and we will soon learn who controls the chambers of Congress and which party will maintain the gavels of powerful committees such as the House Ways and Means and Senate Finance. Major reforms will be put on hold at least until the next Congress convenes in 2015, but not all business during a “lame-duck” Congress will be inconsequential. If NARAB II has not passed the Senate at this point, the remaining days of the legislative calendar will be vital for securing its passage. Once law, NARAB II would establish a national clearinghouse to streamline insurance licensing for agents and advisors operating in multiple states. Already passed in the House, NARAB II will lead to efficient and cost-effective insurance licensing and remove a barrier that is impeding broker-dealers’ ability and financial advisors’ willingness to sell lifetime income products.
December and Beyond
Third quarter annuity sales will help dictate what type of year 2014 was for the insured retirement industry and will serve to develop the trend lines as market participants look ahead to 2015. While the easing of macroeconomic headwinds is leading to a more favorable environment for 2014 and should contribute to a strong year, one cannot discount the influence demographics will have on the demand for lifetime income. With an aging society that is living longer than any previous generation, and without the benefit of the traditional pension plan of yesteryear, the retirement income boom is on our doorstep. This demand for lifetime income – spurred by demographics – will influence the industry during the upcoming decade and will provide the industry with the opportunity to increase its share of the retirement market.