SUMMER 2021 35
Annuity Trends
Predicting annuity trends
Innovative indexed designs and risk sharing could open the barn door here for future longevity income sales .
So it ’ s pretty easy to predict annuity trends , right ? Just predict the stock market , interest rates , volatility , option costs , and innovation !
Or , maybe start by understanding the interrelated factors that impacted the different types of annuities in 2020 :
Variable Annuities ( VA ) – Despite the caveat that “ the past is not a predictor ”, VA sales often go as the stock market goes . Poor / volatile returns dampen sales . The stock market is up , but traditional VA sales were down -12 % in 2020 . Perhaps volatility / uncertainty over the market has dampened sales ?
Fixed Annuities ( FA ) – Low interest rates dampen sales ( down about -5 % 1 in 2020 ), but signs point to rising interest rates , so …? Also , FA ’ s are often seen as competition to Certificates of Deposit ( CD ). CD rates are currently very low compared to FA ’ s .
Indexed Annuities ( IA ) should generally rise when VA ’ s and FA ’ s are dampened . Poor market returns and low interest rates generally should help IA sales . However , volatility / uncertainty in the market increases the cost of options ( the financial tool that allows carriers to guarantee a floor return ) and that brings down upside returns . IA ’ s were down -24 % 1 in 2020 .
Registered Index-Linked Annuities ( RILA ) ( or “ Buffered Annuities ”) are an answer to the high cost of options in IA ’ s . If a consumer can accept short term risk / fluctuation , RILA ’ s can provide higher long term returns and downside protection . RILA ’ s were up 38 % 1 in 2020 , with the caveat that these plans are relatively new and so baseline volume was pretty small .
Chuck Ritzke , FSA , MAAA is the owner of Problem Solving Enterprises , Inc . PSE helps insurance carriers , distributors , InsureTech and other startups solve problems , collaborate , and design / file innovative products / services by providing consulting , analysis , and customized software tools .
1 Full year 2020 over 2019 — Source : Secure Retirement Institute , U . S . Individual Annuity Sales Survey , Fourth Quarter 2020 via LIMRA at https :// www . limra . com / siteassets / newsroom / fact-tank / sales-data / 2020 / q4 / final-4q- 2020-annuity-sales-estimates-vfinal . pdf
Longevity Income Annuities ( LI ), IMO , have the most potential . LI ’ s provide a guaranteed lifetime income , but with no cash values ( e . g ., Immediate Annuities , Deferred Income Annuities ). They have no counterpart outside of the insurance business . IMO , that makes them the flip side of term insurance . Yet already meagre sales were down -35 % 1 in 2020 . Nobody wants to lock-in low interest rates . And necessarily conservative pricing assumptions to support long-term guarantees dampen sales . On the other hand , LI ’ s should have a relative advantage in that the survivorship benefit of LI ’ s are not impacted by low interest rates and so become a relatively bigger benefit . I believe that innovative indexed designs and risk sharing could open the barn door here for future sales .
Other factors to consider 1 Critics continue to effectively diss annuities ( e . g ., “ I hate annuities and you should too ”).
They do so in a confusing , disingenuous way , lumping all annuity types together .
2 Education is probably the best antidote to the criticisms . I believe we should come up with more effective labels to distinguish the different types , maybe scrapping the term “ annuity ” altogether . Complexity also invites criticism .
3 Tax / Regulatory Issues will continue to have a big effect . I think the government at times sees the benefit of promoting annuities ( e . g . the Secure Act ), yet taxation / penalties on insurance are always an attractive target .