Top Five Trends Impacting
Your Annuity Business
The landscape for annuities is changing dramatically. US economic indicators confirm that the economy is improving. With third-quarter 2014 growth of 3.5%, increased hiring, and stock marketing reaching all-time highs, carriers are seeking ways to adapt to flourishing conditions. In spite of the ongoing low interest rate environment, awareness of these changes can help you capitalize on the changing market by providing new options for clients.
- Breaking away from Variable — Low interest rates and the costly price of hedging are causing insurers to continually evaluate whether they want to remain in the variable business, and investors are doing the same. [Read More]
- Greater Upside with Hybrid Products — Insurers have introduced hybrids of variable and fixed products. Due to lower capital requirements, hybrids can generate upside for the carrier. They also benefit the contract owner due to downside protection. [Read More]
- Boom in Fixed Annuity Sales — Despite low interest rates and decreased commissions, fixed annuities have taken the market by storm. [Read More]
- Marketing to Next Gen— A trend worth noting is the creation of annuity products to meet underserved consumer segments. Carriers are revamping their standard operations as they adapt to life in a more transparent, self-service-oriented, and mobile-driven consumer. [Read More]
- More Client Focus at the Expense of Commissions — Wells Fargo is pressuring insurers to lower commissions for the indexed annuities sold by its producers.[Read More]
Breaking away from Variable —Low interest rates and the costly price of hedging are causing insurers to continually evaluate whether they want to remain in the variable business, and investors are doing the same. Over the past few years, major players —Genworth, ING, Sun Life, The Hartford, and John Hancock — have exited the VA marketplace. For those staying in the business, there has been a definite scaling back with strategies to decrease sales volume by eliminating 1035 exchanges, aggressive commissions, and shifting investors to less volatile funds. Prudential, MetLife and AXA barred contract owners from making additional premium payments on some existing contracts, a rarely exercised contract provision. The Hartford gave some contract owners the option to exchange a living benefit for an increase in account value, and AXA and Transamerica offered contract owners the choice to drop certain riders in exchange for an enhanced cash value. Market consolidation has resulted in less competition, so clients may be getting less and paying more for it. There is general ambivalence about whether buyout offers will be made or expanded to other GMXB benefits. What is known is that advisors who can navigate this landscape by staying on top of the best variable or alternative product offerings will be able to navigate the playing field.
Greater Upside with Hybrid Products —Insurers have introduced hybrids of variable and fixed products. Due to lower capital requirements, hybrids can generate upside for the carrier. They also benefit the contract owner due to downside protection. Hybrid annuities, as well as index, immediate or fixed annuities are not purchased to win. They are purchased so clients don’t lose. To learn more about the power of zero and annual point-to-point strategies, take a look at Protect Your Clients Hard Work with Dynamic Index Annuity Products. Product advantages include the ability to lock in gains each year, maintain principle, and receive a reasonable rate of return with savings protection. For instance, a hybrid fixed annuity ties performance potential to an index without direct participation in it. Traditional hybrids have been linked to the S&P500. Today, there are index options like Gold, NASDAQ, and more. Recently, carriers have developed volatility managed index options that provide 100% participation without class. Product limitations include a “capped” index strategy, which means the carrier imposes an upward limit on the level of client’s participation in gains, in order to offer protection against the lows. Hybrids are a great solution for clients who want to allocate risk between a variety of traditional and non-traditional indexes.
Boom in Fixed Annuity Sales —Despite low interest rates and decreased commissions, fixed annuities have taken the market by storm. This year, sales were $25.2 in 2nd Qtr 2014, up 14% from 2013, and year to date have rose to $49.1 billion a 39% annual increase. According to Think Advisor, fixed annuity products are trending higher generally because of the guarantees they offer.
Marketing to Next Gen —A trend worth noting is the creation of annuity products to meet underserved consumer segments. Carriers are revamping their standard operations as they adapt to life in a more transparent, self-service-oriented, and mobile-driven consumer. Historically lucrative products and target markets are no longer producing sufficient returns. The profitable and affluent baby boomer segment is saturated. Agent incentives are challenging with acquisition costs too high for underpenetrated segments, like Gen X and the middle market. However, bridging the gap between the over- and under-insured that is more tech savvy, but less financially confident than baby boomers represents a real marketing opportunity. MetLife’s Walmart pilot program has kiosks in about 200 South Carolina and Georgia Walmart stores. Like the bank channel, Gen X and middle-market customers respond better to simplified products offered through a variety of distribution channels. According to a study released with the LIMRA Life Insurance Conference research shows the MetLife experiment might work with 1 in 5 customers willing to purchase insurance products from retail outlets like Costo or Walmart.
More Client Focus at the Expense of Commissions —Wells Fargo is pressuring insurers to lower commissions for the indexed annuities sold by its producers. Their new platform requires that commissions be limited to 4%, a minimum cap rate of 3%, and a surrender period that maxes at eight years. Executives at broker-dealers are curious to see how the move will work out. The push for simplicity by Wells Fargo is in the opposite direction of carrier product designs. However, it is more in pace with opportunity in the bank channel and underserved consumer segments. Other financial institutions are considering similar endeavors. The commission reduction could result in higher cap rates for clients, and elevate the complexity of different indexes and different crediting methods. Wells Fargo fixed-annuity sales reached to 12% year-over-year for the second quarter, largely driven by indexed-annuity sales. These sales are predominately originated by Wells Fargo’s bank representatives, rather than its wirehouse producers.