Annuity Product Set Still in Flux

A report from financial research and analytics provider Cerulli Associates finds the increasing popularity of fixed-indexed annuities (FIAs) is posing a threat to traditional variable annuities.

Cerulli finds much of the annuity sales activity measured for 2014 can be attributed to fixed-indexed annuities. Bing Waldert, a director at Cerulli, adds FIA sales are still going strong this year, “largely due to their living benefits and bonuses,” leading them to outpace other segments of the annuity markets.   

“Fixed-indexed annuities sales are growing because these products are looking much more attractive to investors of late,” Waldert explains. “This rally can be attributed mainly to the shortage of other options available to income-seeking investors, such as bonds and traditional variable annuities.”

Cerulli says variable annuity sales dropped more than 3% in 2014 versus 2013 levels, adding yet another year of sales depreciation since the global financial crisis. As the report explains, “Variable annuity (VA) flows peaked in 2007 at the height of the living benefit arms race, and subsequently plunged during and after the financial crisis. VA flow growth has been non-existent over the past few years as insurers move away from selling living benefits.”

Compare this with FIAs, which have achieved a 9.7% compound annual growth rate from 2007 to 2014, and one can see the importance of FIAs “guaranteed living withdrawal benefits (GLWBs), as some GLWBs in the FIA space sport base rollups as high as 8% or 9%, and withdrawal rates greater than those on the VA side.”

NEXT: Independent B/Ds favoring FIAs 

Matching findings shared by the Insured Retirement Institute in July, Cerulli finds independent broker/dealers are a particularly hot pocket for sales of fixed-indexed annuities. In fact, sales of FIAs by independent B/Ds “more than doubled on a percentage basis in 2014,” according to Cerulli.

“Fixed annuity sales are moving well beyond their key traditional channel, independent agents,” the report explains.

Overall, Cerulli predicts “steady growth of investment-only variable annuities, fixed-indexed annuities, immediate annuities, and deferred income annuities over the next six years.” Further, “traditional VAs will lose market share as insurers move away from living benefits,” Cerulli predicts. “Meanwhile, traditional fixed annuities will remain in scant use until interest rates, and crediting rates, start to rise.”

Other findings highlighted by Cerulli show dividend-paying stocks “continue to be the most-used solution for retirement income by advisers, followed by bond funds.” Cerulli also notes that variable annuities with living benefits were “No. 1 on this list at one time.”

Waldert concludes insurers and advisers alike “should be aware of not overcomplicating product designs as they seek to broaden the [annuity] market.” Regulators have shared similar concerns recently, including Senator Warren of Massachusetts, who went further and accused some bad-apple advisers of colluding with annuity providers to drive up fees and generate kickbacks from steering investor assets into complicated annuities. 

Information about obtaining Cerulli research reports, including “Annuities and Insurance 2015: Evolving Products for a Sustainable Industry,” is here.