Annuities 2011: The survival guide
February 8, 2011 by David Port
- BY David Port
There was a time, not too long ago in fact, when a clear dividing line seemed to cut across the annuity landscape. On one side of the line resided the fixed annuity specialists and on the other, the variable annuity devotees, with minimal crossover between the two.
How times have changed. Nowadays, to build an annuity book of business, it behooves advisors to be well versed enough in fixed and variable annuities alike to be successful selling both. That’s no easy task, however, given the sheer breadth, changeability and complexity of the annuity marketplace, including a seemingly endless parade of new product designs and contract features, both embedded and optional.
That, plus other complicating factors such as high equity market volatility, bottom-dwelling interest rates and lingering client risk-aversion, make the annuity salesperson’s job even tougher, whether the product at hand is a variable annuity, traditional fixed annuity or fixed index annuity, or whether it’s a deferred or an immediate contract.
Regardless of product type, says Tom Mullen, vice president of sales for John Hancock’s annuity business, it’s clear where the annuity market is headed. “With people’s [asset] portfolios having gone through so many [changes] in the last 18 to 36 months, it’s becoming more and more apparent that many people would benefit from having longevity and income protection. As for what flavor annuity you use to deliver that protection, that’s open to debate.”
What’s not debatable is that annuities don’t sell themselves. The more you know about which products and features are selling best, which sales and marketing tactics are resonating most and what’s happening on the product development front, the bigger edge you’ll have in finding annuity-based solutions for clients and, in the process, fortifying your practice.
Much of the essential annuity knowledge you’ll need to gain that edge resides right here. So read on.
Fixed index annuities
The sales story: After a record year in 2009, fixed index annuity sales were heading toward another record year in 2010. FIA sales for the first three quarters of 2010 were up 4 percent compared to the same period of 2009, according to figures compiled by the insurance industry research group LIMRA International.
Meanwhile, according to a separate report from Beacon Research, FIAs now represent a record 44 percent share of fixed annuity sales. Third-quarter 2010 indexed annuity sales reached $8.6 billion, their second consecutive quarterly eight-year high. FIA sales were up 17 percent in 3Q2010 compared to the same period of 2009, while most other annuity products lost ground.
Head-to-head vs. VAs: While FIAs can’t rival variable annuities in terms of overall market share (despite record FIA sales levels, variable annuities still easily outpaced their indexed counterparts in the third quarter of 2010, $34.9 billion to $8.6 billion), competition between the two product types clearly is escalating.
Indeed, the emergence of “better [indexed annuity] products with better consumer value” is making insurers, marketers and advisors alike take notice, says annuity expert Garth Bernard, founder and CEO of the Sharper Financial Group, in Boston, Mass. “There’s no reason why advisors who sell variable annuities with income riders should not and would not take a look at indexed annuities with the same income riders.”
Why? For one, the fees for those income guarantee riders on FIAs are “massively lower” than those of similar VA riders, according to Bernard. What’s more, he says, FIAs, unlike VAs, offer built-in principal protection “and you don’t have to be securities-licensed to sell them, which can save a lot of red tape.”
Nowadays, says William E. Kauffman, Jr., CLU, ChFC, LLIF, director of marketing for life and annuities at Senior Market Sales in Omaha, Neb., the combination of downside protection and upside potential offered by the FIA resonates more with many annuity shoppers than does the pairing of greater upside potential and greater downside risk found with a variable annuity.
Factor in the emergence of reasonably priced VA-like income guarantees on indexed products, plus the U.S. government’s decision not to regulate FIAs as a security, and it’s clear why independent marketing organizations such, as Kauffman’s, are urging their advisors to put a greater emphasis on FIAs.
New features, new players: Similar in some ways to the living benefits “arms race” that unfolded in the VA market several years ago, the escalating competition among FIA providers to outdo one another with their guarantees bodes well for consumers and the advisors who serve them, Kauffman says. “We’re seeing [insurance] carriers trying to find new and innovative ways to do things a little differently to offer people a safe means of protecting and growing their retirement dollars.”
That trend is manifesting not only in richer guarantees and higher rates of return, but also in the new indexing options available with some FIA contracts, including indices with more of a global flavor.
The influx of new indexed annuity products and features will likely continue, especially with insurance carriers that historically have steered clear of FIAs now looking to join the fray.
Indeed, according to Mullen, historically VA-focused John Hancock is “looking at [the fixed index annuity] market very closely,” with an eye toward perhaps developing an FIA with advanced indexing options that would be sold via registered broker-dealer reps.
The sales story: They may be relinquishing market share to FIAs, but variable annuities remain far and away the most popular type of annuity. According to LIMRA, VA sales dipped 2 percent from the second to the third quarter of 2010, to $34.9 billion. That figure represents a 9 percent increase from VA sales in the third quarter in 2009. Year-to-date VA sales totaled $102.8 billion, up 8 percent over the first nine months of 2009.
Product development: Confronted with new competitive pressures from their indexed counterparts, along with lingering investor risk-aversion that appears to be curbing demand, VA providers appear once again to be accelerating their efforts to innovate to attract new business, after a period of retrenchment.
A report compiled by Morningstar and issued by the Insured Retirement Institute finds an uptick in new benefits for the third quarter of 2010, including a tripling of new lifetime benefits compared to the second quarter of the year. Among the noteworthy new features to emerge in the quarter, according to Morningstar:
- MetLife’s GMIB Plus III, an RMD-friendly guaranteed minimum income benefit with a base that steps up by the greater of 5 percent or the RMD amount. Withdrawals reduce the benefit base dollar-for-dollar up to the greater of 5 percent or the RMD amount.
- Transamerica’s new Income Link, a two-tiered lifetime withdrawal benefit that offers 3.5
percent for life after a first-tier withdrawal period ranging from two to seven years, with withdrawals ranging from 4.5 to 9.5 percent.
- Genworth’s increase of withdrawal percentages on its Income Protector lifetime GMWB from 25 to 50 basis points for some age bands.
- Allianz’s pending rollout of a lifetime GMWB with a guaranteed withdrawal percentage based not on age but on the rate of a 10-year treasury note, so payouts are linked directly to market performance, without age as a factor.
Pricing: Besides having new features to choose from, consumers also stand to benefit from a less volatile VA pricing environment. According to Morningstar, year-to-year quarterly product changes decreased 31 percent between 3Q2009 and 3Q2010, suggesting that VA fees are stabilizing after a period of broad, often substantial hikes.
Specifically, VA fee changes dropped by half, from 20 in the second quarter of last year to 10 in the third quarter, indicating to IRI “that the majority of carriers have made their pricing adjustments in response to the new market realities.”
Simplified sales tactics: Rather than making clients’ heads spin by comparing the complexities and nuances of individual VA products, annuity sellers, marketers and providers are finding that, given the risk-averse mindset of many senior-age investors, a simplified, solutions-based approach works best in selling variable annuities. “We’re focused more on education and less on the nuts and bolts,” Mullen acknowledges.
“Today,” Kauffman adds, “it’s all about safety and solutions for the needs a client has. You have to listen very closely to clients about how they want to use their money, and stay focused on the basic selling points of a variable annuity—the upside potential, plus the things they can do to guarantee income.”
Traditional fixed annuities
The sales story: Two years ago, traditional, fixed deferred annuities were hot. Today they’re decidedly not. On a year-to-date basis through the third quarter of 2010, according to Beacon Research, sales of book-value fixed annuities fell 51 percent, while sales of fixed annuities with a market value adjustment feature dropped 65 percent.
However, there were modest signs for optimism, as the fixed annuity advantage over Treasury rates grew, helping MVA sales increase for the second consecutive quarter.
The outlook: Traditional fixed annuities will be a viable part of the annuity product mix going forward, Bernard assures. Indeed, he envisions them regaining some of their luster once interest rates start climbing again. When that happens is anyone’s guess, however.
In the mean time, he says, one way to increase the appeal of traditional fixed annuities would be to offer income guarantee options with them, as with FIAs and VAs. He expects providers to start doing so in the near future.
From the sales perspective, advisors in search of opportunities on the fixed side should also consider focusing more on fixed immediate (income) annuities, instead of fixed deferred products, Bernard suggests. In doing so, he says, citing recent research on why immediate annuities resonate with consumers, the emphasis should be on the product’s ability to provide guaranteed income to cover a variety of a person’s expenses during retirement, rather than on the return on investment the contract provides.
Advisors may already be embracing such an approach, if recent sales figures are any indication. Immediate annuity sales, according to Beacon Research, increased 17 percent in the third quarter of 2010 compared to the same period of 2009, and 7 percent on a year-to-date basis. Now it’s your turn to get a piece of the action.