Lincoln Financial Exec: As Pensions Disappear, Annuities Offer Attractive Income Stream
December 6, 2013 by Fran Matso Lysiak
OLDWICK, N.J. – Consumers looking for a guaranteed income in retirement are helping bump up the sales of annuities, according to Brian Kroll, senior vice president at Lincoln Financial in charge of the annuity solutions group.
Q: Total third-quarter sales of annuities rose 9% to $59.4 billion, the largest year-over-year growth since the second quarter of 2011, according to LIMRA. What does the industry attribute this to?
A: The good news for the industry is demographics are in our favor. And you’ve also got a benefit within the product: a lifetime income that you can’t outlive that really is going to be attractive to that group. So for us to sustain that sales growth, I think what’s most important is that we have a healthy set of competitors within the industry, that those competitors are committed to the business, that they are consistent in their market presence and also that they responsibly manage their business.
Q: As to annuities overall, how do Lincoln and the life insurance industry respond to some critics who contend there are better ways to save for retirement and to secure an income in retirement?
A: With recent economic events, with the increased longevity of people, with recent changes in the retirement landscape, I think there is a need for clients to have a well-rounded retirement portfolio. I think the security of having an income that you can’t outlive to having a guaranteed income has a space in that portfolio. We have 10,000 potential clients every day turning 65. By 2030, 19% of people will be over age 65. That plays right into the income guarantees that the industry has to provide.
Q: In September, Lincoln Financial introduced a deferred-income annuity. This is a slowly emerging product for the industry. Tell us more about this.
A: We just talked about the demographics and clients aging. With pension plans disappearing and Social Security uncertainty, there’s been a desire by clients and advisers to create a pension-like asset. Folks have been working for 40 years, getting a paycheck every month, so continuing to get a monthly paycheck in retirement is something that’s very attractive to them. So what a deferred-income annuity does for them is it gives them the opportunity to make an investment today that will provide an income at some future date, which they may choose and they can determine how often they want to receive those payments.
Q: These products have been classified as the hybrid between a fixed, deferred annuity and an immediate annuity or as a hybrid between affixed or variable deferred annuity and an immediate annuity?
A: I think they’re more a hybrid of the deferred fixed annuity and an immediate annuity. I view them more as an alternative to the guaranteed living benefits that you see both on the variable annuities and the fixed annuities. So if I was putting a graph together and saying which one provides the most income and which provides the least from a guaranteed standpoint, the variable living benefit provides the lowest guarantee whereas as a deferred fixed annuity with a guaranteed living benefit would kind of be in the middle and then the deferred income annuity would provide the most income on a guaranteed basis.
Q: How are deferred-income annuities, financially attractive/less risky for the life insurers who sell them?
A: From Lincoln’s perspective and I think from an industry perspective you want to have a diverse book of products so you have some equity risk, you have some interest risk, you’ll have some mortality risk. What this product does is it gives us a little bit more investment risk and some mortality risk and both of those are a little bit easier to manage. On the investment side the insurance industry has been managing credit risk for years and so being able to manage that credit risk to have a diversified investment portfolio to manage that credit risk is something that we do well as an industry. And then on the equity side, we have robust hedging programs in place to help maintain those risks.
Q: And you’re still a top player as of the third quarter in traditional variable annuities. Have you de-risked on your living benefit riders?
A: I would tend not to use the term de-risk. What we have done is made the benefits appropriate for the current market conditions. So we’ve made some changes to the products — generally around the edges — we really are offering the same core benefit that we have since 2007 and that’s a 5% increase in the guaranteed amount on an annual basis, along with the 5% income at age 65. That hasn’t changed our product. It’s been something that’s been supportable for a long period of time. We’ve made some changes at older ages and younger ages when the equity and credit markets changed but we’ve really tried to remain try to our story.
Q: What did you see as the top state and/or federal regulatory compliance issues facing life insurers in their financial sales professionals when it comes to selling annuities.
A: I think it’s primarily variable annuities but I think it relates to all annuities. We’ve talked about the amount of change the industry has seen over the last four years both in carriers that are participating in the market and also in the products that are being sold, both from a new product standpoint and changes to existing products. So from my mind that makes it incredibly difficult for the advisers to really stay abreast of what’s available in the marketplace and even to fully understand the benefits in the products that they favor since there have been a lot of changes. So in my view, from a compliance standpoint, adviser is probably a key point for us and to that end the NAIC a couple of years ago put in an annuity training segment as part of their suitability analysis that they perhaps need to go through before they can become licensed with an insurance company.
The interview will be featured in a future episode of BestTV.
(By Fran Matso Lysiak, senior associate editor, BestWeek: fran.lysiak@ambest.com)
