What is happening to Variable Annuities?
October 30, 2018 by Sheryl J. Moore
Funny thing happened yesterday… I “met” a guy on the phone, who asked me if I had recently learned about indexed life insurance. Uh, no. I’m actually THE indexed life guru…have been for 19.33 years.
I cut my teeth on participating whole life, then moved over to the tough stuff. He remarked, “Oh! I thought you were just the indexed annuity rockstar!” No, actually, truth be told – I didn’t learn what an annuity even was until years after I mastered indexed life. It’s just that annuities pay the bills more than life insurance does. If you are reading this, then you get it.
Anyhow, I used to do this variable annuity (VA) thing too. So please don’t stop me, and ask me about how I know about these products; I’ve kind of done it all (except variable life – don’t ask). The interesting thing is that the VA market has been changing so dramatically over the past decade. All deferred annuity lines have been, but have you seen what has been happening with VAs?
Click HERE to read the original story via Insurance Selling.
Product Manufacturers
Do you remember that catastrophic stock market event that happened in March of 2009? Let me put it in perspective. The S&P 500 closed at 2,878.05 on Sept. 6, when this article was submitted. On March 9, 2009, the iconic index was just 23.5% of its Sept. 6 level at a lowly 676.53.
That, my dear friends, is something most of the pricing actuaries prior to that day had never fathomed; their bosses and their boss’ bosses are very sorry for it! Plenty of insurance companies have bought big blocks of annuity business for pennies on the dollar since, because of this mistake.
“About 50 companies were offering VAs in 2011. There are only about half that number manufacturing the products today.”
Many of them are considering exiting the business yet. Stay tuned.
Products
How did this seemingly unpredictable event affect VA products? Let me count the ways! First, the living/death benefit riders that had become a necessity for the sale were either removed, dramatically repriced, or de-risked to the point that salespeople found them unpalatable. Fees were increased to offset the manufacturer’s risks, expenses, and mortality costs. Fund restrictions were placed on the vast majority of products, to ensure that the manufacturer could make certain assumptions in their product pricing. Manufacturers thinned-out their product offerings. Because there were less product manufacturers in the market, that meant less products, too. In short, there were less choices available when it came to VA products.
Salespeople
If there is one thing that will get salespeople’s panties in a bunch, it is CHANGE! Take a typical salesperson that has three different annuities memorized, and change not only his/her annuities, but also their riders, and their compensation… and you may get their walking papers. All of this change was not conducive to retaining salespeople. A couple of companies stood out from their peers with outwardly aggressive product offerings; an easy tool for recruitment efforts. Where sales were once spread out throughout many manufacturers, they began to converge amongst only a sparse handful of companies.
Sales
Before I get to the meat of the matter, let me drop some knowledge on you about how VA sales fluctuate based on market conditions. Simply said, whenever the market is up, sales of VAs are going to be up. Annuity purchasers want all of the upside potential that being fully invested in the markets affords them. They don’t care about the risks (should the markets fall); they want to go all-in. On the other hand, when the markets are down, sales of VAs usually decline in tandem (as we can see in this chart!)
Now, let’s talk about Indexed Annuities for a second. To some degree, when the markets are up, sales of Indexed Annuities (IAs) also benefit.
“Interestingly however, the markets being on the downswing can be an indication that sales of IAs are going to be on the upswing. This is because the annuity purchaser suddenly remembers that ‘it feels uncomfortable to lose money!’ and they want to transfer their money out of places where it is at risk, and into instruments where it is safe from market losses.”
This is when we see more 1035 activity from VAs to IAs (given suitability). The other big reason IA sales move up during periods of market volatility? If you buy an IA when the market is at a low point, you have the opportunity for fantastic gains on the next policy anniversary, once the market rebounds. This can be a compelling argument for consumers to forego that VA purchase they were considering, not risk any market losses, and lock in gains while “zero is their hero.” This mantra has become very salient for those in the VA market since 2010… how well they know!
% Change in Deferred Annuity Sales Difference Between VA and IA Sales
2011 8% 53%
2012 -9% 52%
2013 5% 46%
2014 3% 39%
2015 0% 34%
2016 -6% 21%
2017 -8% 20%
So, while the overall deferred annuity market is growing/contracting by single digits, the VA product that accounts for the lion’s share of sales is slowly getting a competitor in the Indexed Annuity. Where VAs once outnumbered IAs 5:1 in 2011, now the ratio stands at not even 2:1.
“The VA product that accounts for the lion’s share of sales is slowly getting a competitor in the Indexed Annuity. Where VAs once outnumbered IAs 5:1 in 2011, now the ratio stands at not even 2:1.”
And what’s more is that Wink is seeing more companies entering the IA market each quarter! New manufacturers, new products, and new sales… I guess what I am saying is that I think what is happening to Variable Annuities is that Indexed Annuities are gunning for their #1 spot! Look out!
Sheryl Moore is President and CEO of Moore Market Intelligence, an indexed product resource in Des Moines, Iowa, as well as the market research firm of Wink, Inc. Her companies provide competitive intelligence, market research, product development, consulting services and insight to select financial services companies. She may be reached at sjm@indexedrockstar.com.
