The annuity evolution

The headline on a recent Bloomberg news story was eye-catching: “Low Rates May Be ‘Devastating’ to Annuities, Group Says.”

The article centered on a speech by LIMRA Chief Executive Officer Robert Kerzner at a Chicago conference in October. Kerzner minced no words while speaking in, appropriately, the Windy City about the headwinds our industry faces when interest rates are at near-record lows.

“If long-term rates stay where they are, it would be devastating for our industry,” Kerzner said. “For now, there is no relief in sight, and if this is the way it’s going to stay, it’s a game changer.”

I couldn’t agree more that the game is changing. But change can be good.

Sometimes a challenging environment fosters innovation. Experienced insurance carriers that are committed to this product will transform the annuity marketplace to adapt to current economic conditions.

We all know what the headwinds are. The 10-year U.S. Treasury yield was a frighteningly low 1.72 percent as of Halloween. Couple that with the Federal Reserve pledging in September to keep interest rates at historic lows through at least mid-2015 to spur economic growth, and it obviously puts the squeeze on a spread-based business like annuities.

In the midst of this, consumers are looking for potentially higher income streams from annuities, which have become increasingly attractive in the wake of several years of market volatility. There is a discernible shift from the days when consumers sought purely accumulation; consumers are now looking for a guaranteed income stream, too.

What we face in the annuities industry is a feasibility gap — the difference between what consumers want and what carriers can provide, given market conditions.

That’s where the innovation comes into play. Market conditions are spawning new income rider designs that combine an indexing approach to interest credits with a slightly lower guaranteed lifetime income benefit, creating products with greater flexibility and opportunity for the consumer.

The trend is toward offering an alternative “participating” lifetime income benefit, based in part on the indexed interest amounts credited to the underlying annuity. A consumer purchasing the annuity with an income rider can choose between a traditional guaranteed lifetime income approach or one that combines a somewhat lower guaranteed amount with upside potential, based on the indexed interest credits of the base contract. Agents need to understand this trend and may need to sell a bit differently because of it.

For example, at Aviva, we offer consumers an indexed annuity with the option of adding an income rider with an income base that grows at a guaranteed rate or an income base that grows at a lower guaranteed rate. The lower guaranteed rate, however, adds the interest credits from the base contract. Interest credits on the base contract are linked to the movement of a market index, and the accumulation value is guaranteed not to lose money because of market downturns.

Consumers also have more choices when it comes to how their income is distributed. At the time the consumer elects to trigger lifetime income benefits, he or she can choose a fixed amount of lifetime income benefits or — if inflation is a concern — a lower initial benefit with an inflation-linked increasing benefit amount.

These options allow consumers to make decisions based on their own risk-reward appetite at the point of sale. This enables individuals to customize the contract to best meet their needs and goals for retirement.

For carriers, the additional option of the participating approach to income riders is important. Not only does it enhance consumer choice, it also helps insurers deal with the low interest rate environment and manage pressure on reserves associated with the high guaranteed roll-up rates that have evolved in recent years.

Carriers with experience in, and commitment to, the indexed marketplace are going to continue to develop products that are good for customers, distribution and their own financial strength. Having seen market fluctuations before, experienced carriers have learned how to change the annuity marketplace with new products and features to adapt to current market conditions.

Fixed indexed annuities still offer a great value proposition for consumers who are looking for safety and some level of guarantees. With variable annuities, consumers are putting their money at risk to some degree. Meanwhile, most “safe money” options, such as CDs and money market funds, are paying around 1 percent — or less than the current rate of inflation, which was 2 percent over the last 12 months, according to figures that came out in October.

We definitely face headwinds for the future of indexed annuities — low interest rates, income-based sales (or guarantees) that have led to more assumption-based pricing, and regulatory challenges. I believe experienced carriers have and will continue to create compelling products and propositions for consumers and distribution.

I think it’s a game-changer that will be innovating, not devastating, for the annuity industry.

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