The shifting paradigm: looming changes and opportunities for the annuity producer
By Joe Anzalone
Asset Marketing Systems
As today’s annuity producers leave the lost decade of 2000-2010 behind, with no end to the economic malaise in sight they face a variety of developments that will have a significant impact on the way they market, sell and plan in the future.
The only constant, they say, is change. This adage is especially true now. As today’s annuity producers leave the lost decade of 2000-2010 behind, with no end to the economic malaise in sight they face a variety of developments that will have a significant impact on the way they market, sell and plan in the future. While we have all acknowledged and adjusted to the most obvious changes in the products we offer — interest rates, commissions and the like — other changes to the industry landscape are no less important.
For several years now, we’ve been told to concentrate our marketing on the baby boomers. While we’ve certainly seen an uptick in advertising concentration on the boomer retirement consumer, the sales trends for annuities continue to lag behind.
According to a recent LIMRA study, the average age of an annuity buyer is 64, telling us that the producer community is still spending an inordinate amount of time, money and concentration on seniors. In doing so, producers are not simply leaving money on the table; they are also putting themselves increasingly at risk from a regulatory perspective.
And there has been a massive increase in the number of pre-retirees. The money in the 50-60 age market is substantial, and it can be argued that the best prospects are in that bracket. The numbers are staggering. According to the same study, 55 percent of pre-retiree households have less than $100,000 of investible cash.
Indeed, the higher concentration of future annuity sales will be for cases of $100,000 or less. What’s more, uncertainty in the pre-retiree marketplace is at an all-time high: 57 percent now believe they won’t retire when they had planned, and 70 percent believe they’ll have to work longer than they envisioned.1
Increased focus on guaranteed income solutions — in marketing, seminar content and planning concepts — will yield results if the trends are to be believed.
Despite all the regulatory attention and negative media fixed indexed annuities have garnered in recent years, it’s conceivable that the FIA could achieve a level of mainstream acceptance rarely seen before. Pressured by volatile markets and consumer demand, the biggest names in variable annuity and mutual fund distribution are jumping onto the FIA design bandwagon.
This is especially interesting in light of recent sales and distribution trends. Because of limited capital in 2009, we saw seven companies exit the market, nine pull products off of the shelves, seven reduce commissions, five reduce issue ages and four discontinue all new agent appointments.2
More of the same occurred in 2010, as demand outpaced supply. In 2011, these trends abated somewhat, but producers still saw historically low rates and commissions for FIAs; this, in an environment of rising marketing costs, put more pressure on producers than ever before.
Product availability and access has also changed, presenting producers with sometimes confusing choices as a quasi-captive strategy has been employed by a number of FMOs and carriers, working in concert, to funnel distribution and income into their own respective coffers. The average producer now belongs to a stunning six FMOs, yet sells an average of just three products, the result of increasing product and market commoditization.3 The onset of the guaranteed lifetime withdrawal benefit has, quite literally, saved the day for the FIA manufacturer and seller alike. In spite of historically low interest rates, FIA sales hit their highest point ever in 2010 at $32 billion.
2011 will likely see a significant decrease based on current trends, but FIA sales are still trending towards income solutions, rather than simply safer accumulation solutions; in light of past and present interest rates, this comes as no surprise. GLWBs are being elected in almost 60 percent of FIA sales today, and while only 2 percent of consumers annuitize, almost 11 percent turn on income on their GLWBs, typically in the first 1.2 years of their contract.4
FIA sales now account for 4 of every 10 fixed annuity sales. Ebbs and flows aside, the product continues to find its way into American homes, even as total fixed annuity sales have decreased significantly since 2008.5
Product innovation has been the key to continued FIA success. The trend towards products with flexible and convenient income design, combined with the increasing desire for income solutions and the entry of the larger players into the market, should only result in more mainstream acceptance. This should result in more sales for every FIA producer, both independent and captive.
We also expect the tide of negative media to turn increasingly positive as the larger players commit more resources, and see more revenues, from the development of the channel.
The defeat of SEC proposed Rule 151a was seen as a victory in most FIA-friendly quarters, as independent producers, carriers and FMOs breathed a collective sigh of relief. Regulatory threats, however, continue to loom on the horizon.
The most notable threat may be from the SEC, who still aims for a fiduciary standard for all parties. Under Dodd Frank, Rule 9-13 language opens up the possibility of the fiduciary standard “for all,” and would remove the broker-dealer exception currently in place under the Advisers Act of 1940.
With the mood on Capitol Hill trending towards more consumer protection and industry regulation, and FINRA lobbying for the job of fiduciary overseer, this is seen as a real threat. What’s more, many (if not most) legislators on the Hill have no idea what an annuity is, or how the standard would practically affect both sellers and consumers.
The impact on the industry would be huge, and the fight against 151a may pale in comparison to the fight against the new standard.
Interestingly, although 151a was vacated by the court, the court ominously sided with the SEC on one important definition — that of “risk.” The court agreed with the SEC’s conclusion that principal protection alone did not eliminate the element of risk from an FIA; rather, the uncertainty of the contract’s eventual rate of return added a new component of risk not found in more traditional fixed annuity vehicles.
Chances for future securitization of the FIA are minimal given the court ruling, but it’s interesting to note their viewpoint on what constitutes principal protection. A lesser threat, but worth mentioning, is the possibility of taxation on tax-deferred buildup in insurance vehicles. The unprecedented deficit problem likely means a combination of future taxation and austerity measures, and every possible solution is fair game.
As annuity producers adjust to this shifting paradigm, they should strive for the following:
- Training and education on income solutions — It’s imperative to take advantage of every reasonable opportunity to learn more about income planning strategies, products, and marketing to tap into growing consumer sentiment.
- Adding more “life” to your practice — As many of the field force has seen, life insurance strategies, properly positioned, can open up a world of income opportunity for your pre-retiree customers in a time when they need it most. And while FIA sales continue to draw regulatory attention from both state authorities and compliance officers, life sales don’t receive the same level of scrutiny. And because of the differing cost structure in a life contract, caps and rates on IUL are much higher than on a typical FIA.
- Presenting full planning solutions — Producers will find increasing success in the future environment if the FIA is positioned as one component of an overall framework, or plan, towards future guaranteed income. When positioned in such a manner, products are not so much sold as they are bought, because it is the overall framework, funded by products, that the consumer ends up buying.
2Annuityspecs.com, September, 2011.
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