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Structured Annuities Take Hold

It was almost a decade ago when I heard the news that a company that cannot stand indexed annuities had launched an “indexed annuity.”

No better way to confirm the information than to go straight to the horse’s mouth: I gave the product management division of the company a call. “Did you guys launch an indexed annuity?” I asked with disbelief.

“Oh yes, we are about to submit sales to your competitor in the market research space. Would you like us to send our sales to you as well?” they asked.

“Wait! [XYZ Insurance Company], whose wholesalers have bad mouthed indexed annuities for years has launched an indexed annuity? What does your product look like?” I was dying to know. They explained the fairly simply design of the product, and the uber-competitive cap rates caught my attention. “And that has a zero percent floor?” I asked doubtingly.

“No, the client absorbs all losses beyond the first [10%].”

“That isn’t an indexed annuity. That is a security; a type of variable annuity, but not an indexed annuity.”

The insurance company proceeded to insist that I must list their product sales under the indexed annuity portion of Wink’s Sales & Market Report. I forcefully declined – I would not be the laughing stock of the indexed annuity market, reporting sales of a product with a negative floor, under grids of products that promised principal protection.

I immediately dismissed the product as an imposter. Little did I know then that structured annuities would become the fastest-growing segment of the annuity industry.

These infants of the annuity industry have been known by many names:

  • Hybrid annuities
  • Buffered annuities
  • Indexed variable annuities
  • Index-linked variable annuities
  • Registered indexed linked annuities
  • Structured annuities

The term “hybrid” annuity is not appropriate, as true hybrid annuities use a combination of annuity and long-term care insurance, to provide benefits in the event the annuitant needs benefits under the Pension Protection Act. The “buffered annuity” moniker isn’t always a proper descriptor, as not all of the premium allocation options in these annuities are buffered. The “indexed variable annuity” isn’t really appropriate either because not all of the products offer variable subaccounts.

Don’t even get me going with the “ILVA” or “RILA” names…it is NOT an indexed annuity, and using the indexed terminology in the name gives me flashbacks of the whole “EQUITY” indexed debacle (we don’t need folks confusing securities with fixed insurance products again!). Because these annuities are similar to structured notes, this seems a satisfying nombre.

So now that we have beat a dead horse- what ARE these products?

I don’t feel comfortable saying that they are a mix of indexed and variable annuity, as they are definitely a securities product, and indexed annuities are not. However, many used to describe indexed annuities as a product offering that was a nice “middle ground” between fixed annuities and variable annuities.

In the spirit of that message, I will say that structured annuities are a nice “middle ground” between indexed annuities and variable annuities.
Structured annuities limit their potential upside performance, based on the performance of an outside index- just like indexed annuities do. However, the caps on structured annuities are relatively aggressive, compared to indexed annuities. For example, the average structured annuity annual point-to-point cap today is 11.67%, while the average indexed annuity annual point-to-point cap today is 5.16%.

In turn, structured annuities generally do not offer principal protection for the purchaser (although some premium allocation options do offer this); the annuitant is subject to losses. However, those losses are also limited on the downside.

For example, the typical structured annuity may offer for the insurance company to absorb the first 10% of losses, but the annuitant would be responsible for all losses in excess of 10%. By comparison, every indexed annuity available for sale today has a minimum guaranteed floor of no less than 0.00%; the purchaser is not subject to market losses at all.

These products have experienced a lot of innovation in a short decade-long period. Initially, the products all credited interest based upon a term end point (or long-term point-to-point) crediting method. Today, these products offer numerous methods for calculating the interest (still not as many as indexed annuities, but if I were a betting woman, I’d say they’ll get there!).

In the beginning, the products only used cap rates to limit the indexed interest; today spread rates are also used to limit the indexed interest. No doubt, someone will offer a product with participation rates as the “moving part” before we know it. The freshman products had no living benefits, but there are definitely offerings today.

Initially, I was quick to dismiss structured annuities as a product offering. “Who needs a middle ground between indexed and variable annuities?” I asked.

Consumers have spoken: they do.

In just the four quarters that my company has been tracking these products, sales have gone from $2.2 billion a quarter, to $3.5 billion a quarter. Further supporting the interest in the product line is that at the beginning-of-the-year, there were only five companies offering this unique type of annuity; today there are 11. And everyone seems to be doing R&D on these. That’s right- structured annuities are the new “It Girl” of the insurance business.

And why? With interest rates at historical lows, caps on indexed annuities are so low that many one-time loyalists are now saying, “I can’t sell that!” These same salespeople find the opportunity to offer their clients a potential 11.67% index credit much more appealing than a potential 5.16%.

In light of this, if low interest rates continue- structured annuities’ growth could give indexed annuities a run for their money. But ultimately, this is NOT a good solution for the prospect who is not comfortable with risk. Period.

Ms. Moore provides competitive intelligence, market research, product development, consulting services and insight to select financial services companies. Ms. Moore works closely with regulators. Her research has been presented to the National Association of Insurance Commissioners Conference on several occasions, to aid in their understanding of indexed products and provide guidance on issues such as suitability and illustrations. [email protected].

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