Over the next three years, retail life and annuity agents and financial advisors can expect simpler annuity structures, more fee-based annuities and fewer riders and income guarantees in product rollouts, a consultant said.
The days when annuities giants pumped out an “overwhelming volume of complex, tough-to-understand annuity products are gone,” said Chris Eberly, vice president of research and consulting with Novarica, an insurance IT consultancy.
Insurers instead have focused on “a few key blocks of business and simplifying products within those blocks.”
These days, insurers are guided by low interest rates, new regulation and targeting retail clients based on income needs rather than what companies can sell.
“It’s the end of the shotgun approach” to sales, Eberly said.
The latest intelligence comes after several weeks of interviews with IT departments responsible for product development within insurers.
Eberly’s research appears in an “Emerging Trends in Annuities” report published with a colleague, senior associate Harry Huberty.
It details new developments that include the introduction of fee-based annuities, bringing products to market faster, increasing transparency in how agents are paid and improving efficiencies around the administration of annuities.
Changes will affect products in the industry’s variable and fixed annuity segments, both of which saw declines in the second quarter.
Second-quarter variable annuity sales dropped 8 percent to $24.7 billion from the year-ago period, while fixed annuity sales dropped 7 percent to $29.2 billion over the same period, according to LIMRA Secure Retirement Institute.
Despite these figures, the increasing number of baby boomers at or nearing retirement — along with an increasing number of millennials who are beginning to save — gives annuity carriers “good reason to be optimistic that demand for annuities will rebound,” the Novarica report said.
“While carriers should adapt to the new environment, those who approach with more focus, simplified product sets, and the technological capabilities to support online sales and a connected, flexible distribution can position themselves for success.”
Distributors to Narrow Focus
Agents should also expect insurers to favor some distributors over others as companies decide which channels suit them best, Eberly said.
By and large, insurers are prioritizing based on what has traditionally been their “strongest (distribution) suit,” he said.
Some insurers have “doubled down” on their career channel — Northwestern Mutual, MassMutual Financial and New York Life, for example, he added.
Other insurers seem intent on bank and broker/dealer channels. Still other insurers are expanding their relationships with registered investment advisors (RIAs).
Insurers are attracted to RIAs because they are growing rapidly and are more profitable and capturing more assets faster than other channels.
Finding Middle Ground on Fee-Based Annuities
In one example of how RIAs and insurers have found middle ground on fee-based indexed annuities, Index Protector 7, an FIA launched from scratch last year by Great American Insurance Group in Cincinnati, has found 50 RIA distributors so far.
Since Index Protector 7 was launched Aug. 22, 2016, more than 50 registered investment advisors — Raymond James, Commonwealth Financial and Brookstone Capital Management, among others — have agreed to sell the annuity.
The journey of Index Protector 7, one of the first fee-based FIAs in the market, offers a glimpse into the dialogue that unfolded between product manufacturers and distributors in the independent channel, which is responsible for 50 to 60 percent of all FIA sales.
By the standards of the company that created Index Protector 7, 12 months is quick, given the traditional reluctance on the part of RIAs to sell FIAs.
Index Protector 7 flew out of the gate after a campaign to educate and explain to RIAs why it had a seven-year surrender charge period, said Tony Compton, vice president of broker/dealer and RIA sales at Great American.
With no surrender charges on comparable fee-based variable annuities, RIAs questioned the need for such a charge on Index Protector 7, a fee-based asset.
Seven-year surrender charges penalize annuitants for turning in their annuities during the first seven years they own the contract. Insurers use those charges to recoup the costs of their investment loss and for marketing expenses.
Fee-based variable annuities and fee-based FIAs are two different products, Great American managers told RIAs. Surrender charges are necessary on fee-based FIAs because of the guarantees associated with fixed annuity contracts.
RIAs wanted to be able to withdraw their fee out of the annuity instead of out of a separate account.
It is common in the RIA channel for the advisor fee to come from the third-party money manager that is managing the client’s assets.
Great American obliged and made that option available in their fee-based FIA, Compton said.
But RIAs persisted with their questions: for example, on how to handle billing and reporting.
An RIA normally uses a software platform that creates consolidated reporting for clients, but historically that reporting software has not displayed FIA values.
Based on technology already in use at Great American, along with new RIA agreements, annuity account values appear on several major reporting platforms, Compton said.
A fee-based FIA is a great option for RIAs concerned about their bond and bond fund portfolios, Compton added. The conversations had to break down the advantages and the drawbacks of FIAs, and outline where they fit in a client’s portfolio in today’s investing environment.
Cultivating the Independent Channel
With the continuing growth in retirement savings, insurers cultivating the independent channel are doing so because they don’t have a large captive distribution network, or because they know their captive agents are not getting any younger and are looking to retire, Novarica’s Eberly said.
“I’ve not come across a carrier saying ‘We’re dumping our captive and going RIA,’ but I have come across carriers saying, ‘We have a captive but we want to grow our RIA,’” he said.
Insurers have realized that RIAs are the ones capturing the assets, “so they are saying, ‘Let’s use that as a market channel for us,’” he said.