Annuity Providers Face Profit Pressure
It’s been a tough environment for annuity providers. To combat interest-rate pressure on their corporate profits, many providers are considering raising prices or canceling low-cost options.
VA income guarantees, for instance, are “quickly becoming less appealing to insurance companies,” says Don Hughett, partner and wealth advisor at Octavia Wealth Advisors in Cincinnati. Typically, he says, they are priced with the assumption of a considerably higher interest rate environment. “In response to the current environment, there has been movement in the industry designed to lessen guarantees and, in many cases, to incorporate flexibility in the guarantees ... to protect the interests of the insurers.”
Given these market pressures, annuity providers have to be careful. “When managing products, especially in a challenging environment like the one we’re facing now, it’s important for annuity providers to balance the consumer value proposition with their own long-term viability, in order to be strong and stable to meet client obligations,” says Eric Henderson, president of Nationwide Annuity in Columbus, Ohio.
Henderson noted that four of the top 10 VA providers during the 2008 financial crisis are no longer in the annuity business because they couldn’t weather the storm. “All insurers will struggle to earn a decent return and manage the credit risk in their portfolios,” he says.
Always Innovating
One way annuity providers cope with uncertain conditions and changing client appetites is by creating new products or new variations of old products. Several companies now offer products with rising income features, for instance, some of which are specifically linked to inflation and are dubbed inflation-protected annuities. “In a time of unprecedented low interest rates, it’s likely that products that offer downside protection with the ability for crediting rates to rise as interest rates increase will be attractive to investors,” says Panaitisor at SRI.
Since inflation has been less than 3% annually since the financial crisis of 2008, the market for inflation-protected annuities hasn’t been strong. Panaitisor is aware of only a limited number of such products, but allowed that it “may be an area of opportunity for manufacturers to innovate.” The benefit of a rising income annuity comes at a cost, of course, but it may be worth it for those who are worried about losing purchasing power over time and want to hedge against the effects of inflation to safeguard their retirement. Most pensions aren’t indexed to keep up with inflation, and even Social Security cost-of-living increases have historically tended to lag the general inflation rate.
Clients Want Options
Separately, DPL conducted a survey that found many advisors are reacting to the low interest rates by recommending riskier assets for their clients’ retirement portfolios as they search for yield.
“Due to our prolonged interest rate environment, advisors feel the need to dial up investment risk to meet income needs, thereby exposing clients to sequence of returns risk, which can be devastating for those nearing retirement or recently retired,” Lau said in a released press comment about the survey.
Still, many advisors and clients are satisfied with the current varieties of annuities.
“People want options, and annuities in general provide that,” says Paula Nelson, president of retirement at Global Atlantic Financial Group, based in New York City. “Variable annuities appeal most to those looking more for market growth potential over interest crediting. For interest-based saving alternatives, we see many customers looking to fixed-index annuities.”
Such annuities have a fixed rate of return, but they earn interest based on (though not actually directly invested in) the performance of an equity index. They may have greater growth potential than other fixed annuities, but lately their popularity appears to be waning. In the second quarter, fixed-index annuity sales fell 41%, the lowest quarterly total for the product since the first quarter of 2015.
Despite today’s challenges, many people find that annuities are an essential part of a smart retirement plan—perhaps now more than ever. “With the unprecedented uncertainty in the markets, economy, politics and society at large, this is actually the absolute right time to be having conversations around protected lifetime income, and annuities are still the only products out there that can provide that,” says Devine at the Alliance for Lifetime Income.
Overall, though, it seems that many clients are just holding their breath. “Many individuals are in ‘pause’ mode and are waiting until the economy settles down,” says Curtis Johnston, vice president and wealth advisor at Girard in King of Prussia, Pa., adding, “or until the election is over.”