The annuity industry is in a boom period, with the possibility of more record sales figures even as market conditions begin to shift, according to LIMRA.
Dramatically rising interest rates and a fluctuating equities market have propelled annuities sales in the past year. While interest rates could begin to reverse course later this year, Todd Giesing, assistant vice president of LIMRA Annuity Research, believes the products have the momentum to carry them through the next several years.
“Overall, our research indicates that we can expect to see continued momentum in the individual annuity market as we move forward,” he said. “The industry needs to continue to look at options to enhance the experiences for both advisors and customers through technology and process improvements to be able to meet the growing demand for annuities.”
For the better part of the last two decades, annuities saw sales in the range of $200 billion to 250 billion. Even with markets shifting, LIMRA believes that there is enough momentum to propel sales to up to $300 billion.
A component of that momentum is the advisors who are selling the products. When the traditional equity markets became less reliable, advisors needed an alternative safe investment to put their client’s assets. That alternative became annuities.
“[We] had a good number of advisors who may not have sold annuities in the past. ... They had to use them because they were the best option for their client,” Giesing said. “That brings the potential that these advisors … may start utilizing them more in their practice moving forward.”
Another aspect of that momentum has to do with a shift in the demographics of the country’s population. About 70% of annuity holders are between the ages of 56 and 70, Giesing said. Over the next five years, eight million more Americans will be at least 65 years old, which is the prime group are seeking annuity products.
“The potential pool is only going to grow as we move forward, and the demographic shift is also going to aid in the momentum for annuity sales in the future,” Giesing said.
Finally, throughout 2022 fixed-rate deferred annuities saw an influx of about $113 billion, according to Giesing, and most of that was in short-term rates which ran about three to five years. That means those contracts will be coming up in the next few years.
“We feel the momentum will also continue because of this influx we’ve seen recently,” he said. “That money is going to have to go somewhere, and we feel a good chunk of it will stay in the individual annuity market at that point in time.”
While LIMRA is forecasting continued success for annuities in general, it is anticipating the assets will begin to shift and those products that led the charge may start to see declining numbers.
“The start of the year is conducive to what we saw last year, but we do think as interest rates start to decline, we should see a tapering off of sales as we move through 2023,” Giesing said. “What we anticipate as the economic scenarios change is that certain product lines aren’t going to fair as well.”
Fixed-rate deferred annuities are one of the products that will face this change the most, he said. The funds enjoyed a banner year last year, however, stabilizing interest rates will impact interest in this product.
LIMRA is forecasting that interest rates will plateau at the start of this year and start to slowly come down later this year and into next. If those conditions persist, interest in the fixed-rate deferred annuity will start to wane in favor of other products, according to Giesing.
“We’ll start to see a pattern shift where we’ll see more flows going into products where investors can take on a little more risk with higher upside,” he said.
He said that even though sales in these products will go down, they will still remain strong compared to historical averages.
One product that could see a significant shift in its fortunes is the traditional variable annuity, which has not been enjoying the same level of success as other annuities during this boom period. That could start to change along with market conditions, according to Giesing.
“We are expecting flows to come back into products like traditional variable annuities, which had been challenged here for the past year or year and a half,” he said. “It will provide that option for someone who has a higher risk tolerance to look at solutions like traditional variable annuities.”
Other products that offer protection will also maintain their numbers including fixed index annuities and even registered index annuities. LIMRA anticipates that sales for these products peaked last year, so their sales will not be strong this year, but still higher than historic norms, according to Giesing.
Finally, those products that provide a guaranteed income component will continue to see strong flows going forward as those entering retirement seek a way to continue to fund that retirement.
“We do see the potential for products that have income components to grow over the next five years given the demographic shift,” Giesing said. “These products have the potential because of the demographic shift, we’re anticipating moving forward that more people are going to be entering retirement without the backstop of a corporate pension itself and needing that supplemental corporate income.”