by Matthew Drinkwater
In what may be a surprise to some, fixed annuity sales are expected to grow at a faster rate than variable annuity sales in the next few years and should reach $130 billion by 2008, according to LIMRA International, Windsor, Conn.
Fixed annuities were the dominant annuity product until the 1990s, when the annuity industry directed most of its attention and energy toward the development and marketing of its variable products. Variable annuities experienced rapid sales growth from the mid-1990s through 2000.
Based on the LIMRA forecasting model, 2004 fixed annuity sales should rise about 2% from 2003 levels. (see chart)
|BY THE YEAR
|Fixed Annuity Sales Forecasts ($ billions) |
|% Increase from
|* "Fixed sales" includes all money paid into new fixed contracts and existing contracts within |
deferred and immediate annuities and structured settlements. Payments into fixed funds within variable annuities are not included.
Source: LIMRA International, Windsor, Conn.
Subsequently, fixed annuity sales are expected to increase each year at an annualized growth rate of 9.3% through 2008. (Note: The modeling technique used here accounts for variation in historical sales data, combined with econometric projections of several key factors.)
A variety of economic and demographic factors, as well as increased use of equity-indexed fixed annuities, favor this trend. For example: >Economic factors:
Growing fears of inflation, an improving economy and mounting federal debt have placed a great deal of upward pressure on interest rates. Although these factors will conspire to keep fixed sales relatively stagnant in 2004 over 2003 levels, ultimately they will lead to more attractive crediting rates for newly issued FAs.
Although the economy has improved since the early 2000s, the recovery has been slow and uneven. Moreover, few expect a return of the market conditions of the mid- to late 1990s. As a result, returns on variable products might not be sufficiently high to offset their inherent market risk. Therefore, dollars invested in annuities could be more likely to flow into fixed products (as well as fixed funds within variable products). >Demographics:
Perhaps more important than economic projections for understanding long-term sales trends are the underlying demographics of the United States. The leading edge of the enormous baby boomer generation is only a few years away from turning 60. Older customers – who tend to be more conservative and are more likely to buy fixed products than younger people – will represent a larger and larger proportion of all annuity buyers.
For example, at the end of this decade, the number of people turning age 48 each year will steadily decline, while the number of people turning age 63 will increase as the baby boomers advance into their golden years. These two ages are significant because they represent the average age of purchase for variable and fixed deferred annuities, respectively. >Role of equity index annuities:
Since their introduction in the mid-1990s, EIA sales have shown impressive growth and have constituted a larger share of total fixed annuity sales (through the second quarter of 2004, they represented about 24% of fixed deferred sales). These products offer a guaranteed fixed rate of return with the potential for increased gains depending on market performance. While EIAs are more complex than traditional fixed annuities and often have limits or caps on equity-based returns, they may have greater appeal to people entering their retirement years. Such individuals may be more risk averse and less focused on maximizing return than they were during their pre-retirement years while also wishing to invest for a potentially lengthy retirement phase. >Suitability Concerns:
Suitability also may cause greater demand for fixed products. At both the state and federal level, there are new and proposed guidelines for annuity sales to seniors. California, Florida and Wisconsin have each passed laws and other states will likely follow suit. In June, the Securities and Exchange Commission and the National Association of Securities Dealers released a joint report that was sharply critical of broker-dealer annuity sales practices, including brokers making unsuitable recommendations to seniors.
Although these and many other factors influence the pattern of annuity sales, much variance in past annuity sales growth can be explained by a few key drivers, including interest rates, yield spread, per capita disposable personal income and stock market growth. The annuity sales predictions shown here were based on econometric projections of these factors.
It should be noted that these forecasts depend largely on expectations about market performance and interest rates, which are themselves very uncertain. Other possible reasons for deviation from these forecasts include an increased tendency among annuity buyers to allocate into fixed buckets within variable contracts, additional utilization of guaranteed living benefits and other guarantees on VAs, and competition from non-annuity investments such as CDs.
While we do not expect industrywide fixed sales to exceed variable sales any time soon, fixed annuity writers and distributors should benefit from the demographic and economic trends described here. It remains to be seen whether all the players that stand to gain from these trends will pursue the opportunity with equal success.
Ph.D., DLMI, ACS, is an associate scientist in the Retirement Research Center of LIMRA International, Windsor, Conn.
Email address: Mdrinkwater@limra.com
Last Updated: 10/29/2004 9:50:00 AM
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