Annuities Writers Fight to Grow Market Share and Address Margin Compression

The ability to roll out new annuities products, pricing, and product changes rapidly in response to market conditions is vital for growing revenue and market share. Economic uncertainty from COVID-19 only increases the importance of launching new products rapidly. Addressing the needs and aspirations of potential consumers and producers that came of age in the 21st century will be critical for annuity writers; otherwise, they could lose those populations to more consumer-friendly financial services alternatives.

Ongoing low investment returns and distribution shifts mean changes to product mix.

The Federal Reserve’s sharp cuts to interest rates mean that returns on the underlying investment accounts of fixed annuities are also greatly reduced. As a result, insurers are shifting product mixes from fixed annuities back to variable annuities, especially structured variable annuities that offer better performance caps and upside potential. They have restricted the sales of some products and have stopped marketing other products entirely.

At the same time, insurers are reducing indexed annuity commissions to advisers and reducing annual withdrawal and rollup rates on annuities that offer guaranteed lifetime withdrawal benefits.

Recent direct distribution plays have focused on multi-year guaranteed annuities (MYGAs), which offer guaranteed rates for longer periods than traditional annuities. Insurers need to make their products and purchasing processes more attractive, particularly to Millennials. With an increased focus on indexed products that do not require SEC supervision or FINRA licensing for producers, product manufacturers are expanding relationships with IMOs and other distributors beyond broker-dealers and wirehouses. This development increases market access for manufacturers but also changes compliance and suitability responsibilities.

Insurers and vendors are making it easier for financial advisors to sell annuities as part of holistic financial planning.

Insurers are offering financial advisors simplified, low-cost products without commissions. They do so through marketing organizations in some cases. Vendors are offering solutions that enable insurers to analyze and market annuities. These solutions provide product-specific training alongside other insurance and investment products.

Insurers that offer direct-to-consumer annuities and those considering a direct-to-consumer strategy must enable online applications, including compliance and suitability checking.

COVID-19 has increased the importance of digital and fraud detection/prevention investments.

Digital initiatives have moved to the front burner. For example, Canvas, a digital agency owned by Puritan Life Insurance Company of America, began offering fixed annuities online without commissioned sales agents in late 2020. Annuities require more guidance than simpler life insurance products, but there is still room for insurers to leverage third-party data and digitize processes to improve efficiency and increase straight-through processing. Insurers have been particularly challenged with licensing and appointments during the pandemic.

Another impact of COVID-19 is on fraud and security. Insurers are reporting an increase in fraud, especially account takeover (ATO) attacks. Insurers are responding by educating advisors, back-office and call center employers, and field staff on fraud awareness.

Insurers are making moves to preserve margins.

As of 2021-Q1, preliminary estimates for total individual annuity sales were up for fixed and variable annuities compared with 2020-Q1. This increase has been largely driven by registered index-linked annuities (RILAs) and fixed-rate deferred annuities. Overall group annuity risk transfer sales were down 10% between 2019 and 2020.

Insurers have tried to preserve margins through cost reduction, efficiency initiatives, investments in higher-yield assets, and by lowering crediting rates. They have also lowered cap rates, reduced sales of fixed indexed annuity products, limited or cut benefit riders, and stopped selling variable annuities with guarantees.

Regulation is challenging insurer discretionary spending.

The Department of Labor’s best interest rule will likely re-emerge, but the timing is uncertain. In addition, insurers must now contend with best interest regulations from the SEC and states. For example, the Appellate Division of the New York State Supreme Court struck down the New York Department of Financial Services’ Rule 187, outlining a best-interest standard for annuity sales as “unconstitutionally vague.” The department can appeal and move for a stay or propose a more prescriptive rule.

In January 2020, the NAIC adopted modifications to variable annuities reserve and required capital requirements. NAIC also changed the accounting treatment for hedging variable annuities from mark to market to amortization to match liabilities better. A.M. Best suggests the two measures should reduce non-economic volatility and the use of captive reinsurance. The remaining exposure to market volatility may be a further impetus for some firms to de-risk annuity products or shed annuity business through reinsurance agreements or by selling the business outright.

The future is changing for annuities writers.

Annuity writers wrestle with revenue growth and cost reduction. They are modernizing policy administration systems, investing in straight-through processing, and improving producer self-service capabilities. They are also adopting more sophisticated actuarial capabilities, updating models, and leveraging automation to serve their client base given increasing compliance requirements.

For an in-depth look at the trends in this space, read Novarica’s report Business and Technology Trends: Annuities.

Add new comment

CAPTCHA
This question is for testing whether or not you are a human visitor and to prevent automated spam submissions.
1 + 0 =
Solve this simple math problem and enter the result. E.g. for 1+3, enter 4.

How can we help?

If you have a question specific to your industry, speak with an expert.  Call us today to learn about the benefits of becoming a client.

Talk to an Expert

Receive email updates relevant to you.  Subscribe to entire practices or to selected topics within
practices.

Get Email Updates