By Linda Koco
Contributing Editor, AnnuityNews
Indexed annuities and income annuities have grown market share against all odds and all predictions.
Indexed annuities’ share of the overall fixed annuity sales was 41.3 percent in second quarter 2011, and income annuity market share was 11.2 percent, according to data provided by Beacon Research, Evanston, Ill.
That’s up from 37.7 percent and 9.3 percent, respectively, in first quarter 2011.
The second quarter findings represent about 84 percent of U.S. fixed annuity sales in second quarter 2011, Beacon says. All data are estimated.
The scope of the change is more dramatic when comparing results with eight years ago. According to the Beacon, indexed annuity market share was only 11.4 percent in first quarter 2003 and income annuity market share was just 4.4 percent in the same quarter.
Market share gain
The gain in market share has been at the expense of the so-called traditional fixed annuity products. Beacon breaks out these products into two categories: fixed-rate annuities without market value adjustment features (MVAs) and fixed-rate annuities with MVAs.
According to the Beacon data, annuities without MVAs had a second quarter 2011 market share of 40.1 percent, way down from 72.6 percent in first quarter 2003. The annuities that include an MVA feature held a second quarter market share of 7.4 percent, down from 11.6 percent in first quarter 2003.
The second quarter 2011 figures represent sales of $8.4 billion for indexed annuities and $2.3 billion for income annuities. Those are relatively small sales numbers when compared to second quarter sales of variable annuities, which LIMRA, Windsor, Conn., puts at nearly $41 billion.
However, the indexed/income sales and market share figures are getting attention all the same, especially since they seem to have emerged from a lot of the negativity that both products endured in years past.
In early 2003 (and well before), many annuity professionals looked upon indexed annuities as little more than a novelty, a niche market for the post-2000s recessionary period. Some thought the product too confusing to gain a serious toehold. And critics in the media and government sniped away at its commissions, surrender periods, fixed product status and positioning in the marketplace.
As for income annuities, just about everyone in the industry in early 2003 (and well before) said these products were insignificant players, always had been and always would be. Industry practitioners across the country said very few consumers would buy them because people just don’t like the idea of locking up their money knowing they could end up never getting the money back if they die early.
At that time, first quarter 2003 sales for the two products were $2.6 billion and $1 billion, respectively, compared to over $19 billion for traditional fixed annuities (with and without MVAs).
Yet Beacon’s numbers show that sales of the two products kept on growing, as if on parallel tracks. In first quarter 2004, indexed sales were $3.7 billion and income annuities were 1.2 billion; a year later, first quarter numbers were $6 billion and $1.4 billion, respectively, and in 2006, first quarter numbers were up again, though modestly, to $6.4 billion and $1.5 billion. On it went through the eight-year period. (See chart.)
In some quarters, there were fallbacks (as during the 2008-2009 recessionary period). But sales bounced back soon thereafter, so the overall trajectory was up.
The growth in indexed annuities sales and market share is a sign of “enormous success,” according to Judith Alexander, director of sales and marketing at Beacon.
She attributes this in part to the indexed annuity’s position as a “middle ground” between variable annuities and fixed annuities. “The middle ground is attractive to consumers when market conditions look as if the equities markets will be rising,” she explains.
Another factor was the addition of guaranteed lifetime withdrawal benefit options to the indexed products. Alexander says the options first started appearing on index annuities in 2006, and more and more carriers have added them since then.
As for income annuities, Alexander believes that although their sales volume is relatively small compared to other annuity products, their growth in sales and market share during the falling interest rate environment of 2011 is noteworthy.
For years, annuity experts have been saying that any prolonged low interest rate environment would be a drag on income annuity sales. That’s because low rates typically reduce payouts to the consumer, so consumers don’t want them and agents don’t want to sell them. Yet despite the rock-bottom interest rate environment in second quarter 2011, income annuity sales reached their highest market share yet — 11.2 percent.
Alexander attributes some of the income annuity’s growth to the positive assessments the product have garnered in the press in recent years. The positive view of income annuities in a recent Government Accountability Office report probably helped, too, she says.
Another factor is that “the income annuity is relatively simple,” says Alexander. “Whatever option you choose is reflected in the payout rate you get, so you know what you are paying for. It’s all right there, and you can decide how important the option is to you.”
Income annuity sales growth has only occurred in pockets, however. A handful of insurance companies, including sales leader New York Life, account for the majority of sales, says Alexander.
Still, given that many market watchers said income annuities would “never” sell in a meaningful way, the product has now become an annuity to watch. Alexander is predicting that if a solid rise in long term interest rates occurs later on, “income annuity payouts will start rising and we will see big sales in these products.”
Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at email@example.com.
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