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Innovation is Key for Annuity Industry

Innovation is the key word in the annuity industry right now. Some carriers are early to the game, while others still have some catching up to do. In LifeHealthPro’s “These are the top 5 trends shaping the annuity market,” Gerry Murtagh discussed in depth what is happening now and what 2016 will bring for annuities. The main factors shaping the current market are our increasing longevity, persistent low interest rates, an aging Baby Boomer population, market volatility and the DOL’s proposed fiduciary rule. There are significantly more people who need to guarantee income that will last for two plus decades through retirement. The industry must provide products to meet the guaranteed income needs of consumers. Ernst & Young found these five common trends among industry leaders that they interviewed this past summer.

Annuity sales are likely to remain strong because of the demand for guaranteed income and slightly higher interest rates. But annuity dominance is shifting within the industry. Fixed indexed annuity products have been increasing steadily in sales, while variable annuity sales have been flat. Many carriers stopped selling VAs or took away some of their benefits. The fixed indexed annuity segment has seen new products and carriers, as well as more products with GLWB income riders. Annuity sales were up 3% last year thanks to increasing fixed annuity sales. In particular, fixed indexed annuity sales were up 23% last year. Deferred income annuity sales are also increasing at a high rate and are likely to make up a much larger percentage of the overall annuity market in the coming years. As market demand shifts, carriers will be shifting their annuity product focus to keep up with consumer demand.

Another important trend in the annuity market right now is the continued innovation and adaptation of the products. Insurance companies make changes to their annuity products to meet the needs of consumers. Fixed indexed annuities are offering a greater choice of indices and more flexibility to keep up with Baby Boomer demands. As more Millennials search for guaranteed income, carriers will be suited to innovate and meet their specific needs. While GLB’s are still popular with variable annuities, these living benefits are harder to come by and cost more to add on to your annuity. Investment-only variable annuities are coming back into the market, but with more subaccount options than they had 30 or so years ago. Companies who sell deferred income annuities have introduced Qualified Longevity Annuity Contracts as the government has made these products easier to use in qualified retirement plans. Insurance companies work hard to balance their risk with changing consumer demands.

The annuity industry has never been a leader in technology, but it really has to adapt to this customer demand. Consumers expect everything to be available via their smartphones, including the availability of annuity balances and transaction processing. From self-service for certain processes to completing administrative tasks, technology has to be at the forefront of the annuity industry right now. While companies will have to invest in this newer technology, they will reap the benefits in the long run from lower transaction and administrative costs. Buying habits of consumers are changing as well. From different kinds of distribution channels to so-called robo-advisors, keeping up with technological advances is key for the annuity industry right now if they want to remain relevant. It won’t be easy, but it is necessary.

The fourth annuity market trend is actually taking better care of consumers. While there are still government suitability regulations to follow, companies are moving towards better customer service on their own. They are providing advisor and customer education and improved training to make sure that any decisions made are in the customer’s long term best interest. This is not necessarily an easy shift for some companies, but strong customer relationships are invaluable. Companies are eliminating products that weren’t meeting customer needs and really working to do right by the customers purchasing their annuity products. This added customer care requires annuity providers, advisors and agents to work together in balancing customer needs with profitability.

Finally, the annuity marketplace will see a lot of disruption in the distribution channels. The DOL fiduciary rule guidelines are not set in stone yet, but they will enact big changes throughout the annuity landscape when they are set. This rule increases compliance costs on the product side and moves advisor compensation models to fee-based instead of commissions. One CEO doesn’t think that companies will be able to both manufacture and sell products after the rule takes effect. They might have to choose just one aspect of the business.This DOL rule could completely change the ways of the annuity industry. Technological advances, the DOL fiduciary guidelines and changing consumer demand are forcing innovation and adaptation in the annuity industry.

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