The Federal Reserve raised interest rates mid-month last December, which is likely a good thing for the fixed annuity industry. Insurance News Net’s Linda Koco forecasted how the .25% increase would effect the industry in the article “Rate Increase Bodes Well for Fixed Annuity Sales.” Fixed annuity sales were already up in the third quarter before the increase in interest rates. Beacon Research’s President pointed out that insurance companies had already been gradually raising their fixed annuity crediting rates and indexed annuity cap rates over the course of 2015. The average crediting rate for 5-year MYGAs (Multi-Year Guarantee Annuities) went from 1.68% in November of 2014 to 1.88% in September of 2015. Fixed indexed annuity caps have also gone up since August of last year.
Even though these rate increases seem small, they make a big difference to people interested in fixed rate annuity products. Many of them want to lock in any higher rate because of how long rates have remained very low. Fixed annuity sales increased by 15.9% during the third quarter of last year and these incremental increases are a big reason why. Fixed indexed annuity sales increased by 14.5% from the second to the third quarter last year and MYGA sales were up 16% during that time. Volatile equity markets also sent a lot of people to fixed rate products, as is the norm. The Fed hasn’t increased rates in close to ten years, so this increase hints that they will continue to rise in the future. That means that fixed annuity sales are likely to keep going up as well. MYGA sales will probably be high because people ladder their annuities in MYGAs as rates rise. Indexed annuities are going to remain popular as well because of their lifetime income guarantees, increasing rate caps and the persistently volatile equities markets.
The article points out that there could also be some surprises to watch out for. There will inevitably be people who hold off buying a fixed annuity because they foresee even higher interest rates coming soon. Those interested in immediate annuities might do the same thing. It’s a delicate balance waiting for the “right” time to purchase your annuity. You never know when you will get the highest interest rate until it’s too late. Higher interest rates can negatively affect corporate profits, but most insurance companies have hedged themselves well against risk because of the tumultuous last decade. Carriers will likely continue to improve upon products and keep producers and consumers happy with their annuity choices. The Fed’s interest rate increase is good news for the fixed annuity industry, as they can expect sales to keep rising this year.
Written by Rachel Summit