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Fixed Index Annuity Industry Trying to Avoid Forecasted Sales Decline


Indexed annuity sales have been growing steadily for almost a decade, but according to many experts the growth is likely to end this year. Investment News’ Greg Iacurci wrote that “Indexed annuity sales (are) projected to plummet 30% because of (the) DOL fiduciary rule.” Some forecasts predict that indexed annuity sales will go down 30-35% to $40 billion in 2017, which is the level that sales were at back in 2013. The Department of Labor’s fiduciary rule increases the investment advice requirements for retirement accounts. This will cause a disruption in the way that insurance companies and product distributors do business and effect all aspects of the variable and indexed annuity markets.

LIMRA forecasts fixed indexed annuity sales of $60 billion this year. If that is the case, it would be the 9th year in a row that indexed annuity sales increased and sales would be around 20% higher than they were last year. Fixed Index annuity sales have skyrocketed in recent years because of economic factors. Persistently low interest rates have made other investments less desirable. Consumers have turned to indexed annuities over the past decade for their market growth potential and principal protection. Many new insurance companies have switched from focusing on variable annuities and started in the indexed annuity business. But LIMRA believes that sales in 2017 will fall all the way down to $40 billion. Insurance companies and distributors have to start following the DOL rule by next April, so LIMRA says that indexed annuity sales will fall steeply when the second quarter of 2017 begins.

Anyone who charges a fee for investment advice related to 401k’s and IRA’s is considered a fiduciary under the new DOL rule. Last year, around 2/3 of indexed annuity sales were funded from these types of plans. The inclusion of indexed annuities in the rule was a bit of a blindside to the industry because only variable annuities were included in the proposal. When fixed indexed annuity products were included in the Best Interest Contract Exemption guidelines, the forecast dimmed for these products. Originally, everyone thought that indexed annuity sales would continue to skyrocket once variable annuity products faced these increased regulations. LIMRA had already forecasted earlier this year that variable annuity sales would go down 25-30% next year.

Annuity manufacturers and distributors will have to learn a new way to do business under the DOL fiduciary rule guidelines. Independent marketing organizations (IMOs) were the distribution channel that sold 2/3 of indexed annuity products in 2015. But this particular channel will either disappear or completely change to meet the new guidelines. In order to sell fixed indexed or variable annuities on a commission basis, there must be a contract between a financial institution and the investor. IMOs are not considered financial institutions. No one really expects insurance companies to take on this financial institution status for their IMOs because the risk is just too high. The independent agents associated with these IMOs will not be able to sell commission-based annuities if nothing changes. Some IMOs have decided to launch their own broker-dealers so that they can be a financial institution. Other fixed indexed annuity providers are working to develop fee-based products so that they don’t have to comply with the BICE guidelines. LIMRA forecasts a large drop in fixed indexed annuity sales because of the DOL fiduciary guidelines that go into effect next April, but the industry is working hard to adapt and avoid that fate.

Written by Rachel Summit

Follow Rachel, aka Finance Mama, on Twitter and Google+

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