2008 was a difficult year for many financial sectors, and the annuity business was no exception. With the possible implementation of the Department of Labor’s (DOL’s) fiduciary rule rapidly approaching, many industry experts are predicting that 2017 will prove to be just as challenging. Here’s what some are saying to expect, as reported in a LifeHealthPro article.
There’s no discussion about the future of annuities that doesn’t include the top regulation facing the industry, the DOL’s fiduciary rule. Traditional fixed annuities will fall under the 84-24 Exemption, but indexed and variable annuities will fall under the Best Interest Contract Exemption (BICE). In order to qualify for the BICE, those who sell indexed and variable annuities will have to work with a Financial Institution (FI). For those working with variable annuities, this is not a major concern considering banks and Broker/Dealers (B/Ds) already have Financial Institution status. Field Marketing Organizations (FMOs) and Brokerage General Agencies (BGAs), the primary distribution channels for indexed annuities, do not currently have FI status.
The Department of Labor recently released a document, their “Proposed Best Interest Contract Exemption for Insurance Intermediaries,” to provide guidance for FMOs and BGAs before the April implementation date. The document states that FMOs and BGAs will need the following to seek FI status:
- Average annual fixed annuity sales of $1.5 billion for each of the preceding three years; (Less than a dozen of the 350 FMOs in operation today could meet this threshold.)
- Insurance or cash reserves, or both, equal to 1% of their fixed annuity sales in the past three years, with maximum 5% deductible to cover violations of the exemption;
Interested parties have 30 days to comment on the document which was available on January 18. Many industry players feel that the DOL guidance was provided too late with just over two months before implementation. Only time will tell how the rule will impact the industry, and whether the rule will be delayed, modified, or remain in its current form.
Another concern for the annuity industry is low interest rates. Prior to the market’s collapse in 2008, the average fixed annuity rate was 3.10%. Today it’s just 2.71%. Indexed annuity caps have also dropped, from an average 6.86% to 4.03% over the same period. These historic lows have led to product innovation to continue to peak interest from consumers.
Over the last decade, most insurers have focused efforts on developing indexed annuities to combat the lower interest. However, with fixed annuities falling under the 84-24 Exemption of the DOL’s fiduciary rule, that is no longer the case. Industry experts predict we will see many more new traditional fixed annuity products in 2017, with a focus on Guaranteed Lifetime Withdrawal Benefits (GLWBs). Expect to see more fixed annuities with unique riders and ancillary benefits like return-of-premium provisions, bailouts, and index-linked kickers too.
Low interest rates have also led to a slew of new ways of calculating indexed gains on annuities. We likely won’t see a bunch of new crediting methods being created, manufacturers are expected to find more ingenuity with how they are presenting the rates on indexed annuities. GLWBs will also continue to evolve. An ongoing trend of fee-based indexed annuity product development will continue.
On the flip side of the coin, sales of fixed and indexed annuities will likely drop in 2017. While some expect president Trump to postpone implementation of the fiduciary rule, if it doesn’t go down like that, sales will likely decline about 15%. This doesn’t mean that the annuity industry is doomed. When you consider that we’re currently in the middle of an administrative transition, new products are rapidly being developed and salespeople are having to deal with moving FMOs/BGAs, it isn’t surprising that significant delays and declines in sales are expected. After the dust settles and the industry has adjusted to the new normal, sales will rebound and the world will keep spinning.
Written by Rachel Summit