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The Future of Variable Annuities

According to a variable annuity product expert with Morningstar, consumers and financial professionals can expect the already battered VA market to get worse before it gets better. While no one is saying that the variable annuities market is slated for certain death, it isn’t expected to pick up in the near future, mainly due to new regulations from the Department of Labor (DOL), restrictions on subaccount investments and stingier guarantees.

InsuranceNewsNet has reported that while the $100 billion in variable annuity sales won’t disappear immediately, the decrease in new sales recently is nothing short of catastrophic.

“There’s a void right now,” in variable annuity sales, said Kevin Loffredi, senior product manager for Morningstar in Chicago.

In the fourth quarter of last year, sales of new variable annuities fell 20% to $23.96 billion, Morningstar reported, largely in part of the new regulations set forth in the DOL’s fiduciary rule. The rule raises investment advice standards and has many reps talking to lawyers about their future liability.

“Annuities are sold and not bought, that’s true, but they need to be nurtured at the broker-dealer and if the home office isn’t encouraging reps to nurture them and tell people how to use them, then interest in the product will wane,” Loffredi stated.

Last year, FINRA regulators slammed MetLife with a record fine in connection to variable annuity sales after identifying the products for heightened supervision due to their costs and complexity. However, the variable annuity market was already on the decline before the DOL even proposed the new rule, so regulation can’t be the only driving force.

Another pressure point on variable annuities comes from the yield on the 10-year Treasury note, which gauges how well a VA can perform for investors. Low Treasury yields cause insurers to pull back on benefits, while higher yields mean insurers can be more generous. Currently, the yield on the 10-year Treasury note is historically low, and insurers remain cautious, fearful they may get caught in “a severe market downturn, as they did nearly 10 years ago when financial markets collapsed,” Loffredi said.

To avoid this, insurers have raised the costs of benefits and the lifetime guarantees on variable annuities, with benefits priced in around 300 to 400 basis points. Insurers are also limiting the subaccount investment freedom that advisors have. When compared to the growth of 401(k) accounts in the current bull market, investors aren’t seeing the same potential within variable annuities, which are being managed in volatility subaccounts. Many clients are confused by this comparison, making it more difficult for advisors to sell variable annuity contracts.

In addition to these struggles, variable annuities have also been facing the consequences of a bad reputation. There have been entire websites dedicated to smearing the VA name. Because of this, many consumers have turned to the “safer” option, fixed annuities, sales of which have rocketed up 12% to a record $61 billion in 2016. Just a few short years ago, variable annuities accounted for 70% of all annuity sales. But in 2016, they dropped below 50% for the first time ever and are struggling to rebound.

“In order for the variable annuity industry to rebound, insurers will have to devise products that do not rely on risky guarantees, but will somehow still resonate with advisors and their clients,” said Steven D. McDonnell, president of Soleares Research. “This will take time, creativity and innovation.”

In fact, many insurers are currently working on putting out fee-based variable annuity products to entice more financial advisors. Rising interest rates are also expected to help all annuity sales, including VAs. Demand for guaranteed lifetime income is continuing to rise as millions of Americans find themselves underprepared for retirement. So while a rebound may be slow for variable annuities, they aren’t expected to die out completely.

“My opinion is that variable annuity usage would level off or increase slightly but not a flood going back in,” Loffredi said.

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