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Demand is Not the Issue

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If we’ve learned anything from the past two record sales years, it’s that demand for annuities remains as strong as ever. Let’s face it: rising interest rates have helped matters a lot lately, but we must add to that forms of inherent demand that apply regardless of market conditions.

Two of those inherent sources of annuity demand are tax-deferred investment growth and downside protection, the latter more of a factor with fixed and indexed annuities and RILAs and less so with variable annuities (although if death and living benefit guarantees are offered on the latter, they too can provide a safety net).

It looks to me that investors these days are not in complete lock-down mode; they highly value principal protection but would also like to get as much upside as they can, which is why RILAs are doing so well. Witness the popularity of “dual direction” features which can turn losses into gains! Forgive me if I am repeating myself (I have expressed this opinion enough times in my firm’s commentaries) but I think RILAs will have no problem building on the sales momentum they have generated this year.

As we industry people know, there’s another attractive annuity feature, namely guaranteed lifetime income, which historically has been overlooked, however there is evidence that investors are becoming more aware of it. Evidence of this can be seen in the recent sales growth of income annuities; the preliminary 2023 data from LIMRA show that deferred income annuity deposits grew by 96% and fixed immediate by 43%.

And certainly, guaranteed living benefits have helped the income story. Lifetime withdrawal benefits, which originated on the VA side, now appear to be all the rage in the indexed annuity market. I haven’t done a check to see what is being offered lately, but there have been some rather generous base growth factors and withdrawal percentages in FIA riders. Forgive me, but I do wonder whether some indexed annuity carriers are not pushing the envelope a bit much; after all, the cost of managing living benefit risk was a key reason why former leading VA carriers exited the market in the last decade. Only time will tell.

The industry should be able to leverage the favorable conditions it has at present. In my view annuity insurers could do more experimentation with inflation protection and long-term care features, although they should exercise care in doing so. I have heard, anecdotally, that a company that has offered GLWBs with withdrawals indexed for inflation feels comfortable in doing so because it distributes solely through affiliated distribution; that could be a way to go but would result in limited capacity.

A relative of mine who works in another part of the insurance industry told me that Warren Buffet once said (or wrote in a book, I’m not sure) something akin to the following: “there is no risk too big to insure, just insufficient premium to cover it.” If it’s true I would like to find the source of the quote. In any event, it gets to the heart of the matter, which is there is an expense to cover any risk, and if that gets too high, either the solution does not get offered, or it ends up not working out.

The annuity business is in an interesting situation at present: it is coming off two straight banner years, yet considerable challenges are on the horizon (which were discussed in the January 12 issue of The Soleares Report), not the least of which is the looming DOL fiduciary rule.

It looks like the industry will be forced to adapt to a new regulatory environment. But the bottom line is that the inherent advantages of annuities will remain: asset growth, principal protection and guaranteed income; it just may be that industry players will have to get more creative in communicating them to consumers.

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