Volatility control indices add appeal to annuities by removing the cap on the upside, Limra

Following the release of Limra's Secure Retirement Institute Fourth Quarter US Annuity Sales survey, which was released at the end of February, SRP spoke to Todd Giesing, assistant research director, at the trade body, about what is driving the shift towards fixed-index annuities, the use of volatility control indexes and how the Department of Labour (DoL) fiduciary rules could put a halt to growth.

Is the shift towards FIAs to do with the DoL fiduciary rules, as opposed to investors' expectations shifting towards a particular type of product?

Most of the activity comes from independent agents not associated with any broker dealer, but we have also seen an increase in activity from banks and broker dealers. Each channel has its particularities and they have got involved with the market for different reasons. The low interest rate environment has been a very important driver for banks, which can offer better value through index-linked annuities versus other banking products such as certificates of deposits or fixed-rate deferred annuity products. Index annuity products have the potential for higher growth, while providing principal protection that conservative investors are looking for. If you look at the independent broker-dealer channel, they are not using these products so much as an accumulation focus as the banks, but as a way to deliver a guaranteed income source through their guaranteed living benefit riders.

Why do you think fixed-index annuities are driving increased activity?

There are two angles when you look at the US annuities market. On one hand, you have products that help provide guaranteed lifetime income via the benefit riders and, on the other, you have products that help people to grow their assets from an accumulation perspective with the protection layer. Some providers focus on a particular type of annuity and other offer a selection of the different options. The success of a product depends mostly on the individual features and how they fit into people's needs. A similar type of products are what we call variable annuities structured products, which are a mix between fixed index and variable annuities. These products usually have a cap on the upside and also on the downside losses. So, no principal protection, but a cap on potential losses.

These products compete with other annuity products that offer similar riders but the riders offered by indexed annuities have been very competitive. Independent agents also have a significant market share and the focus on that distribution channel is primarily the guaranteed income. Around 70% of sales come from this channel.

What is your take on the use of volatility control indices?

The use of vol control indices has added appeal to fixed-index annuities, because, with these indices, you can remove the cap on the upside. The participation on the uncapped performance of the underlying and the capital protection element make these products a very attractive proposition. We started to monitor proprietary indices last year and around a quarter of the products in the market are linked to these kind of volatility control strategies to manage asset allocation.

What's your forecast for 2017 and what trends do you expect to drive activity in the US annuities market? Do you expect the DoL fiduciary rules to affect the market negatively?

For 2017, the forecast is dependent on what is going to happen with the DoL rules, as this could be the main driver of activity and could impact the sales of fixed-index annuities. There is uncertainty because of the change in administration in Washington, and there is potential for a delay and even changes to the rules, although we are only one month away from the implementation deadline. So, what we have done is to write our forecast considering the two scenarios. If the Dol rules go ahead on April this year, we expect a significant decline in fixed-indexed annuity sales of between 20% to 25%. This decline would be the result of significant distribution disruption, as the rules do not recognise independent marketing organisations as financial instituitions. This could cause significant disruption in the distribution of these products short-term, until these companies find where they fit under the new fiduciary rules framework. There was a recent clarification that the DoL would provide an exemption for carriers, but the requirements are very stringent (high sales volumes and resources) and this could impact the sales volume. The second scenario, if we have a delay on the rules, which could push implementation to 2018: we would continue to see indexed annuity business as usual and sales would be expected to continue growing at around 5%, and with overall sales being similar to 2016.

What are the challenges the industry is facing?

In the short term, the regulatory environment will dictate where the annuities market is going and will shape how sales evolve and what products will be winners. Regulation will impact all business lines and could bring challenges to distribution. Providers haven't had a lot of time to consider the implementation of the new guidelines and over the last year the focus has been on figuring out how to comply... changes to their systems, resources, etc. So, until there is more clarity and the new framework is implemented or not, firms will not be able to focus on growing their businesses in a post-fiduciary world.

Despite the uncertainty around regulation, these products remain well positioned to respond to the needs of investors and people approaching retirement. Demand is not going to go away, which is why, once the regulatory issues have been resolved, there is scope for the market to continue growing. The demographics in the US (baby boomers continuing to enter retirement) also provide a strong base to continue growing this market."

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