2015 Fixed Indexed Annuity Distribution Trends. Marketing, Sales and Sales Support Developments in Third-Party Channels

Transcription

1 2015 Fixed Indexed Annuity Distribution Trends Marketing, Sales and Sales Support Developments in Third-Party Channels July 2015

2 About the Insured Retirement Institute: The Insured Retirement Institute (IRI) is a not-for-profit organization that for more than twenty years has been a mainstay of service, commitment and collaboration within the insured retirement industry. Today, IRI is considered to be the authoritative source of all things pertaining to annuities, insured retirement strategies and retirement planning. IRI proudly leads a national consumer education coalition of more than thirty organizations and is the only association that represents the entire supply chain of insured retirement strategies: Our members are the major insurers, asset managers, brokerdealers/distributors, and 150,000 financial professionals. IRI exists to vigorously promote consumer confidence in the value and viability of insured retirement strategies, bringing together the interests of the industry, financial advisors and consumers under one umbrella. IRI s mission is to: encourage industry adherence to highest ethical principles; promote better understanding of the insured retirement value proposition; develop and promote best practice standards to improve value delivery; and advocate before public policymakers on critical issues affecting insured retirement strategies and the consumers that rely on their guarantees. Visit today to experience the vast resources of the Insured Retirement Institute for yourself IRI All rights reserved. No part of this report may be reprinted or reproduced in any form or used for any purpose other than educational without the express written consent of IRI. REV 07/15

3 OVERVIEW Fixed Indexed Annuities (FIAs), are growing rapidly both in terms of sales and in terms of their footprint in third-party distribution. Historically available primarily through captive insurance agencies, the product is now offered through regional, independent, and full-service (wirehouse) broker-dealers. The product has seen double digit percentage growth the past two years, with sales increasing 14% to $38.7 billion in 2013 and another 24% to $48 billion in 2014, or about 21% of all annuity sales. FIAs have also outsold traditional fixed annuities since Essentially a fixed annuity, but with a crediting rate that is a function of the change in price of one or more indexes, FIAs can be complex and difficult to understand and some distributors have created specific training programs and suitability review processes to ensure that advisors understand what they are selling, and consumers understand what they are buying. From January through March of 2015 IRI conducted a survey of 15 broker-dealers/distributors, across all thirdparty channels, to form a picture of how the landscape for these products is evolving, and how distributors are managing the rapid growth of FIAs. KEY OBSERVATIONS Variable Annuities with Guaranteed Lifetime Withdrawal Benefits are still the market leader, representing almost half of total annuity sales. While still eclipsed by variable annuities, FIA sales now account for 1 of total broker/dealer annuity sales, versus traditional fixed annuities which account for 7%. Eight in 10 distributors say their sales of FIAs are growing, and four in 10 say sales are growing significantly. Half of distributors believe FIAs will make up a greater percentage of their overall annuity sales in the future. Distributors believe that higher interest rates, lifetime income benefits, and principal protection with some upside potential will be the primary drivers of FIA sales growth. Nine in 10 distributors make five or more FIAs available to their advisors. Eight in 10 distributors offer products from five or more insurers. For almost one-half of survey respondents, more than 5 of fixed indexed sales include a guaranteed lifetime income benefit About six in 10 distributors believe that wholesalers are very or extremely important to the success of the sales process, and almost eight in 10 believe wholesalers are very or extremely helpful to their advisors. Eight in 10 distributors allow maximum surrender charges of no more than nine or ten years; fewer than one in 10 allow surrender charges to exceed ten years. The FIA products sold by more than six in 10 distributors pay gross commission of 5% or less, with the remainder using products that pay 7% or less. No distributor surveyed carries a product paying more than a 7% gross commission Fixed Indexed Annuity Distribution Trends 1

4 FIXED INDEXED ANNUITIES A PRIMER While a comprehensive treatment of FIA products is beyond the scope of this paper, a brief introduction to the product is useful for providing background. An FIA is a fixed annuity that credits a minimum guaranteed rate of interest over a fixed number of years, plus additional interest that may be credited based on the percentage change in the value of a broad market index. Interest is calculated using a formula that determines how much of that percentage change applies to the account value of the FIA. Participation rates, caps, and spreads are all tools used to limit the amount of interest that can be credited based on the change in value of the index. For example, if an FIA has a participation rate of 5 of the change in the value of the S&P 500 index, and the index returns 1 in a policy year, 5% is credited to the account. These tools help make the product economically viable, i.e. by limiting upside the insurance company is able to purchase index options with the portion of the premium that is not invested at interest to support the minimum guaranteed interest rate. The lower prevailing interest rates, the less budget exists to purchase options on the index from which the additional interest is derived. The first FIA product was called KeyIndex, issued in February, 1995 by Keyport Life Insurance Company, followed by Lincoln Benefit Life s Savers Index in June of that year, and the product operated much like these simple examples. Since that time FIAs have evolved, with changes both to the formulas used to calculate credited interest and to the indexes themselves, which for some products have moved beyond broad market indexes into synthetic indexes designed to dampen volatility. Additionally, many FIAs now offer Guaranteed Lifetime Withdrawal Benefits, positioning the product as both an accumulation and income solution. This delivers new, innovative solutions for solving complex saving and retirement problems, as well as challenging distributors to provide product support and training. FIA SALES AND SALES GROWTH About sixty percent of surveyed firms say that at least 26% of their financial professionals use FIAs in their practices, with about one-third stating that more than 5 use FIA products. 6 of surveyed firms say that annuities make up 1 to 25% of their total product sales. Percentage of Financial Professionals Using FIAs 29% 29% 21% 21% 5% to 1 11% to 25% 26% to 5 More than 5 2 Insured Retirement Institute

5 Annuities as a Percentage of Total Sales Less than 1 1 to 25% 26% to 5 Variable annuities with Guaranteed Lifetime Withdrawal Benefits lead the market, capturing 48% of annuity sales, followed closely by variable annuities without Lifetime Withdrawal Benefits at 22% of sales. Fixed Indexed Annuities, however, rank third with 1 of sales. This is a strong showing for a product that many third party distributors did not offer just a few years ago. Sales of Annuity Types as a Percentage of Total Annuity Sales Fixed Annuities (SPDA) Fixed Indexes Annuities (FIA) FIA with Guaranteed Lifetime Income Benefits Single Premiums Immediate Annuities (SPIA) Deferred Income Annuities (DIA) Variable Annuities (VA) WITH Guaranteed Lifetime Income Variable Annuities (VA) WITHOUT Guaranteed Lifetime Structured Variable Annuities Other 7% 1 5% 4% 1% 2% 0.2% 22% 48% Fixed Indexed Annuity Distribution Trends 3

6 Almost 4 of survey respondents state that their sales of FIAs are growing significantly, with another 4 citing modest growth. This aligns with the significant growth observed in the aggregate industry sales data. Current FIA Sales Growth Growing significantly 39% Growing modestly 39% Steady 23% Declining modestly Declining significantly 5% 1 15% 2 25% 3 35% 4 45% Looking ahead, however, more respondents believe future sales growth will be modest, though almost one-third still expect significant future sales growth. Expected FIA Sales Growth Sales will grow significantly 31% Sales will grow modestly 46% Sales will remain about the same 15% Sales will decline modestly 8% Sales will decline significantly 5% 1 15% 2 25% 3 35% 4 45% 5 4 Insured Retirement Institute

7 Respondents were also asked to state the top three factors they expect to drive further growth in FIA sales: Top Factors Secondary Factors Other Factors Higher interest rates FIAs offer lifetime income benefits similar to those offered with variable annuities Concern that lifetime income benefits may be less generous in the future Value of principal protection with some upside potential Persistent low interest rates Continued product enhancements Optional income and death benefits Demographics, e.g. aging Baby Boomers Product benefit education Market correction or bear market conditions Poor product reputation due to early designs fading Consumer education about longevity risk More carriers offering product, improved wholesaling Improving indexing strategies Both higher interest rates and persistent low interest rates were cited as potential sales drivers, which seems paradoxical but in fact is simply viewing the product from two different perspectives. In a persistent low interest rate environment, sales are boosted by the product being an attractive alternative to low interest products such as CDs. As rates rise, index options become less expensive and FIAs are able to provide more upside potential, making the product more attractive from a growth standpoint. The availability of guaranteed lifetime income benefits with FIAs was also noted as a strong growth driver, as evidenced by almost half of respondents reporting that more than 5 of their FIA sales include a lifetime income benefit. Percentage of FIA Sales with a Lifetime Income Benefit Attached 8% 46% 23% 23% 5% to 1 11% to 25% 26% to 5 More than Fixed Indexed Annuity Distribution Trends 5

8 In terms of the percentage of future annuity sales, while almost half of respondents expect FIAs to be a bigger part of their annuity business, half expect the ratios to remain about the same. Of note, no respondents expect FIA sales to comprise a lower percentage of their annuity business. Expected Growth in FIA as a Percentage of Total Annuity Sales Greater percentage than today 46% About the same as today 54% Lower percentage than today Respondents expecting FIAs to be a larger component of their annuity business in the future largely cited current sales growth trends, de-risking of VA lifetime income benefits, and more competitive product offerings as drivers. Those believing their ratio of annuity sales will remain about the same pointed to the FIA playing a complementary role to a core VA-based business. Given the similarities between FIAs and other product in terms of the roles they can play in the portfolio, respondents were asked the extent to which FIA sales are displacing sales of other financial products. The top three were variable annuities with lifetime income benefits, traditional fixed annuities, and certificates of deposit, and at least some displacement was noted by many respondents with all types of fixed income products. 14 Extent to Which FIAs are Displacing Sales of Other Products Variable Variable Traditional Certificates Corporate annuities WITH annuities deferred of Deposit bonds Government bonds lifetime income WITHOUT fixed benefits lifetime income annuities benefits Significant Displacement Some Displacement No Displacement Not applicable Bond funds 6 Insured Retirement Institute

9 THE SUPPLY CHAIN The number of companies offering FIAs has grown in recent years. In 2014, 39 companies reported sales for 323 unique FIA products (Source: Beacon Research). The survey sought to develop an understanding of how this growth is translating into carrier and product availability on broker-dealer platforms. The majority of survey respondents make the FIAs of five or more insurance companies available to their financial professionals. About one-third of distributors work directly with issuing companies, another third obtain product from an independent marketing organization (IMO), and 39% have direct relationships with issuing companies and also use IMOs. The majority also make five or more FIA products available. This is important to ensure that advisors have choice and flexibility, but also highlights the need for product-specific training to ensure they fully understand product nuances. Number of FIA Suppliers 5 or more 79% 3 or 4 21% 1 or Working Directly with Manufacturers versus with Independent Marketing Organizations (IMOs) 39% 31% 31% Directly with issuers IMO Both 2015 Fixed Indexed Annuity Distribution Trends 7

10 Number of FIA Products 5 or more 93% 3 or 4 7% 1 or PRODUCT STRUCTURE Distributors may decide which types of crediting strategies they will make available to their financial professionals. The most straightforward strategy, annual point-to-point, is offered by every distributor that makes FIAs available to advisors. Other, generally newer, strategies such as daily averaging or inverse point-to-point, are less likely to be made available Annual point-to-point Monthly point-to-point Inverse annual point-to-point FIA Crediting Strategies by Firm Availability Quarterly point-to-point Other period point-to-point Term end point Monthly averaging Daily averaging High water mark features Fixed with multi-year Fixed with equity kicker Multiple index strategies Available for all sales Permitted but discouraged Not offered in any fixed indexed product we sell Use evaluated on a case by case basis Not permitted 8 Insured Retirement Institute

11 Similarly, distributors may evaluate and restrict participation rates, caps, and spreads when selecting FIA products to put on their shelves. The majority of firms have a fairly open architecture in this respect, with index-linked interest spreads or asset based fees and uncapped strategies being the most likely to be restricted in some way. Of note is that two respondents do not permit participation rates of less than 10; a possible reason for this may be the challenge of explaining the concept of partial participation in the index gain to consumers. FIA Participation Rates, Caps and Spreads by Firm Availability Participation rates less than 10 Index-linked interest capped Index-linked interest spread (may also be expressed as an asset fee) "Uncapped" strategies (10 participation with allocation requirement to a fixed account and/ or linked to a volatility controlled custom index) Available for all sales Permitted but discouraged Not offered in any fixed indexed product we sell Use evaluated on a case-by-case basis Not permitted In past years, a common criticism leveled at FIAs was the payment of excessive compensation to the sellers of the products, which resulted in lengthy and onerous surrender charges, sometimes in excess of 20 years, for the purchasers. This certainly does not seems to be the case with today s FIA, for which almost two-thirds of distributors report gross commissions of 5% or less, and about 8 report maximum nine or 10 year surrender charge schedules. No respondents reported gross commission in excess of 7% Fixed Indexed Annuity Distribution Trends 9

12 Maximum FIA Up-Front Gross Commission 5% or less 64% 6% or 7% 36% More than 7% Maximum Surrender Charge on Actively Sold FIAs More than 10 years 7% 9 or 10 years 79% 7 or 8 years 14% Less than 7 years Insured Retirement Institute

13 PRODUCT PERCEPTION Survey respondents say that almost two-thirds of their financial professionals are very receptive to using FIAs without lifetime income benefits, and 43% are very or extremely receptive to using FIAs with Lifetime Income Benefits. With the latter, 5 are only somewhat receptive and will more frequently use other products, such as variable annuities with lifetime withdrawal benefits. Receptivity of Financial Professionals to FIAs WITH Lifetime Income Benefits Extremely receptive, they are asking for them and using them widely in their practices 14% Very receptive, they are excited and engaged when hearing about the product and frequently use it in their practices for clients that need guaranteed income 29% Somewhat receptive, they are open to using the product and/or learning more about it but frequently use other products, such as VA with GLWB, instead 5 Neutral, they haven't seemed to either embrace or reject the product 7% Not at all receptive, they don't understand how it works, think it is too complicated, and/or are concerned their clients won't understand it Receptivity to FIAs WITHOUT Guaranteed Minimum Withdrawal Benefits Extremely receptive, they are asking for FIAs and use them widely in their practices Very receptive, they are excited and engaged when hearing about FIAs and frequently use them in their practices as a CD substitute 64% Somewhat receptive, they are open to using FIAs and/or learning more about them but on balance they favor more traditional fixed income products such as CDs 21% Neutral, they haven't seemed to either embrace or reject FIAs 14% Not at all receptive, they don't understand how FIAs, think they are too complicated, and/or are concerned their clients won't understand them Fixed Indexed Annuity Distribution Trends 11

14 On balance, distributors feel that safety of principal is the most important aspect of FIAs to consumers, with most rating it an extremely or very important feature. Also of high importance are the FIA as a fixed income substitute, i.e. a product that provides a bond-like return without carrying the interest rate risk of a bond, the availability of guaranteed lifetime income benefits, and guaranteed growth. 14 Importance of FIA Features to Consumers Safety of principal Guaranteed growth Participation rates less than 10 Participation in market gains Fixed income "substitute" with no interest rate risk Participation rates less than 10 Extremely important Very important Somewhat important Neutral Not at all important Like advisors, consumers are receptive to the use of FIAs. While they are not very likely to ask about them, almost 4 of distributors believe their customers are completely open to using them in their portfolios. Receptivity of Consumers to Purchasing FIA Products Extremely receptive (they ask about FIAs and/or are enthusiastic about using them) 8% Very receptive (they are completely open to using FIAs) 39% Somewhat receptive (they may have reservations or questions but are cautiously open to learning more) 23% Neutral (they don't dislike FIAs but aren't enthusiastic about them either) 31% Not at all receptive (it takes a lot of patience and overcoming of objections to move a sale forward) 5% 1 15% 2 25% 3 35% 4 45% 12 Insured Retirement Institute

15 SALES SUPPORT The relative newness of FIAs to financial professionals creates some challenges for distributors. Inadequate understanding of the products can create suitability and compliance risks, making it critical for distributors to provide training and support. The majority of distributors appear to have a handle on this, with about two-thirds covering FIAs in their broader annuity training and another one-third conducting FIA-specific training. A third of distributors also provide opportunities for continuing education (CE) credit through FIA training. FIA Training We do not have a specific training program for fixed indexed annuities. 7% We have some training materials and/or tools but no guided or classroom training. 29% Fixed indexed annuities are covered in our broader annuity training 64% We conduct dedicated training specifically for fixed indexed annuities. Our fixed indexed annuity training provides opportunities for CE credit. 29% 29% Other 14% Only about 2 of distributors have suitability review procedures specific to fixed indexed annuities, but the remaining firms handle suitability review as part of broader annuity sales guidelines or through their general suitability review process Fixed Indexed Annuity Distribution Trends 13

16 FIA Suitability Review and Approval Processes Fixed indexed annuities, as well as other annuity types, are handled as part of our general suitability review and sale approval process. 21% We have policies and procedures for suitability review and sale approval that cover all annuities (fixed, immediate, variable, and fixed indexed). 57% We have specific policies and procedures with regard to suitability review and sale approval of fixed indexed annuities. 21% Distributors lean fairly heavily on product manufacturers for support, particularly when products are complex. About 6 of distributors consider wholesalers to be extremely or very important to the sales process, and three in four find them to be extremely or very helpful. Importance of Wholesaler Support to the FIA Sales Process Extremely important, we rely heavily on wholesalers and may involve them in complex or large cases 23% Very important, our financial professionals and/or support staff contact wholesalers often to understand how FIAs work and how to explain them 39% Somewhat important, our financial professionals and/or support staff may reach out to wholesalers with questions from time to time 23% Neutral, I don't really have an opinion as to how important they are 15% Not at all important, our financial professionals and/or support staff do not rely on wholesalers 5% 1 15% 2 25% 3 35% 4 45% 14 Insured Retirement Institute

17 Helpfulness of Wholesalers in the FIA Sales Process Extremely helpful, we get excellent support and we would not be successful without it 23% Very helpful, the wholesalers we work with are almost always easily reached and their support helps us close sales 54% Somewhat helpful, though they may sometimes be difficult to reach, lack complete product knowledge, or are occasionally deficient in other them 8% Neutral, I don't really have an opinion about how helpful they are 15% Not at all helpful, they are difficult to reach, don't know the products as well as they should, or otherwise fall short To the extent that distributors use IMOs, the majority also find them extremely or very helpful. Helpfulness of IMOs in the FIA Sales Process Extremely helpful, they provide excellent service and support and we would not be successful without them 56% Very helpful, the IMOs we work with are very engaged, keep us up to date on new products and product developments and provide training 22% Somewhat helpful, we value them but they fall short in one or more areas Neutral, I don't really have an opinion about how helpful they are 11% Not at all helpful, we would do just fine without them 11% Fixed Indexed Annuity Distribution Trends 15

18 CONCLUSION While variable annuities capture the lion s share of premium dollars in third-party distribution channels, sales of FIAs are growing, reflecting the appeal of the product to both advisors and consumers. They can provide principal protection, some upside potential, and guaranteed lifetime income benefits comparable to those currently available on VA products. Advisors and consumers value these attributes, as evidenced by their receptivity to FIAs, particularly when guaranteed lifetime income benefits are offered. FIAs are evolving fairly rapidly, but distributors seem to be managing this through training, leveraging wholesaler and IMO support, and in some cases limiting the availability of certain types of crediting strategies. Relatively few distributors have set up specific policies and procedures for FIA suitability reviews, but this is not necessarily an area of deficiency as they are covering the product under their general suitability review processes. 16 Insured Retirement Institute

19 METHODOLOGY The Insured Retirement Institute (IRI) conducted a survey of 15 IRI member distributor firms between January and March 2015 to measure trends in fixed indexed annuity market development. All third-party channels were represented in the survey. Distribution Channels of Survey Respondents National Wirehouse 13% Regional Broker Dealer 13% Independent Broker/Dealer 4 Bank 7% Other (please specify) 27% 5% 1 15% 2 25% 3 35% 4 45% 2015 Fixed Indexed Annuity Distribution Trends 17

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