Eight big changes that will reshape the annuity biz
February 21, 2010 by Darla Mercado
The next decade for annuity distribution is shaping up to be unlike any other. Or at least, that’s the take of Jack Marrion, editor of Advantage Compendium Ltd. In a new report, Mr. Marrion examines where the industry has been — and more importantly, where it’s headed in the next decade. Despite the predicted upheaval in the business, Mr. Marrion believes more fixed annuities will be purchased in the next ten years than ever before. Why? Because the value proposition for fixed annuities will find a receptive audience in the nearly 58 million Americans that are currently between age 55 and 7.5
Here’s Mr. Marrion’s take on what the annuity landscape will look like in ten years.
[Story by Darla Mercado]
8. 1035 exchanges will drop off
There will be tougher rules governing annuity transfers, thereby reducing the number of permissible exchanges. As the protected value of an annuity becomes greater than the actual transferrable value, it will become impossible to match that benefit in a new product. Though premium bonuses may help raise sales, the bonuses are only fully realized if the annuity stays in force.
7. MOs go away — or get restructured
Marketing organizations (MOs) can get up to 3% in override commissions from the sales of indexed annuities. But if Rule 151A becomes a reality, and the products end up being treated as securities — and sales levels remain unchanged — the 75% of marketing organizations that don’t have a securities connection will lose at least half of their override income. Further, with 151A, sales will plummet because the indexed annuities would be subject to securities compliance. Even without passage of 151A, marketers’ structures will change. Indeed, the typical annuity marketing organization of 2010 will be a rarity in 2020.
6. Securities regulators take over
There will be more stringent regulation of fixed-annuities sales with state securities regulators engaging in a near-takeover of the policing of the industry. Even without 151A, agents will feel pressure to become affiliated with a broker-dealer or a registered investment adviser — and those firms will feel greater pressure to make sure all fixed-annuity sales and transfers are suitable. Suitability officers will become more commonplace.
5. MOs with B-Ds, RIAs have a leg up
By working with an annuity marketing organization that has a broker-dealer or an RIA, agents will get someone on the compliance side who understands them and the insurance products they sell. Further, because securities products will end up becoming more popular — and because many agents are also securities-licensed — marketing organizations that don’t have securities connections will have fewer agents to work with.
4. Pension planners get comfortable with annuities
Private annuities will not be required in pension plans, despite the recent buzz about the topic. Indeed, some of the current proposals contain ideas that would be politically difficult to implement – such as mandatory annuitization. Nevertheless, the burgeoning government interest in the use of annuities in retirement planning will overcome stiff resistance from various industry groups – leading to increased use of annuities in pension plans.
3. Guaranteed benefits take on new forms
By 2020, fixed annuities will be used to cover longevity risk, or they will be used in tandem with investments to create income. And the types of guaranteed benefits will go well beyond today’s lifetime withdrawal riders and LTC/annuity combos.
2. Wall Street grabs a bigger piece of the action
Wall Street could become the main annuity store for consumers, Mr. Marrion believes. Investment firms are already teaming up with life insurers to create stand-alone living benefit wrappers to match with mutual funds or managed money accounts. Currently, “insurance needs” in a Wall Street portfolio are met by bonds. In the future, he predicts that need will also be met, at least in part, by a synthetic annuity attached to an investment.
1. Sales will skyrocket
The growing population of retirees will be more open to hearing about fixed annuities — particularly as creative plans for living benefits evolve.
