Indexed insurance products set 2010 sales records despite challenges

March 2, 2011 by Sheryl J. Moore

Preliminary 2010 sales of indexed insurance products show that the growth in sales of these products is staggering. Not only do we have the not-too-distant decline in the stock markets fueling that fire, but also historically low interest rates on traditional fixed money products such as certificates of deposit, fixed annuities, and fixed universal life.

Note: The sales results discussed in this article are preliminary, as my company is still waiting on a top insurance company to report their fourth quarter sales due to a conflict with their earnings call. Final results will be available the first week of March, 2011.

First let’s talk about indexed annuities. Total sales of these fixed annuities with index-linked interest topped $31.1 billion for 2010. Once final sales are prepared, we anticipate that number will rise to $32.5 billion. Notwithstanding final numbers, these results mark the third consecutive record year for indexed annuity sales. The consistent increases resulted in sales growth of 6 percent, 13 percent and 8 percent in 2008, 2009 and 2010 respectively. It has certainly been the best time to have indexed annuities in your arsenal.

However, it has also been the most challenging.

In the wake of our nation’s economic collapse, capital became scarce. Annuities, a capital-intensive insurance product, were the beneficiaries of this scarcity; resulting in a barrage of product changes to fixed, indexed and variable annuities. In 2009, we observed insurance companies that sell indexed annuities take the following actions to help with capital constraints:

• Exit the indexed annuity market
• Pull products
• Reduce issue ages
• Increase minimum premiums
• Increase Guaranteed Lifetime Withdrawal Benefit rider charges
• Reduce GLWB rollup rates
• Discontinue sales of all GLWBs
• Discontinue uncapped crediting methods
• Reduce the premium bonuses paid to the annuitant
• Reduce the compensation paid to the sales agent
• Switch to a levelized commission structure that pays out over a number of years
• Terminate agents
• Stop all new agent appointments
• Stop accepting 1035 business temporarily
• Stop accepting all business temporarily

These changes continued into the following year when record low interest rates made business difficult for the already-challenged insurers offering fixed, indexed and variable annuities. In 2010, we observed insurance companies that sell indexed annuities take the following actions to help with historically low interest rates:

• Exit the indexed annuity market
• Pull products
• Increase GLWB rider charges
• Reduce GLWB rollup rates
• Reduce GLWB payout rates
• Reduce the premium bonuses paid to the annuitant
• Reduce the compensation paid to the sales agent
• Reduce minimum guaranteed surrender values (MGSVs)
• Reduce minimum participation rates, caps, and increase maximum spreads

The record low interest rate environment has continued into 2011, resulting in yet more product changes in the annuity market. Thus far in 2011, we have seen insurance companies that sell indexed annuities take the following actions to help with continued historically low interest rates:

• Pull products
• Increase GLWB rider charges
• Reduce GLWB rollup rates
• Reduce GLWB payout rates
• Discontinue sales of select GLWBs
• Reduce the premium bonuses paid to the annuitant
• Reduce the compensation paid to the sales agent

It is uplifting to note that most recently we have seen one company partially restore their compensation on some of their indexed annuities and a second company restore the uncapped crediting methods on their indexed annuity portfolio. Things are getting better, but results are contingent on the interest rate environment — and it is going to be a slow recovery.

Now let’s address indexed life insurance. Total sales of the fixed insurance product with index-linked interest topped $667.1 million for 2010. Once final sales are prepared, we anticipate that number will rise to $692.7 billion. Notwithstanding final numbers, these results mark an increase of more than 25 percent in sales over last year and a potential one-year increase of 30 percent, once final results are released. It has most definitely been the best time to have indexed life insurance in your toolbox.

The indexed life market has not been plagued by the same challenges that the annuity market has, as the insurer offering indexed life is able to compensate for their spread on the product in more than one way. In fact, the indexed life market has never been hotter. Six new insurance companies decided to try their luck in the market in just the third quarter of 2010 alone, resulting in a of total 39 companies offering indexed life at the close of the year. Still more insurance companies intend to launch indexed life in 2011.