U.S. variable annuity and fixed indexed annuity sales are expected to decline by at least 10% through 2018 as the industry struggles to adapt to upcoming regulations put forth by the Department of Labor, according to Cerulli Associates.

The Boston-based global research and consulting firm states in its research that while insurers are trying to grow their businesses in the face of obstacles regarding “benefit hedging, product derisking, and the sustained low-interest-rate environment,” Cerulli sees the biggest challenge for the foreseeable future is DOL’s fiduciary rule, formally called the conflict of interest rule.

Insurers’ responses to the new regulatory landscape will significantly impact the future of VA and FIA sales. “In order to ensure future relevance, insurers must examine both the pricing and positioning of their products,” says Donnie Ethier, associate director at Cerulli.

The Insured Retirement Institute found that industrywide annuity sales in the third quarter totaled $51.3 billion, an 8.2% drop from sales of $55.9 billion during the second quarter of 2016, and a 12.3% decline from $58.5 billion in the third quarter of 2015.

As a percentage of sales, IRI reported that fixed indexed annuities now make up 57.6% of the fixed annuity market. For the entire fixed annuity market, there were approximately $15 billion in qualified sales and $11 billion in nonqualified sales during the third quarter of 2016, IRI said.

Cerulli says interest in I-share (fee-based) VA products has been “slowly growing” within the industry over the past few years, as most insurers and distributors believes they’ll be needed to comply with the DOL rule.

“Adoption of the fee-based model has been mostly overlooked by the industry,” Ethier says. “However, what was once considered an opportunity is now a necessity.”

According to Cerulli, nearly half of insurers surveyed said that sales through fee-based platforms would increase as a result of the rule. “They could also be a source of future innovation, given that few versions currently offer guarantee lifetime benefits,” Ethier states. “This may be an opportunity for developing new benefit ideas for this contract class.”

Ethier adds that if “insurers can develop creative products that focus on how advisors do business, they can aid their cause in the years ahead.”

Insurers must also “remain sensitive to cost and compliance considerations and that most broker-dealers want to control the messaging regarding the Conflict of Interest Rule to their advisor networks.”The Cerulli research comes after two federal judges recently blocked insurance industry attempts to stay DOL’s fiduciary rule citing that the rule would hurt fixed-indexed annuity sales.

Kansas Judge Daniel Crabtree rejected the insurer Market Synergy’s request for a preliminary injunction to block DOL’s rule on Nov. 28, while  U.S. District Judge Randolph Moss, in a 92-page ruling, rejected on Nov. 4 arguments from the National Association for Fixed Annuities that the Labor Department unlawfully went against the will of Congress to adopt a rule that would bring — as the judge described it — “catastrophic consequences” for the fixed annuities market.

On Thursday, the U.S. Court of Appeals for the D.C. Circuit ruled against NAFA.

Cathy Weatherford, IRI’s president and CEO, noted that the declining annuity sales during the third quarter “are not surprising given the significant transition that has been occurring across the retirement planning market.” However, Weatherford noted that “the recent rise in interest rates may be a positive development for the industry as we move into 2017. The 10-year Treasury is now up nearly 100 basis points from summer lows. Provided rates can continue to rise gradually, we may see fixed annuities offer higher crediting rates and more generous payouts on both fixed and variable products offering lifetime income.”