The New World of Fixed Indexed Annuities
The New World of Fixed Indexed Annuities
For Agent Use Only.
INTRODUCTION The year 1995 seems like a world ago — the O.J. Simpson trial captivated the nation, eBay launched online and the DVD debuted. Who would have imagined then that just over two decades later we’d witness Simpson receive parole for a different crime, see Amazon crush online and big-box retailers, and watch movies on our phones?
A decade or two can make a world of difference. A decade or two can make a big difference. In the financial world, 1995 also marked the debut of the fixed-indexed annuity (FIA). So, when you consider the innovations or world events that have occurred since then, it makes sense that the FIAs you knew in 1995 are not the same as today’s FIAs. Consumer demand and industry innovation, especially following the Great Recession, have driven the evolution and success of FIAs, and these forces continue to align — perhaps even more perfectly — for greater growth in the coming months and years. FIAs are unique risk management vehicles that combine the growth potential of index-linked interest, the protection from market downturns and the guarantees of lifetime income. These valuable benefits help protect people from the key retirement risks of inflation, longevity and market volatility. This Senior Market Sales® (SMS) white paper examines the evolution and growth of FIAs through the historical lens of the important economic, regulatory and product milestones that have shaped the FIA industry — and shaped many financial advisors’ opinions of FIAs. It does not assert that FIAs are the solution for all retirees. Rather, it shows how FIAs have evolved to earn a respectable position in the toolbox of today’s financial advisor, evidenced by soaring sales and new product innovations that are leading even once-skeptical advisors to acknowledge that FIAs can be the right safe-money alternative for some clients.
THE BIG PICTURE FIAs date back only to 1995, when Keyport Life created the first equity-linked indexed annuity, KeyIndex. But in their relatively short lifespan, they’ve experienced tremendous popularity and remarkable sales momentum — despite being at the center of debate on how they should be regulated. (They started and remain today as insurance products rather than securities. See the timeline at the end of the white paper for the full history.) In fact, FIAs have seen record growth for the past nine consecutive years. FIA sales surpassed $60 billion in 2016 and now make up 27% of the total annuity market. 11
FIA Sales (in billions) $60.9 $60.0 $50.0 $40.0 $32.1 $30.0
$27.3
$20.0 $10.0 $1.5
$5.5
$1996
2000
2005
2010
2016
The reasons for these stellar sales: more insurance agents and financial advisors see their value and want to offer them, and consumers have also responded favorably in a market where competing safe money options are at record-low interest rates. (A recent LIMRA study found that 83% of FIA buyers were satisfied with their purchase.)
FIAs have not only survived but also thrived partly because insurance companies have continued to adapt by making them more attractive to consumers. The latest advancements include uncapped crediting strategies, longer reset periods, smartbeta indices, volatility controls and indexing partnerships with brand-name financial firms such as J.P. Morgan, Merrill Lynch and Barclays. Consumers are particularly interested in guaranteed lifelong income riders. According to LIMRA, nearly 70% of indexed annuity owners elect to add the Guaranteed Lifetime Withdrawal Benefits rider when it is available.12 Institutions have become more accepting of FIAs than in the past, contributing to the growth of FIA sales overall. Banks and broker-dealers have jumped on the FIA product and expanded the market through their relationships. The percentage of FIA sales from banks and broker-dealers compared to other channels has increased, eclipsing 30% in 2016.2 The market has diversified in other ways, too, and FIAs are no longer considered a niche market. Whereas two carriers owned 40% of the market in FIA sales in 2005, today the growth of FIA sales is spread across a healthier, broader group of carriers.8
“Innovation is the only way to win.” - Steve Jobs
MARKET SHARE BY ANNUITY TYPE FIA sales have eaten into the market shares of other annuities.
U.S. Individual Annuity Sales — Annual Variable
$257
Fixed
$265 $239
$238 $222
$220
$230
$236
$237
$140
$133
$222
Dollars in Billions
$156 $184 $128 $141
$109
2008
$147
$145
2009
$105
$117
$111
$73
2007
$158
$82
$81
2010
2011
$84
$96
$104
$72
2012
2013
Source: LIMRA Secure Retirement Institute, U.S. Individual Annuities survey
2014
2015
2016
THE LATEST DISRUPTION IS FIA’S GREATEST OPPORTUNITY YET In April 2016, the Department of Labor (DOL) released the much-anticipated fiduciary rule mandating that all financial advisors who oversee retirement accounts adopt a fiduciary standard of duty putting the interest of their clients above their own. The FIA market is well positioned for further growth in a post-DOL-fiduciary world. What may be seen by many as a disruption could create opportunities for savvy financial advisors who are looking to help their clients manage risk in addition to managing their assets. Safe money options will continue to be an important part of a financial plan, and the fear of another financial crisis has increased the appeal of FIAs among consumers and financial professionals. The powerful combination of index-related accumulation with downside protection is appealing to consumers in times of both growth and recession. We are also seeing many carriers starting to offer fee-based FIAs, providing advisors an alternate asset class to traditional stock and bond portfolios to bring their clients greater diversification, volatility governors and guaranteed retirement income solutions.
“ Rule
No. 1:
Never Lose Money
Rule No. 2:
”
Never Forget Rule No. 1
— Warren Buffett
CONCLUSION Despite all the disruption, the insurance industry continues to innovate, and FIAs are perhaps its most innovative product yet — with more yet to arrive. To realize the opportunity in FIAs, you need only to think of 1995 and all that has transpired since then. You didn’t have access to news at your fingertips on Twitter, shopping on Amazon or TV shows on demand. Just as other industries innovate, the insurance industry has innovated. Just as other industries produce life-changing inventions, so has the insurance industry. FIAs deserve a fresh look, because today, what can seem a world ago was really only a matter of days in the past. With the speed of life-changing innovations accelerating, your clients depend on your willingness to recognize the best, the newest and the next products in your industry that could help them succeed — and your business deserves that, too.
WHERE DO YOU GO FROM HERE? In an ever-changing regulatory, economic and product environment, you need a partner with the experience, tools and fortitude to be with you every step of the way. Founded in 1982, Senior Market Sales has not only weathered the greatest industry changes, but also emerged as an industry leader. In fact, spotting the opportunity within industry disruption is how we’ve succeeded. Today, our menu of products and services goes well beyond FIA solutions and includes Medicare planning, long-term care, life insurance, and advisorfocused software products, including Social Security Timing®, Tax Clarity™ and SmartRisk™. We monitor changes from a regulatory and economic standpoint and work with some of the leading insurance carriers in the market to make sure we are up-to-date on all of the current product changes and enhancements. We do all of this so that you have the support you need to focus on what you do best. SMS’ mission is to help you leverage time, make more money, and put your business in a position of distinction. We have tools and programs to make you successful.
Contact one of our marketing consultants today to find out how we can help you!
1.877.645.4939 www.SeniorMarketSales.com
ENDNOTES 1.
LIMRA International.
2. Indexed Compendium, April 2016. 3. Employee Benefit Research Institute and BenefitsPRO. 4. “Hybrid Indices in Fixed Indexed Annuities: The New Wave,” by Simpa Baiye, Product Matters, Society of Actuaries, Issue 92, June 2015. 5. “Key Moments in the Evolution of Fixed Indexed Annuities,” LifeHealthPro, March 15, 2016. 6. Fear of Financial Planning Survey, Nationwide Financial, conducted by Harris Interactive, 2013. 7.
“Indexed Annuities Battle with SEC Comes to an End,” by Sheryl J. Moore, Annuity Specs, July 21, 2010.
8. “Fixed Indexed Annuities: Recap... And What’s Next?,” by Guillaume BriereGiroux, Oliver Wyman, May 2014. 9. https://insurancenewsnet.com/innarticle/here-come-the-fee-based-indexedannuities. 10. http://www.prnewswire.com/news-releases/nationwide-announces-its-firstfee-based-fixed-indexed-annuity-300486312.html. 11. “Fixed annuity sales hit record $117.4 billion in 2016,” thinkadvisor.com, February 21, 2017. 12. “Guaranteed features propel indexed-annuity sales,” by Darla Mercado, InvestmentNews, June 6, 2014.
A BRIEF HISTORY OF FIAs Keyport Life created the first equity-linked indexed annuity, KeyIndex.
The popularity of 401(k) plans, and the decline of traditional pension plans, started to emerge.
The housing bubble and subprime mortgage crisis resulted in the Great Recession lasting from December 2007 to June 2009. During this period of financial hardship, the S&P 500 declined 57%. The government initiated a process of quantitative easing to increase the money supply and stimulate the economy.
FIA sales had taken off by 2005 but were concentrated with two carriers owning 40% of the market.8
1995
Within a couple of years, the Securities and Exchange Commission (SEC) started to increase scrutiny on the classification of FIAs as insurance products and not securities. 7
2007-2009
2005
2000-2002 2000 A decade-long period of record economic expansion came to a sudden halt with the dot-com stock market crash.
During what became the longest bear market since the Great Depression, the NASDAQ Composite lost 78% of its value, and overall $8 trillion of wealth was wiped out. This event also ushered in a period of increased volatility in the equity markets. 4
In August 2005, the National Association of Securities Dealers (NASD), now known as the Financial Industry Regulatory Authority (FINRA), issued Notice to Members 05-50, declaring that member firms treat indexed annuities as if they are securities. The question of whether the NASD had jurisdiction over FIAs remained. 7
2002-2007 A period of moderate economic expansion occurred from 2002 to 2007, and FIA sales grew from $11.7 billion to $25.1 billion during this time. 5
2009 In December 2009, after legal action and legislation introduced to “undo” Rule 151A, the SEC agreed to a two-year stay of 151A. 7
KEY:
Red = regulatory events Green = product innovations and milestones Blue = economic events
2011
2016
A wave of product innovations starting in 2011 sparked the growth of FIAs and generated broader acceptance by consumers and financial professionals.
In April 2016, the Department of Labor (DOL) released the much-anticipated fiduciary rule mandating all financial advisors who oversee retirement accounts adopt a fiduciary standard of duty putting the interest of their clients above their own.
2017
1998
2001
2003
2006
2008
2010
2015
In an effort to offer higher interest rates, insurance carriers increased both the length of the surrender charge period and the amount of surrender charge penalties. By the end of 1998, nearly one-half of FIAs sold had a surrender period of 10 years or longer. 5
The courts ruled in the 2001 case Beverly S. Malone v. Addison Insurance Marketing, Inc., that FIAs are not securities. 5
The National Association of Insurance Commissioners (NAIC) passed legislation to protect senior citizens ages 65 or older from abusive annuity sales practices. The act, called the Senior Protection in Annuity Transaction Model Act, was later expanded to cover all annuity consumers, not just those older than age 65. 5
Beginning in 2006, a number of product enhancements emerged that increased the competitiveness of FIAs. These include Guaranteed Minimum Death Benefit riders, Guaranteed Lifetime Withdrawal Benefits and nursing home multipliers. 8
In June 2008, the SEC changed course and pursued the reclassification of FIAs as securities with proposed Rule 151A requiring agents who sell FIAs to become securities licensed.7 In December 2008, after a six-month comment period and significant protest from the insurance industry, the SEC adopted rule 151A with an effective date of Jan. 12, 2011. 7
In July 2010 after 13 years of regulatory action, the Dodd-Frank Wall Street Reform and Consumer Protection Act became law, and FIAs were indefinitely classified as fixed insurance products and not securities. 7
By 2015, 401(k) assets have grown to over $4.7 trillion. 3 Additionally, retirement plan rollovers, which have traditionally been a rich source of FIA premium, are expected to grow to $550 by the end of the decade. 1
In 1998, the SEC decided that FIAs were not securities and wouldn’t be regulated as such.
During the most recent period of economic recovery, the domestic equity markets have rebounded and reached alltime highs in 2017. Fee-based annuity products — mostly in the form of variable annuities — have been on the market for several years, but analysts predict that the DOL’s fiduciary rule will lead to insurers developing more fee-based FIAs. 5,9
For Agent Use Only.
INTRODUCTION The year 1995 seems like a world ago — the O.J. Simpson trial captivated the nation, eBay launched online and the DVD debuted. Who would have imagined then that just over two decades later we’d witness Simpson receive parole for a different crime, see Amazon crush online and big-box retailers, and watch movies on our phones?
A decade or two can make a world of difference. A decade or two can make a big difference. In the financial world, 1995 also marked the debut of the fixed-indexed annuity (FIA). So, when you consider the innovations or world events that have occurred since then, it makes sense that the FIAs you knew in 1995 are not the same as today’s FIAs. Consumer demand and industry innovation, especially following the Great Recession, have driven the evolution and success of FIAs, and these forces continue to align — perhaps even more perfectly — for greater growth in the coming months and years. FIAs are unique risk management vehicles that combine the growth potential of index-linked interest, the protection from market downturns and the guarantees of lifetime income. These valuable benefits help protect people from the key retirement risks of inflation, longevity and market volatility. This Senior Market Sales® (SMS) white paper examines the evolution and growth of FIAs through the historical lens of the important economic, regulatory and product milestones that have shaped the FIA industry — and shaped many financial advisors’ opinions of FIAs. It does not assert that FIAs are the solution for all retirees. Rather, it shows how FIAs have evolved to earn a respectable position in the toolbox of today’s financial advisor, evidenced by soaring sales and new product innovations that are leading even once-skeptical advisors to acknowledge that FIAs can be the right safe-money alternative for some clients.
THE BIG PICTURE FIAs date back only to 1995, when Keyport Life created the first equity-linked indexed annuity, KeyIndex. But in their relatively short lifespan, they’ve experienced tremendous popularity and remarkable sales momentum — despite being at the center of debate on how they should be regulated. (They started and remain today as insurance products rather than securities. See the timeline at the end of the white paper for the full history.) In fact, FIAs have seen record growth for the past nine consecutive years. FIA sales surpassed $60 billion in 2016 and now make up 27% of the total annuity market. 11
FIA Sales (in billions) $60.9 $60.0 $50.0 $40.0 $32.1 $30.0
$27.3
$20.0 $10.0 $1.5
$5.5
$1996
2000
2005
2010
2016
The reasons for these stellar sales: more insurance agents and financial advisors see their value and want to offer them, and consumers have also responded favorably in a market where competing safe money options are at record-low interest rates. (A recent LIMRA study found that 83% of FIA buyers were satisfied with their purchase.)
FIAs have not only survived but also thrived partly because insurance companies have continued to adapt by making them more attractive to consumers. The latest advancements include uncapped crediting strategies, longer reset periods, smartbeta indices, volatility controls and indexing partnerships with brand-name financial firms such as J.P. Morgan, Merrill Lynch and Barclays. Consumers are particularly interested in guaranteed lifelong income riders. According to LIMRA, nearly 70% of indexed annuity owners elect to add the Guaranteed Lifetime Withdrawal Benefits rider when it is available.12 Institutions have become more accepting of FIAs than in the past, contributing to the growth of FIA sales overall. Banks and broker-dealers have jumped on the FIA product and expanded the market through their relationships. The percentage of FIA sales from banks and broker-dealers compared to other channels has increased, eclipsing 30% in 2016.2 The market has diversified in other ways, too, and FIAs are no longer considered a niche market. Whereas two carriers owned 40% of the market in FIA sales in 2005, today the growth of FIA sales is spread across a healthier, broader group of carriers.8
“Innovation is the only way to win.” - Steve Jobs
MARKET SHARE BY ANNUITY TYPE FIA sales have eaten into the market shares of other annuities.
U.S. Individual Annuity Sales — Annual Variable
$257
Fixed
$265 $239
$238 $222
$220
$230
$236
$237
$140
$133
$222
Dollars in Billions
$156 $184 $128 $141
$109
2008
$147
$145
2009
$105
$117
$111
$73
2007
$158
$82
$81
2010
2011
$84
$96
$104
$72
2012
2013
Source: LIMRA Secure Retirement Institute, U.S. Individual Annuities survey
2014
2015
2016
THE LATEST DISRUPTION IS FIA’S GREATEST OPPORTUNITY YET In April 2016, the Department of Labor (DOL) released the much-anticipated fiduciary rule mandating that all financial advisors who oversee retirement accounts adopt a fiduciary standard of duty putting the interest of their clients above their own. The FIA market is well positioned for further growth in a post-DOL-fiduciary world. What may be seen by many as a disruption could create opportunities for savvy financial advisors who are looking to help their clients manage risk in addition to managing their assets. Safe money options will continue to be an important part of a financial plan, and the fear of another financial crisis has increased the appeal of FIAs among consumers and financial professionals. The powerful combination of index-related accumulation with downside protection is appealing to consumers in times of both growth and recession. We are also seeing many carriers starting to offer fee-based FIAs, providing advisors an alternate asset class to traditional stock and bond portfolios to bring their clients greater diversification, volatility governors and guaranteed retirement income solutions.
“ Rule
No. 1:
Never Lose Money
Rule No. 2:
”
Never Forget Rule No. 1
— Warren Buffett
CONCLUSION Despite all the disruption, the insurance industry continues to innovate, and FIAs are perhaps its most innovative product yet — with more yet to arrive. To realize the opportunity in FIAs, you need only to think of 1995 and all that has transpired since then. You didn’t have access to news at your fingertips on Twitter, shopping on Amazon or TV shows on demand. Just as other industries innovate, the insurance industry has innovated. Just as other industries produce life-changing inventions, so has the insurance industry. FIAs deserve a fresh look, because today, what can seem a world ago was really only a matter of days in the past. With the speed of life-changing innovations accelerating, your clients depend on your willingness to recognize the best, the newest and the next products in your industry that could help them succeed — and your business deserves that, too.
WHERE DO YOU GO FROM HERE? In an ever-changing regulatory, economic and product environment, you need a partner with the experience, tools and fortitude to be with you every step of the way. Founded in 1982, Senior Market Sales has not only weathered the greatest industry changes, but also emerged as an industry leader. In fact, spotting the opportunity within industry disruption is how we’ve succeeded. Today, our menu of products and services goes well beyond FIA solutions and includes Medicare planning, long-term care, life insurance, and advisorfocused software products, including Social Security Timing®, Tax Clarity™ and SmartRisk™. We monitor changes from a regulatory and economic standpoint and work with some of the leading insurance carriers in the market to make sure we are up-to-date on all of the current product changes and enhancements. We do all of this so that you have the support you need to focus on what you do best. SMS’ mission is to help you leverage time, make more money, and put your business in a position of distinction. We have tools and programs to make you successful.
Contact one of our marketing consultants today to find out how we can help you!
1.877.645.4939 www.SeniorMarketSales.com
ENDNOTES 1.
LIMRA International.
2. Indexed Compendium, April 2016. 3. Employee Benefit Research Institute and BenefitsPRO. 4. “Hybrid Indices in Fixed Indexed Annuities: The New Wave,” by Simpa Baiye, Product Matters, Society of Actuaries, Issue 92, June 2015. 5. “Key Moments in the Evolution of Fixed Indexed Annuities,” LifeHealthPro, March 15, 2016. 6. Fear of Financial Planning Survey, Nationwide Financial, conducted by Harris Interactive, 2013. 7.
“Indexed Annuities Battle with SEC Comes to an End,” by Sheryl J. Moore, Annuity Specs, July 21, 2010.
8. “Fixed Indexed Annuities: Recap... And What’s Next?,” by Guillaume BriereGiroux, Oliver Wyman, May 2014. 9. https://insurancenewsnet.com/innarticle/here-come-the-fee-based-indexedannuities. 10. http://www.prnewswire.com/news-releases/nationwide-announces-its-firstfee-based-fixed-indexed-annuity-300486312.html. 11. “Fixed annuity sales hit record $117.4 billion in 2016,” thinkadvisor.com, February 21, 2017. 12. “Guaranteed features propel indexed-annuity sales,” by Darla Mercado, InvestmentNews, June 6, 2014.
A BRIEF HISTORY OF FIAs Keyport Life created the first equity-linked indexed annuity, KeyIndex.
The popularity of 401(k) plans, and the decline of traditional pension plans, started to emerge.
The housing bubble and subprime mortgage crisis resulted in the Great Recession lasting from December 2007 to June 2009. During this period of financial hardship, the S&P 500 declined 57%. The government initiated a process of quantitative easing to increase the money supply and stimulate the economy.
FIA sales had taken off by 2005 but were concentrated with two carriers owning 40% of the market.8
1995
Within a couple of years, the Securities and Exchange Commission (SEC) started to increase scrutiny on the classification of FIAs as insurance products and not securities. 7
2007-2009
2005
2000-2002 2000 A decade-long period of record economic expansion came to a sudden halt with the dot-com stock market crash.
During what became the longest bear market since the Great Depression, the NASDAQ Composite lost 78% of its value, and overall $8 trillion of wealth was wiped out. This event also ushered in a period of increased volatility in the equity markets. 4
In August 2005, the National Association of Securities Dealers (NASD), now known as the Financial Industry Regulatory Authority (FINRA), issued Notice to Members 05-50, declaring that member firms treat indexed annuities as if they are securities. The question of whether the NASD had jurisdiction over FIAs remained. 7
2002-2007 A period of moderate economic expansion occurred from 2002 to 2007, and FIA sales grew from $11.7 billion to $25.1 billion during this time. 5
2009 In December 2009, after legal action and legislation introduced to “undo” Rule 151A, the SEC agreed to a two-year stay of 151A. 7
KEY:
Red = regulatory events Green = product innovations and milestones Blue = economic events
2011
2016
A wave of product innovations starting in 2011 sparked the growth of FIAs and generated broader acceptance by consumers and financial professionals.
In April 2016, the Department of Labor (DOL) released the much-anticipated fiduciary rule mandating all financial advisors who oversee retirement accounts adopt a fiduciary standard of duty putting the interest of their clients above their own.
2017
1998
2001
2003
2006
2008
2010
2015
In an effort to offer higher interest rates, insurance carriers increased both the length of the surrender charge period and the amount of surrender charge penalties. By the end of 1998, nearly one-half of FIAs sold had a surrender period of 10 years or longer. 5
The courts ruled in the 2001 case Beverly S. Malone v. Addison Insurance Marketing, Inc., that FIAs are not securities. 5
The National Association of Insurance Commissioners (NAIC) passed legislation to protect senior citizens ages 65 or older from abusive annuity sales practices. The act, called the Senior Protection in Annuity Transaction Model Act, was later expanded to cover all annuity consumers, not just those older than age 65. 5
Beginning in 2006, a number of product enhancements emerged that increased the competitiveness of FIAs. These include Guaranteed Minimum Death Benefit riders, Guaranteed Lifetime Withdrawal Benefits and nursing home multipliers. 8
In June 2008, the SEC changed course and pursued the reclassification of FIAs as securities with proposed Rule 151A requiring agents who sell FIAs to become securities licensed.7 In December 2008, after a six-month comment period and significant protest from the insurance industry, the SEC adopted rule 151A with an effective date of Jan. 12, 2011. 7
In July 2010 after 13 years of regulatory action, the Dodd-Frank Wall Street Reform and Consumer Protection Act became law, and FIAs were indefinitely classified as fixed insurance products and not securities. 7
By 2015, 401(k) assets have grown to over $4.7 trillion. 3 Additionally, retirement plan rollovers, which have traditionally been a rich source of FIA premium, are expected to grow to $550 by the end of the decade. 1
In 1998, the SEC decided that FIAs were not securities and wouldn’t be regulated as such.
During the most recent period of economic recovery, the domestic equity markets have rebounded and reached alltime highs in 2017. Fee-based annuity products — mostly in the form of variable annuities — have been on the market for several years, but analysts predict that the DOL’s fiduciary rule will lead to insurers developing more fee-based FIAs. 5,9
