Did ongoing confusion over the fiduciary rule force annuity sales into a downward spiral?LIMRA Secure Retirement Institute’s second-quarter research reports that total annuity sales dropped by 10% to $105.8 billion in the first half of 2017, their lowest total since 2001. Second-quarter sales reached $53.9 billion, up slightly from the first quarter, but down 8% from the same quarter in 2016.
All sectors within the overall annuity market showed decline, though some segments performed relatively better than others. Q2 variable annuity (VA) sales dropped by 8% to $24.7 billion, while fixed annuities recorded a 7% downturn to $29.2 billion. Similarly, VA sales in the first half sank to $49.1 billion, an 8% decrease from the first six months of last year, while fixed annuity sales suffered an 11% decline to $56.7 billion in the same period. LIMRA also noted that fixed annuity sales exceeded VA sales for the sixth straight quarter — a trend that hasn’t been seen in nearly 25 years.
Meanwhile, indexed annuity sales rose 15% to $15.6 billion in the second quarter from the first quarter. Compared to last year, however, sales still fell by 4%.
LIMRA’s forecasts further declines in annuity sales. The research group predicts that VA sales will sink by 10% to 15% this year, reaching only $100 billion — the lowest level since 1998. Indexed annuity sales will follow a similar downward path, declining by 5% to 10%.
Impact of DOL Fiduciary Rule
The drop in overall annuity sales may reflect the industry’s confusion regarding the impact of the Department of Labor’s impending fiduciary rule. Although the DOL recently sought to postpone full implementation of the standard until July 1, 2019, prolonged uncertainty over the rule likely hampered sales of annuity products — at least in the first half of this year.
Todd Giesing, Assistant Research Director at the LIMRA Secure Retirement Institute, told Investment News that the looming specter of the fiduciary rule hindered annuity sales even with a strengthening equities market and positive interest rates. This caused annuity distributors and advisors to hold back as they searched for new product models and ways to adapt to the fiduciary standard. “With the uncertainty out there, that’s impacting sales,” Giesing said.
Yet the annuity industry received some good news recently when government attorneys filed a brief in a Minnesota federal court indicating that the DOL would dump the class action lawsuit provision in the fiduciary rule’s Best Interest Contract Exemption (BICE). BICE mandates agents and advisors must act in the best interest of the client and avoid conflicts of interest when selling variable and fixed indexed annuities.
The class action provision drew the ire of several industry stakeholders, including Thrivent Financial, which filed a lawsuit in Minnesota last year challenging the DOL’s right to impose the class action directive. Thrivent argued that the DOL doesn’t have the “authority to preclude financial institutions and their clients from entering into and enforcing arbitration agreements that include class action waivers.”
New Types of Annuities
Insurance agents who sell fixed indexed annuities were heartened when the DOL proposed delaying the implementation of the rule and extending two key exemptions: BICE and the Prohibited Transaction Exemption (PTE) 84-24 Rule. PTE 84-24 permits insurance agents and brokers, pension and insurance consultants, and others to conduct certain transactions for which they receive a commission.
Nevertheless, the rule’s potential application and marketplace shifts may revamp annuity product structures. Chris Eberly, VP of Research and Consulting with insurance IT consultancy Novarica, told InsuranceNewsNet that he foresees annuities becoming simpler in design, with fewer riders and income guarantees. He also predicted that the industry will switch to more fee-based annuities that are said to be better suited to the fiduciary standard.
Eberly added that annuity models going forward will be dictated by low interest rates, new regulations, and the specific income needs of the client rather that what insurers can sell. No longer will there be a “shotgun” approach to sales, he said.
Although the annuity marketplace is undergoing changes now, insurance agents need to monitor any shifts in regulations and product structures. When the DOL eventually finalizes the fiduciary rule, annuity sales may experience a revival once regulations are settled. But with or without a fiduciary rule, agents must always serve their clients’ best interests so they receive the secure retirement income annuities can provide.