Total annuity sales slumped 10 percent in first half of 2017, dropping to levels not seen since 2001, according to LIMRA Secure Retirement Institute’s second quarter retail annuity sales survey.
For all annuities, sales were $105.8 billion. For six consecutive quarters, sales of fixed annuities have outpaced variable annuities, a run unprecedented in the past 25 years.
Sales of variable annuities were down 8 percent in the first half of the year, to $49.1 billion. Fixed annuities, less complex and typically less expensive guaranteed income products than variable annuities, also suffered a significant decline of 11 percent in the first half of the year.
Total sales of fixed products were $56.7 billion in the first half of 2017.
Fiduciary rule impact
Any question as to whether or not sales were impacted by the June 9 partial implementation date of the Labor Department’s fiduciary rule could be put to rest by one of LIMRA’s findings: sales of variable annuities to non-qualified retirement accounts, which do not fall under the fiduciary rule, actually increased 5 percent.
“Typically IRA and non-qualified annuity sales move in the same direction—it is rare to see them moving in the opposite directions,” said Todd Giesing, director for annuity research at LIMRA Secure Retirement Institute. “But it would not be the first time they have moved in opposite directions.”
Traditionally, the majority of all annuities have been bought with IRA assets, Giesing told BenefitsPRO. In 2016, IRA sales accounted for 58 percent of all annuity sales.
In the second quarter of 2017, which included the June 9 implementation of the rule’s impartial conduct standards, sales to IRAs accounted for 55 percent of all sales.
That is a significant shift in a short timeline,” said Giesing.
The Labor Department is seeking to delay the full implementation of rule, scheduled for January 1, 2018, by 18 months.
Regulators are considering revisions to the rule, specifically its Best Interest Contract Exemption, which is required for brokers and advisors to earn commissions on investment and insurance products.
The BIC is required for sales of commission-based variable and fixed-indexed annuities. Fixed annuities can be sold through prohibited transaction exemption 84-24, which has fewer disclosure requirements and less liability exposure for sellers.
While many of the BIC’s core provisions are expected to be delayed, sellers of annuities are still required to satisfy the fiduciary rule’s impartial conduct standards, which requires all investment advice on qualified assets to be in customers’ best interest and only for reasonable compensation.
Insurance carriers have lobbied for a delay in the full implementation of the rule, and revisions that could potentially differentiate one-time sales of annuities from fiduciary advice.
In the near term, the protracted uncertainty of the rule under the Trump administration can be expected to further weigh on annuity sales, says Giesing.
“As the uncertainty drags out, we’re probably going to be in a holding pattern,” he said. “Sales aren’t slowing because of a lack of need for annuities in the market, but because product manufacturers and broker-dealers are trying to figure out how to operate under an unknown rule.”
LIMRA is forecasting further declines in variable annuity sales, which are expected to drop below $100 billion for 2017, a level not seen since 1998.
Fee-based annuities emerging, but still just a sliver
Under the Labor Department’s review of the rule, regulators are considering the impact of product innovations, and whether they would benefit from revised or new transaction exemptions.
In its request for information from stakeholders, Labor specifically raised the question of emerging fee-based annuity products.
Fee-based products have provided one area of growth among variable annuities. Sales increased to $570 million in the second quarter—but that only represented 2.3 percent of the variable market.
“These numbers are directly correlated to the rule,” said Giesing. “The momentum is definitely upward, and there is new activity from the product standpoint, but fee-based products are relatively new, and represent a small portion of the market.”
Demographics will sustain demand
Giesing says LIMRA shares many stakeholders’ concerns that the rule as written could be an obstruction for getting near-retirees, and retirees, access to guaranteed income products.
“If the rule were to be implemented as written, and investors are limited to access to advisors or products, that absolutely would be a hindrance to the consumers that need these products,” he said.
The 55-year-old to 65-year-old mass affluent demographic, which Giesing describes as investors with considerable but finite accumulated assets, is the prime annuity market.
The sheer numbers of Americans who fall into that slot bodes well for the annuity market’s future.
“The demand for guaranteed income will be there in the future,” said Giesing, who expects annuity sales to return to an upward trajectory by 2020, presuming the market gets clarity from the Labor Department.
But near-term, the external forces from regulatory uncertainty will continue to slow sales, underscored Giesing.