The implementation of the DOL fiduciary rule's impartial conduct standards last June is clearly weighing on the annuity market, according to the LIMRA Secure Retirement Institute.

Total sales of variable annuities in 2017 dropped below the $100 billion mark for the first time in 20 years, according to LIMRA. Variable annuity sales were $95.6 billion in 2017. In 2011 they topped $158 billion.

Sales for the entire annuity market were $203.5 billion last year, an 8 percent decrease from 2016. Total sales topped $265 billion in 2008.

Under the fiduciary rule's impartial conduct standards, brokers and advisors are required to recommend products in the best interest of investors, and can only charge reasonable compensation on investments sold to IRAs and other qualified retirement accounts.

The entire fiduciary rule, which has been delayed to July of 2019, requires extensive new contractual requirements on the sales of variable annuities and fixed indexed annuities.

Impact of rule's impartial conduct standards

While the full extent of the warranty and disclosure requirements under the rule have been delayed, the impartial conduct standards have been enough to discourage annuity recommendations to qualified retirement accounts. Evidence of that is found in the dramatic slump in sales to IRAs, says LIMRA.

“The implementation of the DOL fiduciary rule in 2017 had a significant impact on the individual annuity market,” said Todd Giesing, director of annuity research at LIMRA Secure Retirement Institute. “The impact to IRA annuity sales was much more pronounced than nonqualified annuity sales.”

For all of the annuity market, $98 billion worth of product was sold through IRAs in 2017. Another $22.5 billion was sold through defined contribution plans—mostly 403(b) plans.

The rest were purchased with nonqualified assets–sales that do not fall under the fiduciary rule. Nonqualified assets purchased $83 billion of annuities in 2017.

Variable annuities

Sales of variable annuities to IRAs dropped 16 percent, or $8.5 billion, last year. Sales to nonqualified assets increased by 4 percent.

“We typically haven't seen that disparity in the past,” Mr. Giesing told BenefitsPRO, referring to the drop in sales to IRAs, and increase by nonqualified assets. “The difference in the IRA market is notable.”

In the third quarter, sales of variable annuities to IRAs dropped 24 percent, while sales to nonqualified assets fell only 3 percent. “The third quarter was telling, and a reaction to the June 9 implementation of the impartial conduct standards,” said Giesing.

Sales of variable annuities saw steady declines prior to implementation of the fiduciary rule. Declines have been experienced every year since 2011, when VA sales peaked during the last decade

“The variable annuity market has been faced with a lot of head winds,” explained Giesing. “In 2011, manufacturers were forced to de-risk, or reduce the guaranteed living benefits in the products to manage tail risk.”

The declining interest rate environment forced insurers to reduce benefits, said Giesing. Over $1 trillion of assets are held in variable annuities, and two-thirds of the products offer some level of guaranteed benefit.

“Insurers take on a substantial amount of risk with guaranteed lifetime income streams. That risk has to be carefully managed,” he added.

The fiduciary rule exacerbated challenges posed by low interest rates. Sales of variable annuities dropped precipitously in 2016. In April of that year, the Obama administration released its finalized fiduciary rule. Sales of VAs have dropped 28 percent since the end of 2015.

Fixed indexed annuities

Fixed indexed annuities have also been impacted by the rule. Sales of FIAs to IRAs dropped 9 percent in 2017, while FIAs purchased with nonqualified assets increased 2 percent.

A bright spot in the overall annuity market was seen with structured annuities, a relatively new product line, which saw $9.2 billion in sales last year, up 25 percent from 2016.

Structured annuities

Structured annuities were first introduced in 2010, and are only offered by a handful of insurers.

Giesing describes the products as a middle ground between traditional variable annuities and fixed indexed annuities.

Structured products have an upside cap, similar to FIAs, but risk is shared between the investor and the insurer through floors that guarantee returns in down markets. With variable annuities, investors bear all of the downside risk.

This is the first year that structured products have been in the spotlight, said Giesing. LIMRA did not break out the split in structured annuity sales between qualified and nonqualified assets.

More insurers can be expected to develop structured products, given their considerable growth in a short timeframe. They carry less risk than products that offer guaranteed income, and are typically sold to younger investors relative to variable and fixed indexed annuities.

“They offer a nice compliment to what has traditionally been available in the market. But we don't expect their growth will ultimately overtake the variable market,” said Giesing.

Total annuity sales were flat in the fourth quarter of 2017, after six quarters of decline. LIMRA is expecting the annuity market to stabilize in 2018—Giesing says flat to marginal growth of up to 4 percent is likely.

Insurance market facing regulatory uncertainty

The insurance market is still facing a cloud of regulatory uncertainty. The Labor Department continues to work on revising the fiduciary rule. The Securities and Exchange Commission is at work crafting a uniform fiduciary standard, as are insurance regulators. And the list of states that are proposing fiduciary standards continues to grow.

That potential patchwork of regulations is a “huge” concern for the insurance industry, noted Giesing.

“It's not feasible to operate, build and distribute products nationwide under the patchwork of emerging regulations,” he said. “A centralized fiduciary rule would be beneficial for our members. Clarity would be a good thing.”

Instant Insights /

Annuity sales to IRAs getting hammered under fiduciary rule

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