The Tsunami of Indexed Annuity Sales
May 17, 2013 by Sheryl J. Moore
In the indexed annuity capital of the world (also known as Des Moines, Iowa), we’re not subject to many natural disasters. Given that Iowa is smack-dab in the center of the United States, we don’t experience many earthquakes. We have never gone through the devastation of a cyclone, although tornados do show up at times. Our farmers occasionally have to pray for rain because of droughts; although the past decade has seen more flooding amongst my neighbors. Most recently Iowa has been the center of an entirely new type of natural disaster, however: an indexed annuity sales tsunami.
Where the type of tsunami that causes death and destruction is caused by the combination of a large body of water and an underwater earthquake, this new Midwestern tsunami is the result of another lethal combination: historic-low interest rates and a need for income that cannot be outlived.
Although indexed annuities have always offered a unique combination of principal protection and limited gains based on market performance, since their emergence in 1995, “record” sales ranging from $2 billion-$14 billion never really caught anyone’s attention. When 2004’s sales increased by more than 67% in a single year, people outside of the life insurance industry finally began to take notice of this unique insurance product. From thereon, the spotlight wouldn’t leave indexed annuities, thanks to a tidal wave of controversy surrounding the proposed securities status of the “safe money” retirement savings vehicle.
Interestingly, that controversy caused a nearly 7% drop in sales in 2006, and sales the following year were flat as a consequence of the tumult. Suddenly, people forgot to question if indexed annuities were a fixed insurance product or a stock-like securities product. Once the market collapsed in 2008 (the second time in a decade that the markets had seen a catastrophic loss of nearly 50%), people began asking other questions. This second market failure caused Americans’ priorities to come under inquiry. Was it really important to get all of the market’s upside, if it meant that you would also experience all of the market’s downside losses as well? Was it more important to earn greater interest in your retirement savings or to retain your existing earnings? Should young workers be risking it all, or realizing that the slow and steady growth of compounding interest outweighed the risks of being “in the market?” The underwater earthquake began to stir.
The following year initiated some strange times in the fixed and indexed annuity industries. At the close of 2008, capital became tight and interest rates began to drop; insurance companies were literally turning away annuity business. It was the first time there had ever been a mismatch between the supply and demand of indexed annuities. Consumers had decided that they weren’t willing to risk their retirement nest eggs inside of “risk money” products, but they couldn’t find alternative vehicles where they could place the money instead. Despite insurance companies’ efforts to suppress the amount of annuity business placed, indexed annuities set sales that year – closing 2009 with over $30 billion in sales. The first tsunami wave begins its ascent upon the life insurance industry.
The economic environment didn’t get less challenging as time went on. Despite the fact that capital became more attainable, the depression in fixed interest rates continued. And it continued. And continued. Where fixed annuity rates averaged 5.43% at the close of 2008, their decline would emulate a downward spiral over the next four plus years. The average fixed annuity rate dropped 1.22%, closing-out at 4.21% at the close of 2009. They declined another 1.06% by the time 2010 wrapped-up. Another 0.38% drop occurred by the end of 2011. Then yet another 0.28% evaporated from the average fixed annuity rate by the time 2012 came to a close, resulting in an average fixed annuity rate of merely 2.49% – just four years after the market’s big drop. The first wave reaches its crescent, and a second wave begins to emerge
Before you know it, the waves are coming, and they don’t stop any time soon. Indexed annuity sales continue to set records. One can hardly catch a breath in between the record-setting sales. Where 2009’s sales shot-up by nearly 13%, sales in 2010 increased a full 7%. The following year’s sales improved just enough to say that they were up. But it’s the close of 2012’s sales that provide the true testament to the power of consumer’s demands – indexed annuity sales close at an all-time record of $34 billion in 2012; more than 5% greater than 2011’s sales The typical reaction to witnessing a lethal tsunami in some remote land may include shock, awe, and disbelief. The indexed annuity sales tsunami is not different in that regard. It will differ, however, in that it leaves you with a smile and a warm feeling inside. Every record-setting year means more-and-more retirees that are being guaranteed an income for life, with the most unique combination of guarantees and potential for upside interest.
I’ll take that kind of natural disaster any day of the week!
