Fixed indexed annuity sales are projected to decline 30% to 35% next year due to a new Labor Department rule raising investment advice in retirement accounts, according to Limra, signaling the disruptive power the regulation will have on insurance companies and product distributors.
Limra, an insurance industry group, estimates fixed indexed annuities will exceed $60 billion in sales this year, which would be a 15% to 25% increase on the 2015 annual total and represent the ninth consecutive year of sales growth for the products.
However, as insurance companies and distributors such as broker-dealers begin complying with the Department of Labor's fiduciary rule by the initial implementation deadline in April, fixed indexed annuity sales will likely see a steep drop-off beginning in the second quarter, according to Todd Giesing, assistant research director at the Limra Secure Retirement Institute.
Limra anticipates next year's annual product sales will decline to $40 billion, a level not last seen since 2013.
The DOL regulation makes a fiduciary of anyone providing investment advice for a fee in retirement accounts such as 401(k)s and IRAs. Nearly two-thirds ($34 billion) of indexed annuity sales last year were funded through IRAs or rollovers from qualified retirement plans, according to Limra.
Economic conditions have helped fixed indexed annuity sales surge in recent years. Low interest rates have depressed yields on vehicles such as CDs, savings accounts and bonds, leading some investors to turn to indexed annuities, which are marketed as products offering principal protection with the potential to participate in stock-market gains.
Further, companies traditionally focused on variable annuities have successfully come to market with indexed annuity products, without detracting from sales of those already in the market, Mr. Giesing said.
Prior to the release of the final DOL fiduciary rule, fixed indexed annuity sales were expected to blossom under the new regulatory regime. The original rule proposal gave fixed indexed annuities an out from an enhanced compliance standard, known as the best-interest contract exemption (BICE), to which variable annuities would be subjected, leading to the belief that fixed indexed annuities would serve as a pivot product from variable annuities.
However, both indexed and variable annuities ultimately fell under the enhanced compliance standard in the final rule.
In May, Limra forecast a year-on-year drop of 25% to 30% for variable annuity sales in 2017.
“Manufacturers and distributors will have to learn how to operate in this new environment,” Mr. Giesing said.
One of the main inhibitors for indexed annuities under the rule is a particularity of the BICE and how it treats independent marketing organizations (IMOs), which market insurance products to independent insurance agents.
This distribution channel accounted for approximately two-thirds of indexed annuity sales in 2015, according to Limra.
Under the BICE, a “financial institution” must enter into a contract with an investor being sold an fixed indexed annuity on a commission basis. However, IMOs are not considered financial institutions under the text of the rule.
“That's one of the biggest disruptors we see to the FIA market right now,” Mr. Giesing said, adding it will “morph” how IMOs are able to conduct business in qualified accounts.
Sheryl Moore, president and chief executive of Moore Market Intelligence, said although she doesn't forecast as steep a decline in sales as that telegraphed by Limra, sales will undoubtedly suffer in a post-DOL world, in large part because of the IMO conundrum.
In the absence of IMOs serving as a financial institution, insurance companies could step in and take on the responsibility on their behalf. However, insurance executives have said publicly it could prove too great a risk.
“More than half of the salespeople that offer these products are independent agents affiliated with a marketing organization,” Ms. Moore said. “There just isn't clear guidance on how these individuals will be able to continue selling without an insurance company that is willing to serve as a financial institution.”
Some IMOs are launching broker-dealers in order to receive “financial institution” status. The DOL also allows for one-off applications from IMOs for such status, but the DOL hasn't yet provided much if any detail as to what the application process should look like.
Several major fixed indexed annuity providers are forging ahead with plans to develop fee-based, advisory products, which could help advisers and their firms avoid some of the more onerous compliance points under the BICE, such as signing of a contract.