The U.S. annuity market underwent a significant shift following the Great Recession. Prior to the economic crash, variable annuity sales propelled growth in the annuity market, accounting for over 70% of the $265 billion in annuity sales in 2007.
After several years of strong and steady equity market growth, and the subsequent market downturn during the Great Recession, investors' behavior shifted rapidly and consumers began to prioritize preservation of their retirement assets over growth.
As a result, VA sales have declined 46% from their peak in 2007, and the rise of fixed indexed annuity sales commenced.
Fixed indexed annuities ascend
Since 2007, FIA sales have experienced significant growth, increasing more than 175% to $69 billion in 2018. This year continues to demonstrate the attractive value proposition of FIAs in today's market.
Results from the LIMRA Secure Retirement Institute Annuity Sales Survey, which represents 95% of the U.S. market, show FIA sales broke sales records in the first two quarters of 2019.
Quarterly sales of FIAs totaled $20 billion in the second quarter of 2019, and retail FIA sales surpassed retail VA sales for the first time.
Three factors are driving this growth. First, you have to look at the economic conditions. Over the past few quarters, increased market volatility combined with low interest rates have made FIAs' value proposition attractive to consumers.
While we are a decade past the Great Recession, the sharp equity market downturn and indicators of an upcoming recession likely have created concerns for advisers and investors to seek preservation of retirement assets, particularly for individuals nearing or entering retirement.
Second, the proportion of FIA sales without a guaranteed living benefit rider has more than doubled since 2014, from $16.3 billion to $39.9 billion in 2018. In contrast, FIA sales with a guaranteed living benefit have remained relatively level since 2014.
When we start to look at when individuals are purchasing FIAs, it is clear the value of protected growth is attracting these consumers. The average age of a FIA buyer is 63.1 years, and nearly two-thirds of FIA sales involve buyers who are between the ages of 56 and 70.
These consumers are more interested in taking advantage of the booming equity markets while protecting their investment from downturns than in locking in guaranteed income at this point in their lives.
Demographic projections indicate that there will be nearly 9 million more consumers nearing or entering retirement over the next five years who are likely to be interested in the protected investment growth that FIAs offer.
Third, consumers' behavioral shift has prompted more companies to alter their annuity portfolio offerings to include FIAs.
In 2007, just 33 companies reported FIA sales to the Secured Retirement Institute; today that number has risen to 40.
In addition, we see several prominent VA manufacturers changing direction and investing more resources to support their FIA businesses. This has led to innovations in product design, such as simpler products, fee-based products and innovative indices, to appeal to a broader array of distribution channels like banks, independent broker-dealers and career agents.
In the past, the lion's share of FIAs were sold by independent agents. In 2018, independent agents represented 55% of FIA sales, compared with 89% in 2007. As manufacturers began to overcome some of challenges to selling FIA products, growth in these nontraditional channels has grown and growth is expected to continue.
As we look to the future, there is significant opportunity to help add security to Americans retirement portfolios, and we believe these factors will continue to boost FIA sales for the foreseeable future.
The Secure Retirement Institute is predicting sales of FIAs will grow through 2023, with the potential to surpass $80 billion annually.
Todd Giesing leads the Annuity Research Team and is responsible for managing the individual research program for the LIMRA Secure Retirement Institute.