Life insurers facing annuity squeeze

A period of fierce competition to build annuity premiums awaits life insurers as they contend with industry consolidation and the difficulties of standing out from rivals.
Premium growth for individual annuities has been on the decline for years. That’s not likely to change anytime soon. The popularity of 1035 exchanges — tax-free transfers of one annuity into another — has been decreasing dramatically. In fact, Conning Research and Consulting estimates that the average annual annuity premium growth rate between 2007 to 2011 will come in at 2.3%. That’s a considerable drop from the double-digit growth rates insurers saw during the late ’90s.
“The momentum to make the exchanges isn’t around anymore,” said Scott Hawkins, an analyst at Conning. “So the underlying problem is, how do you stimulate new growth?”
That’s a good question. The fact is, some older contracts have richer benefits that are still in the money (or worth more than the account balance). The dearth of attractive annuity benefits won’t exactly help plump up sales. And despite industry consolidation, some carriers are finding it difficult to get distribution.
Not surprisingly, Conning found that insurance companies must separate their products from the pack to generate sales. The firm’s long-term analysis of 13 leading carriers, however, revealed that there is no differentiation based on product type.
This is not to say it’s all doom and gloom in the annuity business. Generations X and Y will provide a new set of potential customers for life insurers. Both groups will be less likely to have employment-sponsored pension plans. Likewise, both will probably have smaller Social Security retirement benefits than their baby boomer predecessors.
Conning also found that post-recession, customers are more interested in guaranteed retirement income — and making sure they don’t outlive their savings. Those concerns present a selling opportunity for insurers willing to craft personal pension products. Such offerings will allow customers to purchase shares of guaranteed retirement income or use hybrid products that provide a guaranteed-lifetime-withdrawal benefit wrapped around a mutual fund.
Those products could target younger clients, while immediate annuities could be tweaked to appeal to boomers and older investors, Mr. Hawkins said. He noted that some products intended to appeal to older investors are already being developed in the United Kingdom, including an annuity that’s linked to the Consumer Price Index and inflation, and one that uses medical underwriting to calculate payouts. This way, Mr. Hawkins explained, clients who are expected to live shorter lives receive larger annuity payouts.