As DOL fiduciary rule dies, variable annuities come alive — sales up for first time since 2014

The death of the Department of Labor fiduciary rule is breathing new life into the variable annuity business.

Following 17 consecutive quarters of sales declines, dating back to 2014, there was some good news for insurers in the second quarter this year: an increase in sales.

Product sales increased 2%, to $25.8 billion, when compared with the first quarter’s results, according to the Limra Secure Retirement Institute.

There are multiple contributing factors, including rising interest rates and a strong stock market, but the relaxed regulatory pressures played the biggest role, experts said.

“The whole Department of Labor rule is finally completely off the table,” said Jamie Hopkins, insurance expert at The American College of Financial Services. “Nobody’s worrying about it and it’s not sucking any energy out of the room.”

The fiduciary rule, which raised investment advice standards in retirement accounts, made it more challenging for insurers and brokers to sell products like variable and indexed annuities on a commission basis — which is how the vast majority of the products are sold.

Selling the annuities for a commission, as opposed to a flat, asset-based fee, would have exposed product distributors to more legal risk in the form of class-action lawsuits. Many firms had to overhaul their distribution policies and compensation structures as a result.

Variable annuity sales in individual retirement accounts fell 16% in 2017, due to the regulation, according to Limra.

“When you look at the variable annuity space, absolutely there’s been an impact because of the DOL rule being vacated,” said Todd Giesing, Limra’s director of annuity research.

Although the fiduciary rule partially went into effect last year, the 5th Circuit Court of Appeals struck it down, and it was officially taken off the books in June.

Further, the Securities and Exchange Commission and National Association of Insurance Commissioners, which are respectively working on their own advice rules governing investment and insurance products, don’t seem to be drafting rules that would negatively impact annuity sales, analysts said.

Variable annuity sales are down significantly from a decade ago. Around 2007-08, quarterly sales were above $40 billion — or $15 billion more than most recent quarterly figures. Over 2011-15, the norm was around $30 billion-plus, which started to fall further when the DOL rule was introduced in 2015, Mr. Giesing said.

Limra is forecasting sales to increase up to 5% year over year in 2018.

An improving forecast for interest rates plays into that, too. As the Federal Reserve raises rates, insurers are typically able to make their products and features more attractive to consumers. And the S&P 500 is up roughly 6% year to date, which also has helped attract some consumers to variable annuities, since the products’ performance is tied to how well stocks do.

INDEXED ANNUITIES

Indexed annuities broke their previous sales record, set in Q4 2015, with $17.6 billion in second-quarter sales — due to a combination of higher interest rates and reduced regulatory pressures, experts said. Until last year, indexed-annuity sales had grown in consecutive years beginning in 2007, unlike variable-annuity sales.

According to Limra data, indexed-annuity sales increased among wirehouses and independent broker-dealers 39% and 14%, respectively, year over year in Q2. Variable sales grew only 2% and 7%, respectively, over the same period.

Total annuity sales across all product types were up 10% year over year in Q2, according to Limra.