Product design, distribution and education fill out the challenge for today's advisor
by P.E. Kelley
Mr. Kelley is Managing Editor of Advisor Magazine and L&HA e-newsLink. Connect with him by e-mail: pkelley@lifehealth.comMichael Reardon leads the Product Strategy team for Global Atlantic Financial Company and serves as President of Forethought Life Insurance Company. He sat down with us to discuss the evolution of new trends in the annuity products available in today's economic climate. In particular, he addressed the emerging fixed income portfolio, which is gaining greater traction in the multi-channel distribution of today's financial industry.
PEK: What innovations have been made in the industry with respect to index crediting strategies?
MR: Index annuities are definitely evolving and gaining a stronger foothold in the marketplace today. As far as crediting options, the trend is moving toward a more blended approach, introducing indices beyond the S&P 500 to the products. By expanding the universe of indices available, clients have crediting options that link interest crediting to more diversified strategies, which can help to reduce volatility.
PEK: What trends are you seeing for new riders or combination products for annuity products?
MR: There are two trends evident today. First, with lifetime income riders, I think the balance between guarantees and growth potential is shifting. As the low interest rate environment increases the cost of guarantees, we are seeing a movement toward benefits and riders that offer consumers lower level guarantees with greater growth opportunity, as they seek to generate income that will keep pace with inflation. This is a shift from a marketplace that predominantly sought richer guarantees with more ambivalence toward the upside potential.
Second, I think annuities with options for long-term care protection will become more prevalent as advisors and consumers become more aware of the variety of benefits of these products. The likelihood of needing long-term care and the burden of its cost is becoming more evident every day. Alternatives to the “use it or lose it” nature of traditional long-term care insurance are important. People need options. Annuities can offer protection in a variety of ways, from contract value multipliers for LTC needs, to true hybrids with broader protection features.
PEK: What economic factors are impacting annuity product innovation? How are these factors impacting innovation across the industry?
MR: The biggest economic factor affecting annuities today is the same one affecting the broader financial sector — persistent, extraordinarily low interest rates. As mentioned earlier, low rates increase the cost of offering products with high guaranteed benefits. As a result, companies are reducing the level of guarantees, while offering new ways to provide upside potential, as seen in the increased focus on indexed products.
PEK:Are there any new or notable distribution channels that insurers are designing products for? How are these particular channels impacting product design?
MR: Annuity distribution channels are fairly well established. I think the focus is toward penetrating deeper as opposed to finding new outlets. For example, large wirehouses and banks, as well as independent broker-dealers, all have annuities on their shelves, but only a small fraction of the advisor community is actively selling annuities. Annuities are uniquely suited to address the challenge of generating income in retirement and the risk of outliving your assets. It’s our job in the industry to raise the level of awareness and engage these brokers.
Firms recognize the growing need for lifetime income strategies and are typically supportive of efforts to reach advisors. As far as part two of the question, I would argue that product design is influencing distributors more than the reverse. Modern fixed index annuities best represent this view. While FIAs have struggled to gain traction with broker-dealers in the past, broker-dealers today are beginning to see the potential benefits for clients.
PEK: What are your expectations for product innovations for annuities in 2015 and beyond?
MR: There are an unprecedented number of retirees and people approaching retirement today. However, private pension plans are dwindling, interest rates are low and securities markets are volatile. As a result, bond yields are challenged to keep pace with needs and traditional strategies for drawing down savings risk asset depletion as the typical return assumptions of yesterday cannot be counted on today.
Annuities can offer the guaranteed, predictable lifetime income stream that retirees need. As a result, companies are building products that appeal to people looking for income guarantees and vice versa, the public’s income needs are driving companies to create more innovative guarantee options. If an asset is dedicated to income, we need to help clients receive that income as efficiently as possible.
PEK: How is your company designing income-guarantees into new contracts?
MR: Income needs are not the same from person to person, and the role of annuities can differ significantly based on personal objectives and risk tolerance. There is no “one size fits all” answer to retirement provide the greatest potential for retirement. Advisors can customize an annuity strategy for clients, and that may include incorporating multiple annuities with different features, instead of one annuity doing it one way.
Guarantees are based on the claims-paying ability of the issuing company. Annuities are issued by Forethought Life Insurance Company. Variable annuities are underwritten and distributed by Forethought Distributors, LLC. Forethought is Forethought Life Insurance Company and affiliates, subsidiaries of Global Atlantic Financial Group Limited.
