Fixed annuities, FIAs, and RILAs are expected to compete more fiercely over the next five yearsA new report from Cerulli Associates provides in-depth analysis of marketing, product development and strategy, pricing, sales, distribution, market segmentation, and regulatory trends in the U.S. financial services industry. Access the full report here.
February 16, 2023, BOSTON—Annuity sales—helped along by rising interest rates—are surging. If current market conditions hold, fixed annuities, fixed-indexed annuities (FIAs), and registered index-linked annuities (RILAs) are predicted to compete more fiercely with one another during the next five years, according to the latest Cerulli Edge—U.S. Asset and Wealth Management Edition.
If fixed annuity rates remain high enough, advisors and their clients will likely continue to elect a predictable rate of return with full principal protection versus annuities that offer upside potential with principal at risk. However, as interest rates decrease over time, Cerulli predicts, by 2027, marketshare of fixed-indexed annuities (FIAs) as a percentage of total annuity sales will increase and reach 26%, followed closely by RILAs (23%) and traditional fixed annuities (20%). “With financial markets and economic news remaining unsettling for many investors, annuities that provide predictable outcomes will remain a hot commodity,” states Donnie Ethier, senior director.
Over the past several years, RILA sales growth has outpaced that of all other annuity types, but lately, thanks to rising interest rates, these products have encountered stiffer competition from traditional fixed annuities and FIAs. These conditions will bear watching in 2023 and 2024. Traditional variable annuity (VA) sales, however, will remain under pressure as insurers and advisors continue to migrate away from selling VAs with benefit guarantees, according to the research.
Avenues For Growth In The Annuity Market
Cerulli sees three potential avenues for growth of the annuity market in the coming years, all of them connected to the needs and preferences of the 44% of retired households that cite assuring a comfortable standard of living in retirement as their most important financial goal. While insurers have done their part to enhance product solutions, those that remain committed to the VA marketplace should expand their focus on guaranteed withdrawal benefits (GLWBs). Insurers should also participate in recent efforts to bring more annuities to defined contribution plans. The SECURE Act of 2019 and the just-enacted SECURE 2.0 extend the distribution age requirement and provide retirement savings incentives for qualified plans. The final avenue for growth lies in helping with the cost of long-term care (LTC) with concepts that include in-plan annuities, income-taking solutions, LTC hybrids, and inflation protection features.
Cerulli believes insurers should aim to leverage the current favorable conditions in the annuity market to nudge the industry conversation toward product concepts. “Understandably, the industry is focused on principal protection right now, but the income story of annuities will return and grow in importance,” says Ethier. “The industry would benefit from more studies that compare the pros and cons of various income strategies, such as systematic withdrawals from one’s investments, traditional annuity payments, and GLWB withdrawals,” he adds.
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Headquartered in Boston with fully staffed offices in London and Singapore, Cerulli Associates is a global research and consulting firm that provides financial institutions with guidance in strategic positioning and new business development. Our analysts blend industry knowledge, original research, and data analysis to bring perspective to current market conditions and forecasts for future developments.