Guaranteed Annuities: Certainty In An Uncertain World

How 2020 impacted the annuity industry

by Rich Lane

As we are all aware, this year has drastically affected markets and brought sweeping changes across the annuity industry. While COVID-19 caused disruption unseen since the financial crisis of 2008, there were two primary impacts in 2020 that changed the annuity industry at large: incredibly low interest rates and severe market volatility. Advisors were required to navigate dramatic changes in the marketplace, and find new, virtual ways to connect with clients, all while managing these two crucial challenges. Though this year has proven more difficult to sell annuities, ultimately, we can go into 2021 knowing that the need and demand for annuities will always be there. How that demand is met will change depending on the evolving needs of the client, and the market.

Record Low Interest Rate Environment

This year, we have seen record low interest rates — for the first time since 2008’s financial crisis. For clients, it has been a challenging time to get a reasonable yield on fixed income investments. Since fixed annuities rates are not immune to what is currently happening in the rate environment, they are also impacted by the current interest rates environment. This means that although typically fixed-index annuities have a 6-8% interest cap, in the current, low interest rate environment, they may only have a cap of 3.5-4.5%.

Before this year, fixed-index annuities had been top-sellers. These deferred annuities credit interest at a rate based on returns of an index, so the funds can participate in general market gains. But when the market is continually fluctuating, like it has in 2020, clients seek products with more guarantees. The combination of high market volatility and low interest rate creates tough and uncertain pricing for fixed-index annuities and has clients seeking products with more guarantees. For this reason, Multi-Year Guarantee Annuities (MYGA) have been more attractive to clients this year. MYGAs offer a guaranteed fixed interest rate for a certain period, usually from three to 10 years, which means they are a potentially safer way to grow money when low interest rates are prevalent. From past experiences like 2008, we saw there was an increased focus and interest in MYGAs, as clients would rather have guaranteed 3% interest for 5 years than to possibly get 4.5% interest, at most, with a fixed-index annuity when interest rates are lower, and index returns are less predictable.

Simply put, in times of uncertainty, clients are seeking assurance where they can find it. Advisors can recognize and acknowledge this by helping guide their clients’ aversion to risk toward an annuity option that provides that desired guarantee. For this reason, a lot of carriers that were not in the MYGA space before 2020 now are, and we have seen spikes in sales of those products. Clients want to see their statement go up each year, and because they may be living off of interest, a MYGA becomes more attractive for the guaranteed interest payout. Knowing this, advisors can proactively position this annuity type to clients in 2021, detailing MYGA’s guarantee of investment return, predictable rates of return for a period of time and the benefits of tax-deferred growth and protection.

As of November 2020, the federal interest rate was 3.25%, compared to one year ago when it was 5%. Considering the federal government has talked about extended low interest rates, insurance companies are looking for different ways to invest moving forward. For instance, companies may be considering reinsurance or investments opportunities that they may never have considered in the past.

Navigating Market Volatility

The pandemic has had a global impact, affecting fluctuating markets across the world. This has meant that in 2020, why people are buying annuities and which type they are buying, has all changed.

The first quarter of this year, annuity sales were similar to 2019. From April to May, the industry saw a significant decrease in sales, primarily due to access. Annuity products are sold, not bought. Meaning, the face-to-face interaction between advisors and clients is important to our industry. As clients don’t necessarily seek out annuities, they pursue various investment options, it is incumbent for the advisor to sell the appropriate annuity based on the clients’ goals. Bank closures and advisors working remotely have resulted in a significant decline in annuity sales. From July to September, most sales were coming from existing clients — clients who already had annuities but were moving them from one company to another. New client purchasing remained slow because of reduced access and the downturned economy.

Through at least mid-September, banks have begun reopening, and more advisors began meeting with clients in-person with pandemic safety protocols in place. It’s for this reason that the industry will end the year on a slight uptick compared to previous months. But for 2020 as a whole, sales have been down overall, though perhaps not as drastically as many expected based on the second quarter. These are good observations to take into 2021 as we consider what might be next for the market.

Learnings for 2021

The upheaval created this year may have been unexpected, but in many ways, it is not unfamiliar to our industry. Through major events and crises in the past, we have withstood market fluctuations and substantial change, and by shifting our approach and products to meet clients needs, the annuity industry will stabilize once again. By better understanding everything that has happened in 2020, advisors can prepare for what is likely to influence buying behavior next year.

For instance, with bank closures and in-person meetings between advisors and clients temporarily suspended for much of 2020, the industry was forced to become more digitally savvy than was necessary in the past. Advisors had to learn how to do business virtually — with more virtual meetings, electronic applications, digital policy deliveries and e-signatures. Doing business in-person has historically been a key component to the annuity industry, but, with the gained experience in selling virtually, we now have more options to support customers moving forward. Essentially, these practices bolster access and flexibility for clients when they need it. Virtual meetings become a resource as needed, and e-signatures can increase efficiency. So now, if some clients prefer the convenience of meeting remotely and doing business electronically, advisors have polished a new way of doing business, that can help them better support some clients in the future. The tools have already been created, stress-tested and put into practice.

Looking ahead, it is likely that low interest rates will persist for quite some time, regardless of the new incoming administration; albeit, there may be a shift back to fixed-index annuities in January after the administration is sworn in. Ultimately, the world economy, and the United States’ specifically, will need to recover, and it may be a slow process. This last quarter has shown a tentative return to normalcy for annuity sales, but the industry needs to be prepared for continued uncertainty so advisors can prepare clients for it, too. Moving into the new year, advisors should assume that clients will be looking for ways to increase their yields and minimize their risk, and carriers will look for ways to meet their needs.

Remember, annuity clients, especially those of retirement age, save and invest money for certainty. This is a prominent reason people consider annuities, and often how advisors position them. Advisors should remember that while 2020 may have seen a decline in fixed-index annuities, there will always be a place for fixed annuities, no matter the interest rates. For clients, these annuities guarantee their principal, rate of return and a lifetime income — critical for older investors. So as we look to what’s next, remember that during periods of uncertainty like these, clients place the most value in certainty. It is the responsibility of advisors to help them find that.