Creating & Preserving Wealth

How Low Can We Go?

Annuity manufacturers are countering a persistent low-interest environment with new products, new market strategy

by Colleen McGarry

Ms. McGarry is an analyst on the Life Insurance and Annuity Monitor teams at competitive intelligence firm Corporate Insight. Visit corporateinsight.com

In December 2008, a few months after the largest government bailout of an insurance company in U.S. history, the Fed dropped the interest rate to the all-time low: 0.25%. Since then, the U.S. has maintained an interest rate of 2.5% or lower, affecting the mindset of Americans looking to invest in retirement income. Annuity products often rely on interest rates as a means for determining pricing, potentially affecting the ultimate payout that annuitants receive. How is the industry dealing with this ongoing low interest rate environment?

Competitive intelligence firm Corporate Insight (CI) tracks the industry on an ongoing basis to understand changes firms make throughout their digital experiences. Since 2006, CI’s Annuity Monitor has tracked the online strategies including the product positioning and marketing tactics of leading annuity issuers. Within the last five years of the low interest rate environment, firms have focused heavily on developing new fixed indexed annuities and variable annuities, catering toward individuals looking for growth and protection in retirement. CI has also seen a major industry push leading to consistency across firm marketing and annuity positioning, framing the products as guaranteed lifetime income and urging retirees and near retirees to purchase them to fill gaps in their current savings.

Fixed Indexed Annuities Dominate the Marketplace

CI’s Annuity Monitor saw its coverage group firms announce 31 fixed indexed annuities (FIAs) between January 2015 and December 2019, the most of any annuity product type. The product type has maintained its steady hold on the industry likely due to the combination of growth and protection they boast for prospects. In the post-recession environment, the retiring community—made up of boomers, the group who took the largest hit during the housing crisis—are looking for the guarantees of fixed income with the potential for return of an investment. During low interest rate periods, FIAs stand to gain higher returns than some of the more traditional fixed income products, while standing to benefit from more attractive caps and floors in a higher interest rate environment.

In 2015, five (26%) of the 19 firms tracked by Annuity Monitor introduced new fixed indexed annuities. At the time, 37% of the coverage group promoted their FIAs on the public site, often focusing on index strategy options and tax deferral benefit details. Of those firms, five provided dedicated fixed indexed annuities overview pages and six provided specific product pages. In the years since, Annuity Monitor has seen a shift in the presentation of product information. CI saw a major trend in 2017 and 2018—when the Fed was steadily increasing interest rates—of firms removing product-specific information from public websites, focusing instead on overall annuity education and promotion. In 2019, Fed Chair Jerome Powell promised to stop raising rates, returning to the lower rates of the previous years and affecting the U.S. financial outlook.

With the 2019 lowering of rates, websites began slowly adding more product-specific information for prospects, focusing on FIAs in particular. In recent months, Annuity Monitor tracked two firms separating fixed indexed annuity information from a more general fixed annuity product explanation. Lincoln Financial Group and Nationwide, two top-20 annuity issuers in 2018, updated the public site promotion of annuities to further clarify the benefits of FIAs. In addition to these broader FIA-focused changes, Transamerica added detailed product information to its Transamerica Secure Retirement Index Annuity page to highlight key product features, exemplifying the return to a positioning strategy focused on the goals of retirement-aged individuals wary of a market downturn.

Variable Annuities Stand to Gain in Low Interest Environments

These perceptions create a sense of urgency around annuities, aiming to get the retiree who is holding out for higher interest rates and better annuity pricing to realize that they are missing out on developing income now...

While not as popular as FIAs, coverage group firms launched 21 variable annuities in the span of the last five years. With a more straightforward concept, variable annuities’ attachment to the stock market benefit more directly from low interest rates. Typically, the New York Stock Exchange reacts positively to lower interest rates, as credit becomes less expensive.

Accordingly, annuity investors looking for greater growth may gravitate toward variable annuities. In turn, these products command the second most important area of interest for Annuity Monitor coverage group firms. In April 2014, most of the leading firms monitored by CI provided detailed product information within their public sites, with 10 (67%) out of 15 offering a variable annuity overview page and 11 (73%) out of 15 providing specific product pages. However, these did not typically highlight as many product details as FIA pages did, with most firms linking to additional resources such as fund reports and prospectuses for further information. Recently, firms are offering more detail on their variable annuity public site pages, focusing attention on performance, with 10 (63%) of the 16 firms covered in 2018 now displaying it on the individual product pages.

Annuity Issuers Target Retirees with a Need to Close Retirement Gaps

Since the introduction of the Alliance for Lifetime Income, the annuity industry has collectively deployed marketing practices using the “lifetime income” phrasing. Such framing of the product takes consumers out of the mindset of purchasing a product for today and shines a light toward the value of taking a step toward retirement security in their later working years. With a retirement savings gap of $28 trillion, U.S. insurers have also taken to highlighting how annuities can bolster existing savings for when traditional retirement plans run out, serving as a safety net for individuals who live beyond their initial savings.

These perceptions create a sense of urgency around annuities, aiming to get the retiree who is holding out for higher interest rates and better annuity pricing to realize that they are missing out on developing income now.

Out of the 17 firms that Annuity Monitor currently tracks, 16 refer to annuities as guaranteed income, protected income or lifetime income somewhere on the product type overview pages, often noting a “steady stream” of payments. Not only has the industry taken to referring to annuities as lifetime income, but the government has supplemented this with its own recognition of the descriptive phrasing. In the recently implemented SECURE Act, a Lifetime Income Disclosure requires reports of what a participant or beneficiary’s monthly income would look like if their total accrued benefits were in an annuity.

New Products and Industry-Wide Marketing Strategies Keep Annuities Top of Mind for Consumers

The increase in product offerings related to growth and the industry-wide focus on protection in retirement help keep the annuity industry from losing steam in a low interest rate environment. Fixed indexed annuity sales soared in 2019, with record numbers contributing to the highest annuity sales levels since the Great Recession. In 2019, interest rates decreased consistently, with no change in sight. These numbers show that with annuity issuers focusing on the right products and highlighting the benefits of owning annuities now, the retirement products may continue to pick up despite the Fed outlook.

In tracking the industry and its positioning over the years, CI’s Annuity Monitor continues to identify and analyze the trends that make leading firms the strongest players in the insurance space. As the industry faces changing interest rates and other economic and regulatory factors, we’ll see how annuity issuers continue to adapt their products and marketing strategies.