AM Best FIA Report

Strong Tailwinds for Fixed Indexed Annuities

 Study focuses on product design, risk profile,
investment spreads and industry concerns

OLDWICK, N.J., October 6, 2015—Robust sales, expansion of living benefit riders and flexibility in product design have resulted in strong tailwinds for fixed indexed annuities (FIA) writers, according to a special report by A.M. Best.

The Best Special Report, titled, “A.M. Best Releases Fixed Indexed Annuities Survey Results,” explores the findings of a survey conducted of the top 10 FIA writers, which represents roughly 70% of the overall FIA
market. The A.M. Best survey focused on product design, risk profile,
investment spreads and industry concerns. Product design features included
a review of crediting strategies, living benefit designs and surrender
charges. Risk profile features including questions on guaranteed minimum 
interest rates, indexes options, hedging strategies and emerging areas of
risk. Additional questions were asked regarding sales, distribution systems
and investment strategies.

The report states that FIAs with living benefits are likely to remain a
leading product in the marketplace for the foreseeable future. Those
insurers who currently offer FIAs like the risk/reward profile of the
product, which allows them to more efficiently manage equity market risk
through annual changes to caps and participation rates, in addition to
re-pricing crediting rates based on changing portfolio yields. This risk 
profile is generally consistent with A.M. Best’s product creditworthiness
scale, which classifies basic FIAs at the lowest end of high risk products
within in its product risk continuum.

Some of the highlights from the survey include:

Respondents indicated that the average sales with living benefit
guarantees has remained at 70% in recent years; however, increasingly some
carriers are selling a much higher percentages of “with guarantee” products
and 30% of companies are selling the with guarantee version at 81%-100% of
current year sales;

80% of companies do not offer a bail-out provision. The lack of a
bailout feature increases the persistency of the book under stable interest
and equity market conditions as there is no policyholder put option

  • Surrender charge adequacy for an insurer’s existing book was viewed
as strong, with 20% of the companies reporting surrender charges within a
range of 5.1%-7.5 %, 50% reporting surrender charges between 7.6% and 10%
and another 30% reporting surrender charges in excess of 10%. The dominant
 market leader had lower surrender charges with newer market entrants in the
middle range;
  • In terms of current spreads on new business issued, there was a wide 
variation in reported spreads, ranging from a low of 150 basis points to a
high of 350 basis points. Three out of a total nine respondents (one
company did not provide the data) reported spreads in the 251-300 basis
point range in 2011-2014. An additional two companies reported relatively
low spreads of less than 150 basis points, with one company reporting
spreads above 350 basis points and two companies reporting current spreads
of 151- 200 basis points; and
  • 80% of companies do not offer a bail-out provision. The lack of a 
bailout feature increases the persistency of the book under stable interest
and equity market conditions as there is no policyholder put option.
 However, most companies do offer a limited bail-out provision for medical 
purposes, such as long-term care and critical illness. In terms of a
possible persistency drag on the book, if a company is selling at high
issue ages (70 plus), a bail-out feature for medical issues could dampen
persistency somewhat.

The FIA market is a large and growing segment within the U.S. annuity
market, with increasing levels of product complexity as companies continue
to innovate in response to rising competition. This creates the potential
for an “arms” race within the FIA market similar to what occurred a decade
ago with rapid increases in variable annuity sales. As product complexity 
increases, the risk profile of an FIA is likely to increase. At its core,
the FIA market with guarantees is a hybrid product, offering blended 
returns based on the underlying index composition and its crediting 

For the full copy of this special report, please visit