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TMCNet:  Best's Special Report: Regulatory Uncertainty and Equity Market Volatility Lead to Shifting Trends in Individual Annuity Products

[August 10, 2017]

Best's Special Report: Regulatory Uncertainty and Equity Market Volatility Lead to Shifting Trends in Individual Annuity Products

Individual annuity direct premiums written (DPW) declined by 4.9% in 2016 to $202.7 billion after tepid increases each year from 2012 to 2014, according to a new A.M. Best special report. The muted annual growth rate, which has averaged 0.7% over the last four years, is a reflection of the pressures faced by annuity writers: increased longevity, the imminent retirement of baby boomers, persistently low interest rates, volatility in the financial markets and the DOL fiduciary rule.

The Best's Special Report, "Regulatory Uncertainty, Equity Market Volatility Lead to Shifting Trends in Individual Annuity Products," states that the annuity industry has a growing need for products that deliver guaranteed income and new market segments to engage an aging population. A.M. Best believes that as insurers continue to adapt to the landscape, product innovation and strategic decisions on product focus remain imperative if insurers are to remain competitive.

According to the report, annuities comprise a sizeable portion of the industry's business production, with individual annuities fluctuating at around 30% of the industry's net premium written (NPW) and 45% of reserves over the last 10 years (2007-2016). Driven in part by the emerging pension risk transfer market, group annuities have contributed an additional 19% in NPW and 11% in reserves. Individual annuities also have consistently contributed favorable pre-tax operating gains, accounting for 30%-45% of operating gains in each of the last eight years except or 2011.

Variable annuities (VA) remain the largest contributor to DPW, at 36.2%, but fluctuating growth rates have decreased their contribution since 2012. The top 10 individual VA writers accounted for more than three-quarters of the market (77%) in 2016. The indexed annuity market is similarly concentrated, as the top 10 writers account for roughly three-quarters of the industry's premium. The traditional fixed deferred annuity space remains the most competitive for insurers, despite its accounting for approximately one quarter of individual annuity premium, as the number of insurers writing more than $50 million of DPW in 2016 was nearly double the number of writers in the VA and indexed annuity markets.

A.M. Best has revised its outlook for the life/annuity industry to negative from stable. The revision is reflective of an industry that does not look vulnerable to any single shock, but is susceptible to a multitude of pressures. Although many of the early post-election signs in the United States appear favorable for life insurers, A.M. Best believes it may be a little too early to lock in this enthusiasm, given the likelihood of global economic volatility, changing regulatory oversight, evolving capital requirements, increased investment risk and other industry stressors. However, the report notes that those companies with greater investments in technology and more technical expertise in product development likely can conduct better cluster analysis to help identify commonalities in customer characteristics and behavior, which would help to minimize lapse ratios and better predict policyholder behavior.

To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=264493.

A.M. Best is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

Copyright © 2017 by A.M. Best Rating Services, Inc. and/or its subsidiaries. ALL RIGHTS RESERVED.


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