Sales of variable annuities are expected to drop by 10 percent through 2018 before leveling off in 2019. The decline in variable annuity sales is attributable almost entirely to the Department of Labor fiduciary rule, according to a Cerulli Associates report.
The decline and eventual leveling off will occur as insurance companies and distributors adapt to new Department of Labor conflict of interest rules, Cerulli said.
The Cerulli report, however, also took insurers to task for not doing more to develop fee-based annuity products instead of waiting for regulators to force the industry’s hand.
“Adoption of the fee-based model has been mostly overlooked by the industry,” Donnie Ethier, associate director at Cerulli, said in a news release.
Variable annuity sales are trending toward a drop of more than 20 percent in 2016 compared with 2015, Cerulli said in the report titled “U.S. Annuities and Insurance 2016: Adapting to the Fiduciary Reality.”
In the first nine months of 2016, variable annuity sales dropped 22 percent to $79.4 billion compared with the year ago period, according to LIMRA Secure Retirement Institute’s third quarter U.S. Individual Annuity Sales Survey.
Sales of fixed indexed annuities have fared much better. They rose 22 percent to $46.9 billion in the first three quarters of 2016 compared with the year-ago period, LIMRA also reported.
Insurers Tiptoe into Fee-Based Products
Under the DOL rule, which raises standards for financial advice into retirement accounts and imposes a “best interest” threshold, insurers have tiptoed into the fee-based world to complement commission-based annuity product suites.
DOL requirements, the first of which kick in in April, don’t ban commission-based sales, but many advisors say the rule makes their job more difficult.
This week, Pacific Life launched a fee-based variable annuity branded as Pacific Odyssey to be sold through broker/dealer LPL Financial.
Pacific Odyssey will be distributed through LPL’s asset and wealth management platforms.
Dennis R. Glass, president and CEO of Lincoln Financial Group, in a November conference call with analysts, said there is a “big distribution growth opportunity” waiting for advisors since fee-based annuities still represent such a small portion of industry sales.
If offered the proper fee-based structures, more advisors would be more willing to participate in fee-based annuity sales, Glass said.
Building a Better VA
Cerulli said that in the past 10 years, only a handful of insurers had made even “halfhearted attempts” at developing fee-based variable annuities.
Even with new pressure from the DOL, not all insurance companies are sold on the fee-based model.
“Some insurers feel confident they can sell through commission, but for some things might change a little,” variable annuity expert Steven McDonnell, founder of Soleares Research, told InsuranceNewsNet.
Insurers developing fee-based products or sticking with commission-based annuities represent a “mixed bag,” he said.
Variable annuities with high upfront commissions are likely to be pruned from broker/dealer shelves as insurers make way for fee-based options and where compensation is paid on an ongoing basis instead of a one-time upfront commission, he added.
Whether insurers choose to develop fee-based variable annuities or not, there’s room for innovation among variable annuity companies to make their products more attractive to advisors to sell, Cerulli said.
Spending more time training advisors on the features and benefits of the products, positioning products with how advisors do business and offering more investment flexibility with in a variable annuity would help too, Cerulli added.
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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