The Department of Labor's fiduciary rule is shaking things up in the variable annuity market.
While the regulation has accelerated the
downward trend in overall variable annuity sales for the past several quarters, only recently has the rule's impact extended to the market share of different VA products.
The fiduciary rule, which raises investment-advice standards in retirement accounts, affects investment products sold in qualified accounts, such as individual retirement accounts, rather than non-qualified accounts.
Just over 60% of VAs were sold into the qualified market somewhat consistently since the fiduciary rule was finalized in April 2016. That figure started to decline in the most recent quarter for the first time.
According to data from Limra, an insurance industry group, the share of variable annuities sold into IRA contracts dipped to 58% in the second quarter, a decline of five percentage points year-over-year.
"We saw some significant drops in the IRA business in 2016. But this is the first time we've really seen the market share start to move," Todd Giesing, the director of annuity research at the Limra Secure Retirement Institute, said.
There's been a "
steady decline" in VA sales, among both qualified and non-qualified products, since April 2015, when the fiduciary rule was first proposed, Mr. Giesing said. This year, though, IRA business is down while non-qualified business is up. Non-qualified VA sales were up 5% in the second quarter, according to Limra.
"This is likely a fiduciary impact," Mr. Giesing said. "The target with the fiduciary rule is on the IRA market."
The fiduciary rule's first phase of implementation started June 9. The second and final phase is set to begin Jan. 1, but the Trump administration is
seeking an 18-month delay.
Industry observers expected this sort of dynamic to play out, but its real-world impact is now becoming apparent.
Variable annuities in IRAs have
historically been sold on commission, a type of compensation arrangement that requires broker-dealers and other distributors to
jump through more regulatory hoops and take on greater legal risk under the fiduciary rule. As a result, distributors have shied away from commission sales.
"In my opinion, I would expect there would be continued pressures on IRA variable annuity sales moving forward," Mr. Giesing said.
Insurers have
tried to pivot by developing fee-based, or "advisory," annuities that come with many of the same features available on commission IRA products. These types of products carry a
lesser regulatory burden than commission products. But these products only represent roughly 2% of the total VA market.
Total VA sales were $24.7 billion in the second quarter, down 8% year-over-year, according to Limra. It was the 14th consecutive quarter of year-over-year declines, with the wirehouse and bank distribution channels seeing the biggest drops in Q2, with sales in each down roughly 20%.
Limra estimates sales will drop 10%-15% in 2017 to less than $100 billion, the lowest level since 1998.