Insurers rethink fixed-annuity businesses

A one-two punch of tougher annuity regulations and low interest rates will continue to force insurers to rethink their fixed-annuity operations — and push some out of the market altogether — experts predict. Transamerica Corp., part of Dutch insurer AEGON NV, on Oct. 6 said that it will cease sales of fixed annuities through insurance brokers Jan. 1. The insurer cited a “persistently low interest rate environment” and “increasing regulatory challenges in the fixed-annuity marketplace.” Distributors in the bank and broker-dealer channels won't be affected, Transamerica spokeswoman Cindy Nodorft said. Transamerica's decision to shut down fixed-annuity sales in the insurance brokerage distribution channel, which accounted for about 40% of sales industrywide in the second quarter, is only the latest in a series of moves by insurers to close or pull back on their fixed-annuity operations. In July, Dearborn National told distributors that it would permanently leave the fixed-annuity and fixed-indexed-annuity markets in all channels. Last year, a number of insurers, including Aviva USA, deliberately slowed fixed-indexed-annuity sales despite it being another banner year; 2009 sales were $105 billion, down a slight 2% from the record high in 2008, according to Beacon Research Publications Inc. Insurers were worried, however, that too much new fixed-annuity business would put on strain on their much-needed capital. Industry experts said that insurers are seeing higher compliance costs because of more regulatory scrutiny. At the same time, the low-interest-rate environment means the fixed-annuity business isn't very profitable. As a result, smaller players are likely to abandon the business, they said. “It's a tough year to be in the annuity business,” said Chris Soniat, executive director at Brokerage Resources of America Inc., an independent marketing organization. “We have concerns that we won't have an attractive product to sell.” Mr. Soniat added that while Transamerica doesn't account for many of his firm's fixed-annuity sales, “it's still one less place to go.” On the regulatory front, insurers face more-stringent requirements from the National Association of Insurance Commissioners. The group's annuity suitability model rule was amended in the spring, and as a result, insurers have to make sure that all annuity transactions are appropriate for customers, and establish a system to supervise annuity recommendations. Insurers can work through broker-dealers and banks to fulfill the rule's suitability requirement. But the rule would likely require insurers to take on greater oversight of insurance brokers and producers associated with insurance marketing organizations, as they don't have the same supervisory infrastructure as their broker-dealer and bank channel counterparts, said Larry Niland, senior regulatory advisor with LIMRA, a life insurance marketing and research group. “I understand completely why [Transamerica] would turn the switch off for independent producers in the fixed channel but continue with broker-dealers and banks,” he said. In recent weeks, Mr. Niland has met with executives at about 30 insurers to discuss how the companies will approach complying with the NAIC's rules, which will roll out state-by-state. So far, there isn't any consensus on how to contend with the regulation, which has already been adopted in Wisconsin and will take effect in Iowa in January. Applying suitability initiatives for independent agents is no easy feat for insurers. Allianz Life Insurance Company of North America requires its marketing organizations to have field suitability officers, an initiative that Eric Thomes, senior vice president of sales, recalls as being “cumbersome at first.” “It was a change in how independent agents do their business,” he said. “There was a little opposition and some questions on the intent, but agent satisfaction went up.” Insurers who merely spot-check annuity suitability might have some growing pains in complying with the rule, Mr. Thomes said. The economic climate has also had a hand in companies' rethinking their fixed-annuity business. Today's narrower spreads between corporate bonds and Treasury rates means that it is less profitable for insurers to write fixed-annuity business. “Unfortunately, the new model regulations are going into effect at the very time that interest rate spreads are narrowing, so in essence, costs are going up at the same time profit margins are dropping,” said Judith Alexander, director of sales and marketing at Beacon Research. Second-quarter fixed-annuity sales came in at $19.4 billion, down 30% from the year-earlier period. Still, results were up 18% from the first quarter, reflecting widening spreads in the second quarter. Insurers may even return to the practice of making their products unattractive by offering low crediting rates on fixed annuities or by reducing the compensation to the broker, said W. Andrew Unkefer, president and chief executive of Unkefer & Associates Inc., an insurance-marketing organization. Others dismissed reading too much into Transamerica's rejiggering of its fixed-annuity operation. “We're in a very low-interest-rate market, but it's always been cyclical,” said Kim O'Brien, executive director of the National Association for Fixed Annuities. “We're not seeing what Transamerica did as any indication of a trend among our members.” E-mail Darla Mercado at dmercado@investmentnews.com.