Thousands of baby boomers are turning 65 every day, and company pension plans are more and more a thing of the past. Conditions should be ripe for a thriving annuity market. However, annuity sales were 11% lower last year, according to the LIMRA Secure Retirement Institute. Research leader Sam Friedman from the Deloitte Center discusses the situation and how it might change based on information gathered from a recent Deloitte survey.
Friedman notes that current low interest rates are part of a macroeconomic challenge and that interest rates will eventually go up. But there are other factors that insurance companies must face if they want to broaden their market base and keep sales moving forward.
In studying the situation, Deloitte looked at 1,500 individuals through an online survey, half of whom were annuity buyers. The non-buyers were further broken into those who had never considered annuities and those who had thought about it but didn’t buy. According to Friedman, the survey results suggested ways for insurance companies to “rethink and maybe reinvent the annuities market.”
One option is to focus on current annuity buyers. The survey found that four out of ten people who had bought an annuity had bought a second one. And for three out of four of this group, the newest purchase was an additional annuity, not a replacement one. This underscores the importance of the existing client base as a source for resales.
The survey also looked at increasing the size of the market base, “growing the pie.” In order to achieve this, Friedman says, the survey looked at three possibilities. One was repurposing the products—looking at some uses for an annuity besides retirement in order to reach a younger prospect base. Another suggestion was for the insurance industry to be proactive in providing information about annuities so as to cope with widespread lack of understanding of how annuities work, even among people who own annuities.
Another suggestion, Friedman says, was to “leverage the workplace channel.” Recent changes in IRS rules will help to facilitate the use of annuities in defined contribution plans. It should be easier for annuity companies to reach consumers through the workplace approach. For one thing, the IRS has made it easier to include an annuity as a distribution option in defined contribution plans. The IRS has also “set the stage for the sale of deferred compensation annuities.” Another change has been for companies to transfer their defined benefit plans to annuity companies.
Another thing that can help to boost the sale of annuities is to give individuals the option of partially annuitizing retirement funds. Most companies have an “all or nothing” approach to dealing with a retirement fund. Friedman says that some people are concerned about putting all their eggs in one basket. The survey found that people were more comfortable if they had the option of holding back some funds for other investments. And, in fact, having an option like that made people more likely to annuitize the entire amount in their retirement funds.
Summarizing, Friedman says that the most likely annuity buyer right now is someone who already has an annuity. However, if companies can reach out to and develop a younger market, they are much more likely to have annuity buyers down the road. “Starter” annuities would be a good idea.
Sam Friedman is the Insurance research leader at the Deloitte Center for Financial Services, putting his journalistic skills and three decades of industry experience to good use analyzing the latest trends and identifying the major challenges confronting the property-casualty and life insurance industries. He joined Deloitte in October 2010 after 29 years at National Underwriter P&C, where he served as editor-in chief. Retirement News Today is a featured network of the Sequence Media Group.