You can hardly blame us for celebrating. On the heels of the Dateline expose and Rule 151A, Fixed annuity carriers and producers were hungry for some vindication. Following September’s market meltdown, we got it. Fixed annuity sales increased 46 percent to $28.5 billion in the third quarter of 2008 compared to the third quarter of 2007, according to LIMRA.
Fixed annuities proved their worth during the market downturn and consumers bought in big-time, trusting us with what was left of their retirement dreams. But while we were celebrating, something else was happening below the surface — and the implications are just starting to emerge now.
We’re learning now that many carriers lacked the capacity for such volume and are now pulling back (or altogether shutting down) production, leaving some producers with an unprecedented problem: they have applications and money in-hand, but no one who wants to accept it. Why would a carrier actually refuse premium? It’s actually due to the confluence of two factors resulting from the financial crisis.
1. Perfect Financial Storm. When you sell an annuity and your client sends the check to the carrier, that money doesn’t just sit in an account somewhere. It actually gets chopped up and utilized in three different areas:
Insurers cannot simply take on business just because it’s there — not if they don’t want to end up like the mortgage industry. When they issue an annuity contract, they have certain obligations they must live up to. Record-low bond yields and high costs for options are eating away at profits and squeezing insurers extremely tight in their guarantees, given the massive amounts of business coming at them.
Insurers have also been victims of the credit crunch. Basically, looking at our chopped-up dollar above, every $1.00 in premium that comes in equates to something like $1.10 going out because the carrier has to pay commissions and other overhead, plus the cost of buying options, all while keeping enough in reserves to stay financially solvent. Many carriers rely on credit to come up with that extra capital — something that has been scarce in recent months.
2. Dramatic Spike in Demand. Add a huge influx of new contracts to the economic factors above, and many carriers determined they simply could not take on business at the pace the market was demanding. Aviva, for example, was more than $1 billion ahead of its 2009 production goals — in March!
This seems counter-intuitive on the surface. Why wouldn’t surpassing your production goals be a good thing? Think of it this way: In our $1.00 in, $1.10 out example above, Aviva’s $1 billion in extra premium translates to $100 million in additional capital they have to raise. Many carriers simply could not write that much business and remain solvent and profitable in the long-term.
All of this explains the following actions we’ve seen some carriers taking:
Note: None of this actions necessarily mean a carrier is in financial trouble. They are likely precautionary measures to prevent trouble down the road.
The annuity environment is decidedly different today than it was just a few months ago. As a producer, you’re accustomed to carriers aggressively recruiting you to distribute their products. Now companies are telling you they can’t accept your business. Agents find this bewildering at best. At worst, it’s insulting. But it’s important to remember that the carriers are in the extremely difficult position of choosing between keeping their products available in a market where there is high demand and limiting growth to a level that is fiscally prudent for the long-term. So don’t write a carrier off forever simply because you can’t write business with them now.
There’s still high demand for annuities, just fewer agents and carriers with the ability to meet these peoples’ needs. That’s why it’s more important than ever to have an IMO in your corner that has established relationships with a number of strong carriers — so you have options.
Senior Market Sales has been in business more than 25 years and we work with over a dozen annuity carriers. Call 1-877-645-4939 and one of our marketers will review your situation and find the carrier and product lineup that makes the most sense for you and your clients.