[October 05, 2015] |
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A.M. Best Special Report: Fixed Indexed Annuities Survey Results Released
Robust sales, expansion of living benefit riders and flexibility in
product design have resulted in strong tailwinds for fixed indexed
annuities (FIA) writers, according to a special report by A.M. Best.
The Best Special Report, titled, "A.M. Best Releases Fixed
Indexed Annuities Survey Results," explores the findings of a survey
conducted of the top 10 FIA writers, which represents roughly 70% of the
overall FIA market. The A.M. Best survey focused on product design, risk
profile, investment spreads and industry concerns. Product design
features included a review of crediting strategies, living benefit
designs and surrender charges. Risk profile features including questions
on guaranteed minimum interest rates, indexes options, hedging
strategies and emerging areas of risk. Additional questions were asked
regarding sales, distribution systems and investment strategies.
The report states that FIAs with living benefits are likely to remain a
leading product in the marketplace for the foreseeable future. Those
insurers who currently offer FIAs like the risk/reward profile of the
product, which allows them to more efficiently manage equity market risk
through annual changes to caps and participation rates, in addition to
re-pricing crediting rates based on changing portfolio yields. This risk
profile is generally consistent with A.M. Best's product
creditworthiness scale, which classifies basic FIAs at the lowest end of
high risk products within in its product risk continuum.
Some of the highlights from the survey include:
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Respondents indicated that the average sales with living benefit
guarantees has remained at 70% in recent years; however, increasingly
some carriers are selling a much higher percentages of "with
guarantee" prodcts and 30% of companies are selling the with
guarantee version at 81%-100% of current year sales;
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Surrender charge adequacy for an insurer's existing book was viewed as
strong, with 20% of the companies reporting surrender charges within a
range of 5.1%-7.5 %, 50% reporting surrender charges between 7.6% and
10% and another 30% reporting surrender charges in excess of 10%. The
dominant market leader had lower surrender charges with newer market
entrants in the middle range;
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In terms of current spreads on new business issued, there was a wide
variation in reported spreads, ranging from a low of 150 basis points
to a high of 350 basis points. Three out of a total nine respondents
(one company did not provide the data) reported spreads in the 251-300
basis point range in 2011-2014. An additional two companies reported
relatively low spreads of less than 150 basis points, with one company
reporting spreads above 350 basis points and two companies reporting
current spreads of 151- 200 basis points; and
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80 % of companies do not offer a bail-out provision. The lack of a
bailout feature increases the persistency of the book under stable
interest and equity market conditions as there is no policyholder put
option. However, most companies do offer a limited bail-out provision
for medical purposes, such as long-term care and critical illness. In
terms of a possible persistency drag on the book, if a company is
selling at high issue ages (70 plus), a bail-out feature for medical
issues could dampen persistency somewhat.
The FIA market is a large and growing segment within the U.S. annuity
market, with increasing levels of product complexity as companies
continue to innovate in response to rising competition. This creates the
potential for an "arms" race within the FIA market similar to what
occurred a decade ago with rapid increases in variable annuity sales. As
product complexity increases, the risk profile of an FIA is likely to
increase. At its core, the FIA market with guarantees is a hybrid
product, offering blended returns based on the underlying index
composition and its crediting methodology.
For the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=242120.
A.M. Best Company is the world's oldest and most authoritative
insurance rating and information source. For more information, visit www.ambest.com.
Copyright © 2015 by A.M. Best Company, Inc. ALL RIGHTS
RESERVED.
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