How 2022 Changed Annuities – And How We Should Respond
It’s the beginning of a new year filled with new resolutions and future commitments. Reflection becomes a part of the process for creating those resolutions and expectations for the next 12 months. This past year has been one to remember in the annuity industry – for good and bad. In fact, 2022 will likely go down as a year that shapes the retirement industry for years to come.
With the unprecedented rise in interest rates during the summer of 2022, our industry saw incredible growth. Last year will likely be the largest annuity year in decades. Advisors that never wrote annuities saw the value in the product. Clients felt the pain of market volatilities from both the fixed and equities markets, and they sought stability in their savings and retirement portfolios.
Taking the bad with the good
Overall, there was greater awareness of the benefits annuities offer for Americans in retirement portfolios. Advisors listened to education and product manufacturers about how taking longevity off the table benefited the overall probability of success in retirement income.
The downside to all this attention and unprecedented growth was that the industry, for all its previous education, was largely unprepared for the onslaught of sales. Some carriers raised interest rates and index crediting rates to provide more consumer value early and were burned by the pent-up demand for fixed and indexed annuities. Service level standards were pierced by weeks due to the volume of business. The result was missed expectations, frustration and advisor pain due to the loss in confidence from their clients.
On the flip side, our industry responded – it didn’t react. Carriers have been hiring call center employees, new business professionals, trainers and key staff. The good news is that several carriers are staffed for growth equal to two to three times their 2020 and 2021 sales results. That’s great news for our industry and shows the confidence the industry has in the value of our products, the need of the American consumer, and the momentum that exists for our products. It truly is a great time to be in the industry and help consumers take a multiplying risk, longevity, off the table by providing greater client value than alternative safe return products.
A story that I heard towards the end of the year made me think about the future – the next year and where we go from here. A national sales manager of a large insurance carrier and I were talking at a meeting. He said he was at their home office during the deluge of business with this particular carrier. He ran into the head of operations at the company cafeteria. The sales manager asked the operations leader how his day was going.
He responded this way: I’m OK. Today is a good day. Everyone came to work today.
I reflected on the strain that our operations teams have felt over the last seven months of the year. This conversation reminded me how personal business is today. Did our advisors properly handle the delays, or did they convey their frustrations to team members at our firm and then the carrier? What was it really like to come into work and always be behind? And then get further behind because help wasn’t coming in immediately? How did operations leaders keep morale up with the remaining team? At the end of the day, the economic conditions affected every person in our industry down to the person scanning in new business, contracting new advisors and scrubbing applications.
Thinking of how personal our business should be, I begin to ask myself:
- How do we impact individuals from the sales perspective?
- Will a short-term multi-year annuity make a significant difference in 2023?
- What caused us to veer off the path towards transactions versus solutions?
- Why do we look at long-term products for short-term needs, and is that the best approach?
All these questions should be answered in 2023 by the way our industry responds to the current state of the industry, our clients’ needs and the long-term horizon for most Americans.
We will impact most Americans not by the difference in basis points on short-term products but rather positioning the product that matches the need.
For several years, the industry has been shaped by a focus on accumulation. It’s time to put purpose over performance.
Now, that is not to say that rate, performance and product are not important. They have been important, are important today, and will always be important. But we need to focus on the purpose of the dollars. If the dollars are meant to fund retirement, we need to match the product with the purpose. We can’t have the performance dictate the solution just because the three-year rate is basis points above a five-year product. Planning needs to be in vogue, built on purpose, not performance.
I completely see the reasons why advisors look for short-term products in today’s marketplace. With a flat or inverted yield curve, it’s easy to make the argument that the client benefits from a higher rate in the short term. But unless you can tell me exactly what interest rates are going to do every day for the next 30 years, I’m not comfortable saying a short-term instrument is best for the majority of situations. My guess is that more leverage, higher guarantees, and more security can be produced by matching income needs with riders, single premium annuities and deferred annuities in many of those shorter-term sales.
Our business models have to be evaluated. Many models favor assets under management or the use of renewing products over and over. Replacement documents compare products without consideration of need…only suitability. And best interest documents sent to the carrier explain the need and value of the solution. Shouldn’t the client see those decisions in plain text as well?
We have study after study showing the benefits of the leverage provided by income and how much it improves the probability of success. We can’t allow our business models to dictate product selection when there is solid proof that the earlier protected income is placed, the higher the success changes in percentages for many Americans. But time and time again, I hear people tell our sales team that annuities are not in their model. If you take that stance, you need to take the stance that losing clients and running their funds to zero will be part of your model.
All of these issues – little by little – have impacted the industry over the past five to 10 years. I would argue that we have had as much negative impact on the annuity industry as the low interest-rate environment. I’m looking forward to 2023 not because of the current level of interest rates or the market volatility favors the annuity industry but rather because the industry needs to recommit to what it does best. Income planning and protecting retirement income is what we do, and we do it really well. Americans need the industry more than ever. Let’s make sure we are there for them and what matters most to them – lifetime income.