Salesof annuities are down and LIMRA thinks it's due to the DOLfiduciary rule. Here's why.

The implementation of the DOL fiduciary rule's  impartial conductstandards last June is clearly weighing on the annuity market, according to the LIMRA SecureRetirement Institute.

Total sales of variable annuities in 2017 dropped below the $100billion mark for the first time in 20 years, according to LIMRA.Variable annuity sales were $95.6 billion in 2017. In 2011 theytopped $158 billion.

Sales for the entire annuity market were $203.5 billion lastyear, an 8 percent decrease from 2016. Total sales topped $265billion in 2008.

Under the fiduciary rule's impartial conduct standards, brokersand advisors are required to recommend products in the bestinterest of investors, and can only charge reasonable compensationon investments sold to IRAs and other qualified retirementaccounts.

The entire fiduciary rule, which has been delayed to July of2019, requires extensive new contractual requirements on the salesof variable annuities and fixed indexed annuities.

Impact of rule's impartial conduct standards

While the full extent of the warranty and disclosurerequirements under the rule have been delayed, the impartialconduct standards have been enough to discourage annuityrecommendations to qualified retirement accounts. Evidence of that is foundin the dramatic slump in sales to IRAs, says LIMRA.

“The implementation of the DOL fiduciary rule in 2017 had asignificant impact on the individual annuity market,” said ToddGiesing, director of annuity research at LIMRA Secure RetirementInstitute. “The impact to IRA annuity sales was much morepronounced than nonqualified annuity sales.”

For all of the annuity market, $98 billion worth of product wassold through IRAs in 2017. Another $22.5 billion was sold throughdefined contribution plans—mostly 403(b) plans.

The rest were purchased with nonqualified assets–sales that donot fall under the fiduciary rule. Nonqualified assetspurchased $83 billion of annuities in 2017.

Variable annuities

Sales of variable annuities to IRAs dropped 16 percent, or $8.5billion, last year. Sales to nonqualified assets increased by 4percent.

“We typically haven't seen that disparity in the past,” Mr.Giesing told BenefitsPRO, referring to the drop in sales to IRAs,and increase by nonqualified assets. “The difference in the IRAmarket is notable.”

In the third quarter, sales of variable annuities to IRAsdropped 24 percent, while sales to nonqualified assets fell only 3percent. “The third quarter was telling, and a reaction to the June9 implementation of the impartial conduct standards,” saidGiesing.

Sales of variable annuities saw steady declines prior toimplementation of the fiduciary rule. Declines have beenexperienced every year since 2011, when VA sales peaked during thelast decade

“The variable annuity market has been faced with a lot of headwinds,” explained Giesing. “In 2011, manufacturers were forced tode-risk, or reduce the guaranteed living benefits in the productsto manage tail risk.”

The declining interest rate environment forced insurers toreduce benefits, said Giesing. Over $1 trillion of assets are heldin variable annuities, and two-thirds of the products offer somelevel of guaranteed benefit.

“Insurers take on a substantial amount of risk with guaranteedlifetime income streams. That risk has to be carefully managed,” headded.

The fiduciary rule exacerbated challenges posed by low interestrates. Sales of variable annuities dropped precipitously in 2016.In April of that year, the Obama administration released itsfinalized fiduciary rule. Sales of VAs have dropped 28 percentsince the end of 2015.

Fixed indexed annuities

Fixed indexed annuities have also been impacted by the rule.Sales of FIAs to IRAs dropped 9 percent in 2017, while FIAspurchased with nonqualified assets increased 2 percent.

A bright spot in the overall annuity market was seen withstructured annuities, a relatively new product line, which saw $9.2billion in sales last year, up 25 percent from 2016.

Structured annuities

Structured annuities were first introduced in 2010, and are onlyoffered by a handful of insurers.

Giesing describes the products as a middle ground betweentraditional variable annuities and fixed indexed annuities.

Structured products have an upside cap, similar to FIAs, butrisk is shared between the investor and the insurer through floorsthat guarantee returns in down markets. With variable annuities,investors bear all of the downside risk.

This is the first year that structured products have been in thespotlight, said Giesing. LIMRA did not break out the split instructured annuity sales between qualified and nonqualifiedassets.

More insurers can be expected to develop structured products,given their considerable growth in a short timeframe. They carryless risk than products that offer guaranteed income, and aretypically sold to younger investors relative to variable and fixedindexed annuities.

“They offer a nice compliment to what has traditionally beenavailable in the market. But we don't expect their growth willultimately overtake the variable market,” said Giesing.

Total annuity sales were flat in the fourth quarter of 2017,after six quarters of decline. LIMRA is expecting the annuitymarket to stabilize in 2018—Giesing says flat to marginal growth ofup to 4 percent is likely.

Insurance market facing regulatory uncertainty

The insurance market is still facing a cloud of regulatoryuncertainty. The Labor Department continues to work on revising thefiduciary rule. The Securities and Exchange Commission is at workcrafting a uniform fiduciary standard, as are insurance regulators.And the list of states that are proposing fiduciary standardscontinues to grow.

That potential patchwork of regulations is a “huge” concern forthe insurance industry, noted Giesing.

“It's not feasible to operate, build and distribute productsnationwide under the patchwork of emerging regulations,” he said.“A centralized fiduciary rule would be beneficial for our members.Clarity would be a good thing.”