Taking the Bird in the Hand
Rising interest rates and market volatility create a perfect storm for certain types of annuities. Higher interest rates mean insurers can offer more attractive annuity benefits. In addition, market volatility drives investors away from the stock market and toward products with guaranteed returns. In times of economic uncertainty, consumers start to prefer products with better downside protection, even at the cost of more limited upside potential. Likewise, the guaranteed income annuities provide offers peace of mind for those near retirement—a valuable feature in a fickle market.
Fixed annuities in particular are attractive in a volatile market. They offer less risk and more predictability than variable annuities. We have seen this reflected in our own data. In March through June, the application volume of fixed annuities was up 18% compared to last year. Variable annuities, conversely, dropped more than 11%.
We reported last month
that our data showed a rapid increase in demand for fixed annuities that started as early as March 20. This was four days after the first interest rate increase. After Wednesday’s rate hike—and more likely in coming months—carriers and advisors can be ready with the products consumers will want.
If a plateau in annuity demand is coming, we can’t see it from here.
So, we know annuity demand will continue. How can the industry prepare?
Carriers, for starters, can add more annuity products to their portfolios to meet the current needs of consumers. Offering a variety of caps, floors, features and investment options can ensure investors find what they need. Advisors, likewise, can be ready to help their clients navigate their options. Advisors can guide their clients to safer investments that still offer some upside potential, such as fixed-index annuities. Some more risk-averse clients may prefer a traditional fixed annuity.