Rising Interest Rates and the Annuity Tailwind

A group of people sitting in a large meeting room with a giant upward trending red arrow

As interest rates rose in the first half of 2022, annuity sales followed suit. The insurance carriers who benefit most will be those who adjusted their products early. For everyone else, there’s still time to pivot and take advantage of the annuity tailwind.

Primed for New Heights

The 2020 pandemic forced annuity sales to a low point. The effects dragged on, partly because the pandemic itself lasted longer than expected. Carriers adjusted their products to fit the new normal.

Even with the pandemic continuing, annuity sales were up in 2021 compared to the previous year. Total annuity sales were $254.6 billion, up 16% from 2020, and the third highest recorded in history. As inflation continued to rise in 2021 and the first half of 2022, annuity sales could potentially catch a second wind and rise even higher. Inflation typically leads to higher interest rates—fuel to the fire for sales of certain types of annuities.

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Rising interest rates create an environment in which annuity products like fixed, fixed indexed and multi-year guaranteed annuities thrive. Higher interest rates mean higher returns for the consumer. Carriers can offer annuity products with higher returns as well as focus on products designed to offer downside protection—attractive qualities in a volatile economy. In uncertain market conditions, many investors choose products that offer benefits designed to help. Products with principal protection, tax-deferral benefits and improved growth potential—along with downside protection—are in high demand.

In early 2022, inflation continued to climb. For a time, the jury was out on whether it was transitory or here to stay. Some insurance carriers took a wait and see approach. Carriers could not know for certain if inflation would stick around for long. If inflation was not transitory, the Fed would be late raising interest rates. This move, if and when it happened, would mean big opportunities in the annuity market.

But for a time, many factors remained unknown. How much would the Feds raise rates? What will happen to the market? With the stars potentially aligning, the market was poised for a second surge in annuity demand. Carriers waited in anticipation. Then waited some more.

Delayed Gratification

In March the Fed finally made its move. It hiked interest rates first by a quarter of a percent on March 16. Then, it raised rates once more on May 4 by a full half percent. The March 16 hike was the turning point. Our own data at Insurance Technologies shows that by March 20, you could already see a significant market shift in annuity sales.

Then, on June 15 the Fed rolled out a 0.75 percentage-point rate increase. It was the single largest increase in 28 years. This resulted in an acceleration of annuity sales through the rest of the month.

It was a stout response from the market. But will the strong annuity market last? And do carriers still have time to benefit from it?

Catching the Proverbial Worm

Insurance carriers who were quickest to adapt to the changing market conditions are already a step ahead. How much—if at all—insurers adjusted their annuity products in early 2022 varied greatly. Variation in payout rates among insurers was extremely high leading up to the Fed’s initial interest rates hike. Which means some insurers adjusted their annuity payouts on the leading edge of the trend. Just as many, however, were late to the party.

Here’s the good news: the annuities surge is just getting started. By all appearances, the Fed seems to be ready to continue raising rates. Rate hikes at every Fed meeting through the rest of 2022 is not off the table. So, while some early-bird insurers benefited from taking their new or revised annuity products to market quickly, there is still time to pivot.

Carriers can adjust things like caps and participation rates, and use proprietary indices to tweak their annuity products to fit the economic circumstances. In addition, simply offering a variety of annuities allows the consumer to find their ideal investment. Plus, it allows the carrier to take full advantage of 2022’s annuity tailwind.

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