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Index-Based Annuities Surge: What’s Driving Their Growth?

Author

Keith Golembiewski
Assistant Vice President and Director of Annuity Research
LIMRA and LOMA
KGolembiewski@limra.com

October 2024

The annuity landscape has undergone a remarkable transformation in recent years, especially coming out of the pandemic. Index-based annuities, including fixed index annuities (FIAs) and registered index-linked annuities (RILAs), have emerged as the go-to products for the industry. Once considered niche offerings, these innovative annuities have captured the attention of financial professionals, retirees and pre-retirees alike, who are increasingly drawn to their ability to provide downside protection while still offering the potential for market-linked growth. As economic volatility and longevity risks continue to challenge traditional investment strategies, the surge of index-based annuities has created a paradigm shift in how Americans are approaching retirement. Let’s take a deeper look at these products and their role for the future.

Growth of Index-Based Annuities

Index-based annuities have become a cornerstone product for most financial professionals across all distribution channels. Sales have grown to over $143 billion in 2023, making up about 37 percent of total annuity sales. FIA sales have more than doubled in the past decade, and RILA sales have grown from $1.9 billion in 2014 to $47.4 billion in 2023. Based on 2024 half-year sales results, index-based annuity sales could reach $180 billion for 2024, roughly 42 percent of total annuity sales.

Figure 1. Index-Based Annuity Sales ($B)


Source: LIMRA quarterly benchmarking survey, 2023

Why Index-Based Annuities?

Index-based annuities offer a unique win-win proposition for both consumers and insurance companies. For consumers, these products provide a balanced approach to retirement planning, combining the potential for market-linked growth with varying levels of downside protection. This allows retirees to potentially outpace inflation while safeguarding their assets, addressing two critical concerns in retirement planning.

In addition, these products offer other benefits like guaranteed lifetime Income and various levels of diversification. RILAs and FIAs can be structured to provide a lifetime income stream, helping to address longevity risk and ensuring a steady flow of retirement income. RILAs and FIAs can be used to diversify a retirement portfolio, providing access and exposure to various indices and crediting methods. Most of these products also offer access to a fixed account, which can further lower portfolio risks.

According to the Alliance for Lifetime Income’s Retirement Income Institute, a record 4.1 million Americans are set to turn 65 this year and each year through 2027. Although not all those Baby Boomers will decide to retire right away, the surge of freshly minted 65-year-olds — known as "peak 65" — will look to annuity products to support their lives through retirement. One of the major potential impacts to these individuals will be sequence-of-returns risk. According to Kiplinger, “Since the 1950s, the S&P 500 has experienced around 38 market corrections. A market correction is considered to be a decline of 10% or more from the recent closing high. That means that historically speaking, the S&P 500 has experienced a correction every 1.84 years.” In addition, according to the S&P Dow Jones Indices, the S&P 500 index has negative performance a quarter of the time.

Figure 2. S&P 500 Annual Performance

2000 to 2023
Source: S&P Dow Jones Indices. Data through Dec. 31, 2023.

This makes it extremely tricky if you retire during one of these market downturns and start taking income. Mitigating sequence-of-return risk is crucial for retirement success, and products like FIAs and RILAs can provide effective mitigation for new retirees. According to J.P. Morgan Asset Management, individuals who have poor performance at the start of a period, could have a significant funding gap and risk all of an individual’s savings.

For insurance companies, these products provide numerous benefits to their organizations like offering improved risk management capabilities, attractive profit margins, lower capital requirements and the ability to diversify their product portfolios. As we saw in 2023, fixed-rate deferred annuity sales grew significantly, totaling more than $164 billion in sales. Although many insurance companies were excited about fixed-rate deferred opportunities, many seek diversification of sales and products that could provide higher profit margins.

In addition, the index-linked structure also allows insurers to better match assets and liabilities, while also providing flexibility in product design to adapt to changing market conditions. Features like protection or crediting strategies, term levels, participation and cap rates, and index options provide insurance companies more flexibility in keeping products competitive while managing risk. This alignment of consumer needs with insurer benefits has fueled the rapid growth of index-based annuities, making them an increasingly important component of the retirement product landscape.

Over the past year, we’ve seen significant innovation around product features. Insurance companies are offering various custom indices, volatility-controlled indices and back-to-basic indices like the S&P 500. These allow clients to personalize their annuity based on their needs and expectations. Insurance companies are also introducing features like dual-directional strategies, which provide clients the opportunity to receive a return when the index is both up and down. Again, products and features that can be beneficial to both the customer and insurance company.

Conclusion

The surge in popularity of RILAs and FIAs represents more than just a passing trend in the financial services industry. It signifies a fundamental shift in how both consumers and insurance companies approach protection, growth and risk management. As market volatility and longevity risks continue to challenge consumers, these innovative products offer a compelling solution that balances growth potential with downside protection. The mutual benefits for both consumers and insurers have catalyzed product innovation and market growth. As we look to the future, it's clear that index-based annuities will play an increasingly pivotal role for insurance companies, financial professionals and consumers.

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