The US Annuity Market (by Type, Distribution Channel, Contract Type, Investment Category, Asset Under Management, & Annuity Premium): Insights and Forecast with Potential Impact of COVID-19 (2022-2026)

The US Annuity Market (by Type, Distribution Channel, Contract Type, Investment Category, Asset Under Management, & Annuity Premium): Insights and Forecast with Potential Impact of COVID-19 (2022-2026)

Market Insight:

An annuity is a type of insurance contract that is issued and distributed by financial institutions with the goal of paying out invested funds in the future in the form of a fixed income stream. Annuities are purchased or invested in by investors who receive monthly or lump-sum payments. Annuities are mostly used for retirement planning, and they assist individuals in mitigating the danger of outliving their resources.

Annuities are suitable for those seeking consistent, guaranteed retirement income. Because invested funds is illiquid and susceptible to withdrawal penalties, this financial instrument is not suggested for younger people or those who require liquidity. Investors concerned about rising market volatility and rising prices pushed overall US annuity purchases to their highest level since 2008. Insurers, on the other hand, are providing clients higher payments and guarantees on all types of annuities in the face of rising interest rates, which has resulted in an increase in earnings for insurance firms in recent years. The US annuity market value is expected to reach US$259.97 billion in 2023, growing at a CAGR of 4.74% during the forecast period.

Segment Covered:

• By Type: On the basis of type, the report offers the bifurcation of the US annuity market into two segments: Fixed Annuity and Variable Annuity. The fixed annuity accounted for the maximum share in the US annuity market owing to the protection and growth offered by fixed annuities. A fixed annuity can be an attractive option for conservative investors planning for retirement because these products offer a predictable stream of income. The fixed annuities are further bifurcated based on type (Index Annuity and Traditional Fixed Annuity). An index annuity is expected to grow significantly in the coming years owing to the new market participants, the rationalization of product features, and the opening up of additional distribution channels such as banks.
• By Distribution Channel: In terms of distribution channel, fixed annuities are segmented into Independent Agents, Banks, Regional Broker-Dealers, Independent Broker-Dealers, Career Agents, Direct Response, and Wirehouse. The independent agent acts as a middleman to connect insurance buyers and sellers to facilitate a transaction. The bifurcation of index annuity based on distribution channel is also provided in the report namely Independent Agents, Banks, Captive Agents, and Broker/Dealers. Independent agents held the largest share in the index annuity market. Variable annuities are also segmented based on distribution channels (Independent Broker-Dealers, Captive Agents, Banks, Regional Broker-Dealers, Wirehouse, and Direct Response). Independent broker-dealers held a highest share in the market as eased uncertainty on the DOL fiduciary rule has lifted sales through independent broker-dealers in recent years.
• By Contract Type: The report further splits the market based on the contract type of variable annuity: GMWB, Buffer Annuity Contracts, L-Share Contracts, and Others. Buffer variable annuity is expected to grow at the highest CAGR. Buffer annuities are a hybrid between variable annuities and fixed annuities as they allow policyholders to participate in part of the upside in the market, with partial downside protection. Therefore, the importance of buffer annuities is increasing significantly in the market.
• Asset Under Manangement by Investment Category: The report also provides insight into the variable annuity asset under management (AUM). The AUM is categorized based on the investment category (Equity/Balanced, Fixed Income, and Money Market). The US fixed income variable annuity asset under management is expected to grow at a significant CAGR in the forthcoming years. As part of the risk management practices, the majority of insurers have implemented more stringent asset allocation requirements, with many setting caps on equities and mandating investments in volatility-managed sub-accounts. Since allocations to fixed income help mitigate the downside in AUM in case of a market decline, many insurance companies are expected to shift their investment portfolio to fixed income from the equity market.

Top Impacting Factors:

Growth Drivers

• Growing Older Population
• Capitalizing on Stock Market Growth
• Rising Inflation
• Annuities are Protected and Regulated

Challenges

• Annuities’ Complexity and Liquidity Restrictions
• Low Interest Rates and Market Volatility

Trends

• Growing Demand for Registered Indexed Linked Annuities (RILAs)
• Increasing Role of Technology
• Driver: Rising Inflation

As inflation continues at a rapid pace, many people worry about whether their retirement years would be financially secure. High inflation sparks interest in annuities, especially for accumulation-focused fixed index annuity products that provide principal protection combined with greater investment growth. According to SRI Annuity Research, fixed-rate deferred annuities provide about three times the return of certificates of deposit (CDs) on average, making them very beneficial to investors looking for growth that can offset high rates of inflation. Therefore, high inflation has resulted in the growth in the annuity market in the US over the past few years.

• Challenge: Annuities’ Complexity and Liquidity Restrictions

Annuities are long-term contracts (3 to 20 years in length), and like most contracts, penalties are attached if the annuitant breaks the contract. On the other hand, some annuities do not provide enough growth potential. Limited growth means the retirement plan does not grow fast enough and has less money when the annuitant retires. Moreover, annuities offer a lifetime income. However, not all annuities offer inflation-adjusted income. If annuitants start the lifetime income too early, they might not be able to keep up with the cost of living, and they would not have enough money in later years. So before investing in an annuity, people need to weigh all of these factors and decide if an annuity is suitable or not. Therefore, the complexity of annuities makes them less attractive and hence affects the market growth.

• Trend: Increasing Role of Technology

Technology is shaping the annuity market. Annuity agents and advisors don’t have the time to educate everyone about the many details of annuities. But annuities must get into the right hands to help Americans avoid outliving their retirement savings. Secondly, technology can make it much simpler to compare annuities from different providers. It can be time-consuming calling providers to get quotes for the detailed annuity that you are interested in, but an online platform to compare pricing and options would make it easier for everyone to get multiple annuity quotes. Third of all, many people have called for more transparency in the annuity industry. Consumers benefit in every way, including more education, a better way to compare products, and improved suitability. Technology also helps agents and advisors find new clients and add more value to their business. The integration of data governance, edge computing, artificial intelligence (AI), machine learning (ML), and blockchain in the annuity industry would further benefit the market growth in the coming years.

The COVID-19 Analysis:

While the social and medical consequences of COVID-19 have been significant, the shock to the economy and markets had a significant impact on annuity companies. Interest rates and equity markets had declined, credit spreads had widened, and implied volatilities had increased in the year 2020. Each of these movements affects fixed income and equity investments (for example, credit spreads had widened and the creditworthiness of counterparties had affected), as well as the annuity products insurers sell, creating the balance sheet and earnings volatility.

In conclusion, in the initial period of the pandemic, the consumers faced increasing temporary or permanent unemployment, loss of income, and general market volatility. This led to a decline in the appetite for purchasing new annuity products. However, as the economy recovers and consumer behavior begins to stabilize, the pandemic highlight the value of these products and the sales increased in the following year.

Analysis of Key Players:

The US annuity market is concentrated with few players holding the significant share in the market. The annuity market would become more concentrated over time as the importance of 3rd party distribution hinders sub-scale firms. Over the past decade, market share in the variable annuity business has shifted from US public companies to mutual insurers and foreign-owned firms. Meanwhile, in the fixed annuity market, index annuity firms and mutual insurers have gained share. It is expected that the competition in the variable annuity market to remain rational. Many insurers have exited the market, and most remaining firms have increased fees and lowered guarantees given their focus on margins and risk over growth. The key players in the US annuity market are:

• American International Group, Inc.
• Lincoln National Corporation
• Athene Holding Ltd.
• MassMutual
• American National Group, Inc.
• Jackson Financial Inc. (Jackson National Life Insurance Company)
• KKR & Co. Inc. (Global Atlantic Financial Group Ltd.)
• Pacific LifeCorp
• Midland National Life Insurance Company
• Nationwide Mutual Insurance Company
• American Equity Investment Life Holding Company (American Equity Investment Life Insurance Company)
• TIAA

In 1Q22, the top 10 variable annuity competitors generated 88% of industry sales, up from roughly 70% ten years ago. While market share tends to fluctuate in the short term based on the timing of product launches/updates or changes in distribution, it is expected that large and diversified insurers are better equipped to succeed over time. Large competitors have the financial flexibility to absorb the earnings and capital volatility from the product. Furthermore, large insurers, as well as those with a greater focus on the market, have the resources to support robust risk management and wholesaling platforms, critical components of a strong variable annuity franchise. By distribution channel, roughly 45% of sales in 1Q22 were generated through independent brokers, 32% through captive agents, and 10% from banks. It is expected that the share of independent brokers and banks would rise over time, while production from captive agents should decline."