Disruption. It is something that the life insurance industry has been experiencing a lot of lately. And according to EY, the US life annuity insurance market will continue to be subject to disruption in the coming year, making it a competitive environment.
Some of the disrupting factors influencing industry players to reassess their strategies include:
Changing customer demands
- There is a growing need to attract GenXers and millennials who are on-demand, mobile and internet based generations
- Dealing with financial and operational implications due to the new Department of Labor (DOL) Fiduciary Rule
- Advances in digital technology coincide with the rise of cybercrime which increases exposure to cyber attacks or data breaches
How are life reinsurance and insurance companies viewing the current life annuity market and are they feeling the effects of disruption?
I interviewed Scott Selkirk, Managing Director and Head of Pricing at Somerset Re, to get his perspective on the market, where he sees it going in the near future and what Somerset Re is doing to address challenges and opportunities in the annuity space.
Can you describe the current state of the US annuity market when it comes to new business?
As far as new business goes, what’s interesting about the market today, is the shift we are seeing in allocation of annuity sales. In 2016, fixed and fixed- indexed annuities hit a record high while variable annuity sales decreased by more than 20%. For the first time in a long time VA sales were below 50% of total annuity sales. So despite the low interest rate environment, and recent years of strong equity market performance, consumers seem to be shifting away from variable products and moving towards the fixed and fixed-indexed products.
In addition to a shift in customer demands noted by EY, there also seems to be a shift in buying patterns. What do you think is causing this shift?
I think it is a combination of things, but one main reason is the attractiveness of the fixed-indexed products. They offer consumers the ability to participate in equity markets with downside protection that can protect their principal. These products also now provide guaranteed lifetime withdrawal riders that gives consumers longevity protection by providing an income stream they can’t out live. For retirees and near-retirees, this combined solution for accumulation of savings, principal preservation, and guaranteed income, is a unique offering that only our industry can provide.
Do you see this trend continuing in the next two years or are there any other shifts the market could experience?
For right now, based on demographic trends, we see continued growth in all retirement-related products.
From a reinsurer’s point of view, what are the opportunities you see in the market now?
For us, it really starts with interest rates. The sustained low interest rate environment has put a lot of pressure on the investment yields of life insurers. As a result you get compressed interest spreads on the older blocks of business with higher guaranteed minimum crediting rates, and it also makes new business harder to write, because the lower crediting rates on the fixed-side and lower cap rates on the indexed-side, make current product offerings less attractive to consumers.
We are focused on providing companies solutions for these interest-sensitive products, like deferred annuities and universal life that have the higher minimum guaranteed crediting rates. We also support more competitive pricing for new business initiatives, including indexed annuity products.
Our clients can then redeploy their capital that’s tied up at lower returns on older blocks, and put that capital to work in a line of business that they’re happy with. They can also enhance the competitiveness of their current fixed and fixed-indexed product portfolios.
How has using the TAI Annuity System for administration helped with your annuity business operations?
Our decision to implement the TAI Annuity System was really to make it easier for clients to do annuity reinsurance business with us. Given the fact that TAI is so well known on the life side, knowing it is being used on the annuity side gives our clients comfort that these transactions will be administered appropriately. I think it adds a higher level of execution certainty when you know your reinsurer has invested in the right platforms to support the ongoing needs of the business.
How are you processing annuity products?
Thanks to Scott Selkirk for sharing his perspective on the current state of the life annuity market. If you are looking to improve your annuity product administration, request a free demo of TAI annuity to see it in action.
Click to Request a Demo of TAI Annuity Reinsurance Administration Software
About Somerset Re
Somerset Re provides reinsurance solutions that help their clients efficiently deploy capital, improve long-term performance and fund new business growth. Given their specialization in customized risk management solutions for life insurance and annuity sectors, we were eager to hear Selkirk’s perspective on the market.