Recent Market Turmoil May Shift Perception of Annuity Products

August 11, 2020 — Boston

The health and wellness concerns caused by the COVID-19 pandemic, converging with sudden economic uncertainty and global market volatility, presents a unique opportunity for annuity providers to supply advisors and investors with valuable information on the types of guarantees annuities can offer, according to the latest Cerulli Edge—U.S. Asset and Wealth Management Edition.

While advisors have increasingly shied away from using annuities in their client portfolios over the last decade, current market volatility is prompting them to take a second look. Framing the product and the guarantee benefits to investors will be critical to gathering asset flows into the vehicle. “Framing annuities as a type of pension or Social Security payout (e.g., defined benefit) could be an effective tactic to explain their attributes to clients,” explains Donnie Ethier, director of wealth management at Cerulli. He adds that in the current environment, a pension/guaranteed payout is likely to be attractive to specific types of clients, such as small business owners, many of whom may be reliant on government assistance (e.g., Paycheck Protection Program, Small Business Administration loans) to stay afloat during the pandemic.

Derisking portfolios—a strategy many advisors have undertaken since 2018 to mitigate portfolio risk in response to drastic fluctuations in the equity markets—may accelerate variable annuity (VA) interest from advisors in the wake of the pandemic. Insurers are responding accordingly. According to Ethier, “Insurers are working to build in ‘risk levers’ that will enable the adjustment of benefit elements on the fly, to either enhance them or derisk, as conditions may dictate.” These “risk levers” associated with VAs are a selling point for many advisors, some of whom report to Cerulli that they can adequately explain incorporating a VA to a client by positioning it as downside protection.

The challenge for insurers is whether they can sufficiently address the chief reasons cited by advisors for not using VAs—perception of high fees (79%) and a belief that other retirement income strategies constructed by their advisory practice or their home office are more efficient (37%). However, affluent households surveyed by Cerulli’s Retail Investor practice indicate they will likely seek guaranteed payouts and portfolio diversification in this time of market turbulence, and many annuity designs can provide these benefits. “It’s highly likely that investors are more focused than ever on protecting their hard-earned savings than at any other point during the past decade,” states Ethier.

Cerulli finds that overall simplicity will be a key element going forward if annuity providers are to harness the potential for increased sales amid ongoing market uncertainty and heightened risk awareness. “Inevitably, advisors selling annuities will likely need to devote more time to explaining product offerings to clients compared with other investment/income-generating options,” adds Matt Belnap, senior analyst at Cerulli. However, this may be time well spent given the ongoing market environment.

Additionally, Cerulli notes that educational initiatives are likely to play a role in the future success of annuities. Webinars, portfolio analytics tools (e.g., risk measurement), white papers, and retirement planning programs/software are some of the educational methods annuity issuers and asset managers use to explain the products. “Advisors who offer greater simplicity and strong investor-facing education materials will be better positioned to explain their products,” concludes Belnap.

Note to editors

These findings and more are from The Cerulli Edge—U.S. Asset and Wealth Management Edition, August 2020 Issue.

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