Competition for the individual retirement market is heating up as the number of baby boomers heading into retirement increases, creating an opportunity for insurers to attract new customers and their assets, according to “The Big Payout: Growing Individual Retirement Income Opportunities 2012,” a report from Conning Research & Consulting.
At the end of 2011, there was $9.5 trillion in total assets owned by those in or near retirement; there also are 3.6 million baby boomers turning age 65 every year until 2029, and these younger boomers are more heavily invested in defined contribution (DC) plans and IRAs than those who preceded them, which means that the opportunity to serve their income distribution needs will continue to grow.
“Life and annuity insurers have been helping individuals amass assets in preparation for retirement,” said Scott Hawkins, analyst at Conning Research & Consulting. “At the end of 2011, for example, individual and group annuities held 46 percent of all defined contribution plan assets. Beyond annuities, however, we estimate there was an additional $7.3 trillion in combined IRA and defined contribution plan assets. Now, insurers have a growing opportunity to help individuals turn those assets into retirement income.”
From the customer perspective, managing risks such as asset volatility, inflation, longevity and taxes is difficult, and many face the possibility of outliving their assets. The also increasingly are responsible for managing their own retirement income, as those invested in defined contribution plans and IRAs are required to begin taking distributions at age 70 1/2.
This confluence of factors creates a huge opportunity for insurers, as they have “two bites at the apple,” the report says, first as customers hit 65 or enter retirement, and again when the customer hits age 70 1/2. This is prompting insurers to create new financial products to manage longevity, investment risks and asset distribution throughout retirement, the report says.
One of more successful investment vehicles for distributing income is mutual funds. “However, turning those assets into a secure income stream for retirees requires managing investment volatility and longevity risk,” Hawkins said. “Managing those risks plays to the natural competitive advantage insurers have over their competition.”
Insurers also are creating new products to address asset volatility, inflation, longevity and taxes, moving past single premium immediate annuities (SPIAs) and guaranteed living withdrawal benefits (GLWBs) by creating “enhanced payout annuities, rollover annuities and contingent deferred annuities,” the report says.
Retirees are frequently hesitant to give up control of their assets, and liquidity features, which give the retiree immediate access to sums in excess of their standard annuity payouts, increasingly are incorporated into new products. Another new feature is IRA-tailored variable annuities to attract new clients and increase the retention of clients from “DC plans where the insurer offers participant funds or a contingent deferred annuity,” the report says.
Replacing mutual funds with exchange traded funds as hedge to annuities has been another product development that, due to their index based nature, helps cut costs. Another is improving longevity risk management to a predictive model from a deterministic approach, the report said.
Insurers have an edge over the competition for the retirement business due to capital and reserve requirements that protect contract owners against insurers’ insolvency. Conning also estimates that industry wide, there is sufficient risk-based capital to support growth in this area. In addition, at the end of 2011, the individual annuity line held $1.2 trillion in assets and the additional free capital could support an additional $600 billion in new assets.
“As life-annuity insurers look to the future of the retirement income market, the path to growth involves careful strategic planning,” said Stephan Christiansen, director of research at Conning. “Our analysis highlights the need for insurers to meet the competitive challenge represented by the mutual fund industry, and refine their messaging to the retiree and pre-retiree segments. Adding to the competitive marketing complexity, insurers also face substantial investment issues related to these products, and statutory capital constraints. Yet those insurers that succeed in meeting these challenges may be positioned to enjoy their largest growth opportunity over the coming decade.”
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