New York — Variable annuity sales sank in 2008 as the stock market's swoon scared off investors. As a result, insurers are raising prices and adding restrictions on the products. But sales of variable annuities should rebound once the stock market does, according to experts.
"The market will cure you quicker than anything," says Nancy Creedon, a principal with
Industrywide, variable annuity sales fell from $48 billion in the fourth quarter of 2007 to $38 billion in the third quarter of 2008, according to the trade group
Variable annuity (VA) sales had soared in recent years by promising guaranteed income to throngs of baby boomers. Along the way, insurers waged an "arms race" of guarantees in order to gain market share, says Matt Wion, senior actuarial adviser with
But as the stock market's turmoil wore on in 2008, insurance companies began scaling back benefits and raising prices. One reason, experts say, was concern that losses on the annuities' underlying investments would prevent the insurers from following through on the guarantees within the products and their riders. Another was the rising cost of hedging programs that serve as buffers against losses.
Companies, including
Such changes seem to be an "admission that these things were too good," says Paul Sylvester, SVP for annuities at
Still, there is reason to believe that baby boomers, humbled by the market's plunge, will pay up for the promise of guaranteed income, according to Kenneth Kehrer, the director of
"The perceptions of the value of the VA features has been enhanced because of the severe market downturn," Kehrer says. "The fact that they now cost more than they used to may not impact sales."
Sylvester agrees. "I believe these benefits are real, and there's a reason why they have a price to them," he says.
Fixed annuity sales, meanwhile, have taken off. In September 2007, according to the Kehrer-Jackson report, fixed and variable sales were similar—the banks sold $1.8 billion worth of fixed and $1.9 billion worth of variable annuities.
By September 2008, sales of fixed annuities had surged to $2.9 billion, but sales of variables had dipped to $1.3 billion.
Consumers have turned to fixed annuities as an alternative to certificates of deposit, whose interest rates have been less appealing.
Insurers’ issues have not been a major drag on annuity sales, Creedon says. One reason is that states' insurance funds would cover most investors in the event of a carrier's inability to honor its contracts, she says.