The New Buzz with Indexed Annuities: Hybrid Indices

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We have been shouting this from the roof-tops, and see you posting and tweeting about it too: Indexed annuity sales were off the charts for the first half of 2014!

In fact, second-quarter sales alone were $12.6 billion according to Wink’s Sales & Market Report. To gain perspective on how fantastic this is, second quarter 2014’s sales are greater than the entire year’s sales just longer than a decade ago! Not too shabby for a product that is currently plagued by historically record-low rates.

We’ve had the opportunity to analyze these record-breaking annuity sales and take a closer look at the top new trend in the market: a new type of index being offered on index-linked annuities. The most recent buzz from nearly all the top players in the indexed annuity space has been the introduction of new hybrid index allocations on their products. This new product innovation is a direct result of the recent record-low caps being offered on indexed annuities.

Hybrid indices are derived from one or more other indices. Some of these indices are volatility controlled, others are not. Hybrid indices are widely used on “uncapped” crediting methods — a cyclical development that is a direct result of depressed cap rates. If you’ve kept up with your industry news, you will have noticed that “uncapped” is quickly becoming one of the indexed annuity market’s infamous terms –— more on this in a moment.

Although hybrid indices are newer to indexed annuities, non-capped pricing levers are not. Today, just less than half of the 298 indexed annuities offer a crediting strategy that includes a pricing lever other than a cap (such as a participation rate, spread, forced asset-allocation model, etc.). However, approximately 30% of those products offering non-cap pricing levers have one of these new hybrid index allocations available.

Moore Market Intelligence recently reported that 13 different hybrid indices were being offered on indexed annuities in the first half of 2014. In fact, hybrid index allocations accounted for 31% of new indexed annuity sales in the second quarter, according to Wink’s Sales & Market Report — a huge year-over-year leap from the previous period’s 5% allocation. Surprisingly, this 31% was attributable to less than half of these new indices. Many of these new hybrid indices were introduced so late in the quarter that little to no sales were reported. For that reason, we expect this number to increase significantly for the second half of 2014.

Hybrid indices in general are a hot topic, but they haven’t quite taken over the popularity of the age-old S&P 500 index allocation. Historically, the S&P 500 index allocation alone has accounted for more than 50% of sales each quarter. Although allocations to the S&P 500 are down 14% from the same period a year ago, this index continues to have substantial independent market share.

Now, getting back to “uncapped” crediting strategies…

The recent marketing hype surrounding “uncapped” crediting strategies stems from the new hybrid indices being offered with pricing levers such as spreads and participation rates rather than caps. In a low interest-rate environment, such crediting methods give marketers an opportunity to present a more exciting indexed annuity sales pitch. After all, who thinks earning as much as 3.50% on an indexed annuity sounds as appealing as having “unlimited potential for gains?” It is this communication that’s catching regulators’ attention. The State of Iowa’s insurance commissioner most recently issued a bulletin warning marketers that “the use of ‘uncapped’ terminology without additional disclosures of limitations is misleading.”

We personally understand that using the “uncapped” language brings attention to the newly offered crediting strategies when the index itself isn’t as widely recognized. However, “uncapped” marketing can lead to consumers’ perceived notions that their indexed annuity has unlimited growth potential. No indexed annuity offers unlimited potential, as the minimum guaranteed floor of 0% necessitates a limit on the upside potential. We believe it is disingenuous to promote indexed crediting strategies in a way that creates an illusion of unlimited gain potential for indexed annuities.

It is truly exciting to see sales of indexed annuities setting consistent records, and new product innovation always sparks renewed interest in a product line. However, we hope that everyone remembers that creating realistic expectations for gains on index-linked products is essential to maintaining their fixed insurance status!


Victoria Peterson is the VP of Operations and Jamie Johnson is the Communications Specialist at Wink, Inc., a competitive intelligence firm in Des Moines, Iowa, specializing in the life insurance and annuity industries. Together, Victoria and Jamie have more than 15 years of experience working with indexed products and provide market research to financial services professionals, distributors, manufacturers, regulators, and consultants on both a domestic and global basis. Victoria may be reached at Victoria@looktowink.com and Jamie may be reached at Jamie@looktowink.com.

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