(BusinessWire) Given the unlimited risk of loss presented by variable annuities and the significant upside limitations imposed by fixed-index annuities, the registered index-linked annuity (RILA) is fast-becoming a more attractive middle-ground product option in the U.S annuity space, according to an AM Best report.
A new Best’s Special Report, titled, “Registered Index-Linked Annuities Gaining Foothold in VA Segment,” states that the current sales volume of RILAs pales in comparison with that of variable annuities (VA) and fixed-index annuities (FIA), but AM Best believes that RILA likely will outpace other individual annuity products over the near term.
VA sales have declined steadily over the last decade, having peaked at $184 billion in 2007. In 2018, VA sales dropped to approximately $100 billion, down 46% from 2007. Today, fixed annuity sales, led by FIAs, now surpass VA sales, stemming from the uncertainty created by the potential fiduciary rules the U.S. Department of Labor had contemplated a few years ago. VAs allow for unlimited upside growth potential, but are vulnerable to the risk of loss. FIAs allow for limited upside potential from equity markets, because of participation rates and caps used to determine policyholder credits. However, FIAs also provide protection against the risk of loss.
RILAs offer more upside potential than fixed annuities, although policyholders must be willing to absorb some risk of loss. Most current offerings feature a combination of guaranteed upside performance caps and downside absorption rates, with such guarantees measured over periods as short as one year or as long as 10 years.
It has been reported that RILA sales industry-wide totaled $11.2 billion in 2018, representing 11% of all VA sales and 5.6% of total individual annuity sales (fixed and variable combined). More importantly, RILA sales growth has been accelerating since 2016, while sales of traditional VAs continue to decline. Through the first half of 2019, sales of RILAs totaled $7.7 billion, up 63% over the same period in 2018, and accounted for nearly 16% of industry-wide variable annuity sales and 6.2% of all individual annuity sales.
One headwind RILAs face is that only representatives registered with Financial Industry Regulatory Authority (FINRA) can sell the product. As a result, RILAs are likely to see limited penetration into the traditional Insurance Marketing Organization (IMO) channels used heavily by fixed index annuity writers. However, given the current pace of product introductions, as well as the emerging trend of offering an optional guaranteed minimum withdrawal benefit rider on these products, AM Best believes RILAs will become more popular and constitute a larger portion of individual annuity product sales.
