Life insurers turn focus to uncapped indexed annuities

​Uncapped indexed annuities are positioned for market success — as long as insurers and distributors can ensure that customers understand what they’re getting.

​Capitalizing on last year’s massive jump in broad equity-market indexes, life insurance companies are cranking out a new flavor of indexed annuity. These annuities aren’t invested in the market, but offer a rate of interest that’s tied to the performance of an index.

​Indexed annuity innovation was front-and-center at a Monday session at the Insured Retirement Institute’s Government, Legal and Regulatory Conference in Washington.

​“We really see [uncapped strategies] as a strong value proposition for customers,” said panelist Dan Krueger, assistant vice president of product innovation at Allianz Life Insurance Co. of North America.

With traditional indexed annuities, insurers place caps that prevent clients from capturing the full amount of an index’s performance, such that if an index rises 20% in a certain period, only a portion of that gain (say, 5%) will be used to calculate interest.

Uncapped annuities, as their name suggests, remove these caps, but use another lever to limit returns in the form of a spread. This spread is set for a period of time and then reset by the insurer, usually on an annual basis.
(More: How new annuities offer exposure to equities and downside protection)

Mr. Krueger noted that while uncapped indexed annuities offer a little more potential for returns versus their traditional indexed annuity counterparts, performance is far from being “equity-like.”
“Net of spread [which today is in the 2% to 4% range], you’re looking at a 3% to 5% return,” he said.
Because of such differences, this new product offers a range of learning opportunities for brokers and clients.
“It creates some opportunities in terms of training: how to make sure that it’s really clear for the client so that there are no misunderstandings, how to illustrate [the product] properly,” said Rodney Branch, a vice president at Nationwide Financial.

When it comes to selling these products, however, clients should have reasonable expectations. Plenty of independent agents play up the “all the upside without any downside” angle, and “that’s the death of this product because that’s not what’s going to happen,” noted Scott Stolz, senior vice president, PCG investment products at Raymond James Insurance Group.

​“[Uncapped indexed annuities] do offer more upside potential, but we worry about whether the client understands what that upside potential is,” he said. “You start either with an index that is part fixed income or a methodology where part of the money goes into a 1% stable account, and you’ve muted the return.”

​Accounting for such formulas and the spread, if the market goes up 20% or 30%, the client is only getting 7% to 9%, Mr. Stolz added. That means it’s better for insurers to keep it simple, he said.

“We like just one index — the S&P 500 — everyone knows what it is,” Mr. Stolz said. “We want one crediting strategy: point-to-point with a cap.

​“We know we have to offer the uncapped products,” said Mr. Stolz. “But we need to make sure that clients and advisers understand that, in the long run, they’re getting [an additional] 1% to 1.5%” compared to an indexed annuity with a cap.”