Market Analysis – 64111906 – Variable annuity

Executive Summary

The global variable annuity market is valued at est. $135 billion in annual sales, with a recent 3-year CAGR of est. 2.1% reflecting mature market dynamics and shifting investor preferences. While the market faces headwinds from fee compression and competition from lower-cost alternatives, the primary opportunity lies in product innovation, particularly the rapid growth of Registered Index-Linked Annuities (RILAs). The most significant threat is heightened regulatory scrutiny under frameworks like the SEC's Regulation Best Interest, which increases compliance costs and alters distribution models.

Market Size & Growth

The global Total Addressable Market (TAM) for new variable annuity sales is estimated at $135 billion for 2023. The market is projected to experience modest growth, with a forecasted 5-year CAGR of est. 2.5%, driven by demographic shifts toward retirement and product innovation. The three largest geographic markets are the United States, Japan, and South Korea, with the U.S. accounting for over 75% of the global market.

Key Drivers & Constraints

1. Demographic Tailwinds: An aging population in developed nations, particularly the ongoing retirement of the Baby Boomer generation, creates sustained demand for products that offer tax-deferred growth and guaranteed lifetime income streams.
2. Market Performance: Equity market performance is a primary driver. Bull markets increase the appeal of variable products' upside potential, while high volatility pushes consumers toward products with downside protection features (e.g., RILAs).
3. Regulatory Scrutiny: The SEC's Regulation Best Interest (Reg BI) and evolving state-level fiduciary standards impose stricter conduct rules on sellers, increasing compliance burdens and favoring more transparent, lower-cost product structures.
4. Interest Rate Environment: While rising rates make competing fixed-rate products more attractive, they also lower the cost for insurers to hedge the guarantees (riders) offered within variable annuities, potentially making these features more competitive.
5. Competition from Alternatives: Low-cost Exchange Traded Funds (ETFs) and mutual funds present a significant challenge, offering market exposure and tax efficiency without the complex fee structures characteristic of traditional variable annuities.
6. Product Innovation: The growth of RILAs, which offer a balance of risk and reward, is a major driver, capturing market share from traditional variable annuities. RILA sales grew 13% in 2023, reaching a record $47.4 billion [Source - LIMRA, Feb 2024].

Competitive Landscape

Barriers to entry are High, primarily due to immense capital requirements for reserves, complex state-by-state regulatory licensing, and the necessity of establishing extensive distribution networks through broker-dealers and financial advisors.

⮕ Tier 1 Leaders * Jackson National Life: Dominant market leader, known for its strong distribution network through independent broker-dealers and focus on variable annuities. * Equitable: A top-tier player with a diversified product suite and a strong focus on RILAs and structured products. * Lincoln Financial Group: Known for its broad range of retirement solutions and innovative living benefit riders that provide income guarantees. * Prudential Financial: Strong brand recognition and a focus on providing guaranteed income solutions, leveraging a multi-channel distribution strategy.

⮕ Emerging/Niche Players * Brighthouse Financial: Spun off from MetLife, has become a major player by focusing almost exclusively on annuities and life insurance in the U.S. market. * Allianz Life: A leader in the fixed index annuity space, now aggressively competing in the RILA segment with innovative index-linking options. * Global Atlantic: Gaining share through strong product design and strategic relationships with asset managers and distribution partners. * Nationwide: Strong presence in the 401(k) and retirement plan space, leveraging its brand to cross-sell annuity products.

Pricing Mechanics

The price of a variable annuity is a multi-layered fee structure, not a single upfront cost. The primary cost is the Mortality & Expense (M&E) and administrative fee, which typically ranges from 1.00% to 1.75% of the contract value annually. This fee compensates the insurer for longevity risk and administrative overhead. Added to this are the expense ratios of the underlying investment sub-accounts (mutual funds), which can range from 0.40% to over 2.00%.

Optional riders, such as a Guaranteed Minimum Income Benefit (GMIB) or a Guaranteed Minimum Withdrawal Benefit (GMWB), add another layer of cost, typically 0.75% to 1.50% annually. These fees are for the insurance guarantee and are highly sensitive to market conditions. The total annual "all-in" cost to the annuitant can therefore range from 2.0% to over 4.0%, significantly impacting net returns.

The three most volatile cost elements are: 1. Underlying Fund Performance: Directly tied to market volatility; net returns can swing from >+20% to <-20% in a given year. 2. Cost of Hedging Guarantees: The insurer's internal cost to hedge riders is highly volatile, influenced by interest rates and market volatility (VIX). This cost is passed to consumers via rider fees, which have seen est. 10-15% increases on new contracts following periods of high market volatility. 3. Surrender Charges: A back-end fee for early withdrawal, which can be as high as 7-10% in the first year, declining to zero over a period of 7-10 years.

Recent Trends & Innovation

• Dominance of RILAs (Ongoing): Registered Index-Linked Annuities (RILAs) continue to capture market share from traditional VAs. These products offer investors downside protection (a "buffer" or "floor") in exchange for a cap on upside returns, appealing to risk-averse investors. RILA sales comprised 40% of total variable annuity sales in Q4 2023 [Source - Wink's Sales & Market Report, Feb 2024].
• SECURE 2.0 Act Implementation (Dec 2022): This U.S. federal legislation expanded provisions for using annuities within employer-sponsored retirement plans (e.g., 401(k)s). It raised the limit for Qualified Longevity Annuity Contracts (QLACs) to $200,000 and eased rules, creating a new institutional distribution channel for annuity providers.
• Rise of Fee-Based Products (2022-2023): Insurers are increasingly launching "advisory" or "fee-based" variable annuities. These products strip out commissions and have lower M&E fees, designed specifically for Registered Investment Advisors (RIAs) who charge a fee on assets under management. This trend aligns with the shift toward fiduciary advice.
• Technology & Digitalization (Ongoing): Insurers are investing heavily in digital platforms to streamline the application, suitability review, and contract management processes. E-application and e-delivery are becoming standard, reducing paperwork and processing times from weeks to days.

Supplier Landscape

Regional Focus - North Carolina (USA)

North Carolina presents a strong and growing market for variable annuities. The state's population grew by 1.3% in 2023, one of the fastest rates in the U.S., driven by an influx of new residents, including affluent retirees, to areas like Charlotte, the Research Triangle, and coastal communities. This demographic trend fuels demand for retirement income and wealth management products. Charlotte's status as the second-largest banking and financial center in the U.S. provides a deep pool of skilled labor and a high concentration of financial advisors who distribute these products. Local supplier capacity is robust, with major operational hubs for Lincoln Financial (Greensboro) and Brighthouse Financial (Charlotte). The North Carolina Department of Insurance provides a stable and predictable regulatory environment, generally aligning with NAIC standards.

Risk Outlook

Actionable Sourcing Recommendations

1. Mandate Fee Transparency and Target Reductions. Prioritize suppliers who provide unbundled fee breakdowns (M&E, admin, rider, fund expenses). In negotiations, benchmark these components against the lowest-cost providers and target a 15-20 bps reduction in the M&E and administrative fee portion of new contracts. This directly lowers the total cost of ownership for the end-user and improves net returns over the contract's life.

2. Shift Portfolio Mix Toward Fee-Based RILAs. Allocate a target of 30% of new annuity spend to fee-based RILAs. These products align with modern fiduciary standards, eliminate hidden commissions, and offer downside protection that traditional VAs lack. This strategy reduces conflicts of interest and can lower all-in costs by est. 50-100 bps annually compared to commission-based VAs with similar features.