Annuity Industry Overview
In order to understand how AnnuityNet changes the world of annuities,
it may help to have our perspective on the past, present, and future of the annuity industry.
(If you would like to review the basics of annuity products, you may want to visit our Annuities Made Simple page.)
Annuities have been around a long time-in fact, since the days when Rome ruled an empire. Roman contracts
known as "annua" promised a stream of payments for a fixed period of time, or for life, in return for a
single premium payment. This type of "payout" annuity has not changed conceptually up to the present day.
If you enjoy the novels of Charles Dickens or Jane Austen, you've probably come across many references to annuities.
They were the favored investment vehicle of the upper classes in 18th- century Europe and were known as a reliable
way to generate income for the life of the beneficiary. Annuity growth in the United States was spurred by the Great
Depression, as investors sought a stable investment offered by reputable insurance companies of long standing.
Variable annuities, in which the investor can switch investments while still deferring tax, were introduced
in the United States by the Teachers Insurance and Annuities Association-College Retirement Equities Fund (TIAA-CREF) in 1952.
Initially, group annuities were offered to companies as a way to fund pension plans, but in the
early 1960s individual annuities began to outpace sales of group annuities. The market for annuities in general expanded in the 1970s and 1980s, and the market for variable annuities began its great growth
curve in the late 1980s. Investments in variable annuities increased fivefold from 1991 to 1994, while fixed annuities increased only 15%.* Estimates from LIMRA show that total annuity sales for 2000
increased 17% over the same period in 1999, to a total of over $190 billion. Variable annuity sales comprise
most of this total-$137 billion-and grew at 13% year over year. Fixed annuities grew a whopping 27% to reach almost $53 billion in 2000.
The growth in annuities can probably be accounted for to a large extent by the following factors:
A general increase in prosperity for Americans over the long term has resulted in more investable funds. Limits on IRAs and other tax-advantaged investments have made the tax deferral advantage relatively more attractive. Job mobility has increased, with the result that the number of employees staying at one company for their entire career has decreased.
Partly as a result of this trend, there has been an increased reliance on individual saving for retirement rather than pensions and other
employer-provided retirement programs.
The recent growth in variable annuities can probably be accounted for by:
The growth of mutual funds, which are similar to the subaccounts within variable annuities, has made VAs a more "familiar" investment. The long bull market for stocks that lasted until April of 2000, and the ability to choose subaccounts that invest in the stock market, made
the returns of variable annuities seem more attractive.
We believe the annuity industry should continue to grow and expand, as the factors cited above
continue to increase demand. Additionally, as life expectancies expand, more investors will see the income-for-life feature of payout annuities
as an increasingly attractive feature. The demand side of the annuity equation is bright.
Fulfilling the growing demand will not be easy. Some things about the annuity business have
not changed: The products are still difficult to understand, and have become even more complex recently. The annuity business is heavily regulated,
both by states and by the federal government, making the adoption of new processes a cumbersome process. The distribution system is not efficient.
There is little standardization within the industry, and everything from business practices to terminology varies by company. As a result of these
and other inefficiencies, distribution costs for annuities are typically significantly higher than for mutual funds.
AnnuityNet is leading the way toward changes in the annuity industry that will benefit consumers,
distributors, and manufacturers:
Consumers - As distribution efficiencies are introduced, consumers may benefit from lower annuity costs, roughly comparable to mutual fund costs.
Our most sophisticated clients will supply their customers with private-labeled versions of our easy-to-understand educational materials, demystifying
this traditionally complex product. Within the industry generally, we anticipate more annuities will be introduced without surrender charges.** The
Internet will enable customers to easily obtain account information and make account changes at their convenience. Much in the way that pioneers in
the mutual fund business greatly expanded those markets, AnnuityNet will pioneer simpler, user-friendly processes that make annuities as familiar
as mutual funds are today. Distributors - The AnnuityNet platform allows distributors to standardize a single set of business methods and practices across multiple
manufacturers. Distributors will gain more control over the customer relationship and will sell more products at a higher profit per sale.
For more about the benefits we offer annuity distributors, click here. Manufacturers - Our platform gives annuity manufacturers visibility across multiple distributors with a single, standardized interface.
Advantages include significant decreases in the cost of processing applications and reductions in postsale transaction costs by more than 50%.
For more about the benefits we offer annuity manufacturers, click here.
At AnnuityNet, we're not trying to be a household name, but within the insurance industry we're
already known as the annuity back-office for companies that are interested in Simplifying the Process: Less Paper, More Profit.
* The History of Annuities in the United States, James M. Poterba, April 1997.
** Other charges and fees may apply.
CRN 200104-AN209
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