Many popular indices supporting annuities and life insurance today may not perform as well in an environment of recession, high inflation and rising interest rates.
These indices underpin many top-selling products with a strong track record. With the market growing strongly for 15 years, most of the historical periods chosen for sales tools like illustrations only show positive news.
Until recently.
To sum up the situation the industry finds itself in, Sarah Garrity recalled a quote from the 1988 film, ‘Hoosiers’: “Don’t get caught watching the paint dry,” she said during an interview. a recent roundtable at the National Association for Fixed Annuity’s. Annuity Leadership Forum in Washington, DC
“I think that’s where we are right now in terms of product development and what we think going forward, that now is not the time to stand still,” said Garrity, chief sales officer. companies for the annuity distribution team within BlackRock’s pension group. . “A lot of custom indices were perfectly positioned for past outcomes. And, quite frankly, they don’t rise to the challenge of inflation or the opportunity for a rate hike.”
At a conference session last month in Washington, DC, a similar panel posited that rising rates could open the door to annuities sold with risk-controlled indices. These types of products will, for example, use a strong bond component in order to reduce the elements of risk.
Garrity agreed that volatility-controlled indices will definitely rise going forward. “There is no protection without performance with inflation where it is,” she said. “So I think that’s the first thing we see in terms of product design impact.”
Inflation hedge
Industry veteran Sheryl Moore noted index growth during a recent Wink, Inc. webinar. When Moore started Wink, an industrial intelligence firm, 17 years ago, there were a dozen index. Today, there are at least 150 different indices, many of which are proprietary indices developed by major carriers.
Most of these indices are a mix of different indices and other assets like bonds. A standard index, such as the S&P 500, has a long history of returns, on which a reasonable projection can be made simply by looking back. Most proprietary indexes do not have this type of history.
Phillip Brzenk is global head of multi-asset indices at S&P Dow Jones Indices. He told the NAFA audience that gold is a great inflation hedge to have in an index mix.
“Gold is positive year-to-date 3% or 4% last time we checked,” he said. “So it’s about thinking about how you can incorporate something like this into a broader benchmark to actually have that exposure, actually have a more direct inflation hedge in your index.”
Laurence Black is the founder of The Index Standard, a company that provides index ratings. In a changing environment, indexes must also change, he said. Black used the analogy of a family that owns an SUV when it rains, a sedan for country driving and a convertible for casual outings in good weather.
“In the past, what you might have had was an index that could cope with an environment,” he explained. “Unfortunately we live in a much more complex world today so I think what everyone should be looking for is more diverse packages. So if you’re thinking of an FIA maybe that’s what you want to see, these are different types of clues.
“Maybe what you want to see is a bunch of diverse cues that you can pick from that can give you those best results.”
Most popular thematic indexes
The panel agreed that “thematic” indices resonate with conscientious investors. The most common example is environmental, social and governance (ESG) investing. Clients specifically ask for ESG options, Brzenk said.
“I will tell you that in the United States it will certainly not be as important as in Europe,” he added. “In Europe what we’re seeing is that you basically have to have an ESG slant in your offering or it won’t be looked at. I don’t think the US will ever reach that point, but we certainly see the deserves to explore some of these themes in isolation.”
An ESG investment is a security rooted in values related to environmental, social or governance issues, such as climate change, human rights, data protection and privacy. For an action to be qualified as ESG, it must undergo a rigorous evaluation process and respect certain principles defined by investment companies.
If the stock passes the initial assessment, then it is rated based on the MSCI ESG Index. ESGs can fall into three different categories in the United States: AAA-AA: Leaders, A-BBB: Average, and BB-B-CC: Laggard. This index assesses organizations based on their exposure to ESG risks and how well they manage those risks, then assigns them one of the three categories above.
BlackRock had “a very successful launch” of its first ESG index as part of a fixed-index annuity last year, Garrity said. But it’s not so much the themes as the basic thought and construction put into an index, she added.
“When we think about building products, what should come down to at the end of the day is how do we create the best index that’s going to create the best customer outcome, regardless of theme or slant? ” she says. “At the end of the day, at least from our perspective, it really comes down to how do you create the most thoughtful index.”
Editor of InsuranceNewsNet, John Hilton has covered business and other beats in more than 20 years of daily journalism. John can be reached at [email protected]. Follow him on Twitter @INNJohnH.
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