Retirees look to annuities for financial security #NewsUnitedStates

As the youngest baby boomers approach retirement, the annuity market is experiencing a surge in demand, particularly across North America. With over 11,000 Americans turning 65 every day and Canada’s senior population now surpassing 7 million, the urgency for reliable retirement income is becoming more pronounced.

Fixed-rate deferred annuities have more than tripled in the last two years, rising to $164.9 billion in 2023, up from just over $50 billion in both 2020 and 2021, according to research organization LIMRA.

This is largely because traditional sources of retirement income – such as employer-sponsored contribution plans, social security, pensions, and other investments – often fall short of providing sufficient regular income.

Typically sold by insurance companies, annuities are financial products designed to provide a steady income stream. They convert a lump sum of money into regular payments over a set period or for the annuitant’s lifetime.

Highlighting key drivers behind the increased interested in annuities, Paul Murray, (pictured above), CEO of Swiss Re life and health reinsurance said, “Retirees need steady, worry-free income, and the higher interest rates provide more options for reliable retirement income, coupled with the traditional protection insurance offers.”

Economic conditions and consumer interest

The rising demand for annuities is driven by what Murray refers to as “favorable convergence” – the combination of higher interest rates and the growing number of retirees. After years of low yields, today’s economic conditions offer retirees more appealing annuity options.

“Between 2013 and 2022, US 10-year treasury yields averaged around 2%. In contrast, yields are around 3.7% today, and they reached 5% last year. The simplest explanation for stronger annuity sales is that people like 5% more than 2%,” Murray said.

Another key factor driving the increasing demand for annuities is the relatively strong economic environment, marked by low unemployment rates in both the U.S. and Canada. These robust labor markets have empowered more individuals to save for their future, while rising stock prices have significantly enhanced the value of personal investment accounts and retirement savings.

Currently, nearly US$25 trillion is held in private defined contribution plans and Individual Retirement Accounts (IRAs).

“This has provided a foundation for retirement security for millions of Americans who will look to convert a portion of that into guaranteed retirement income with annuities,” Murray said. “Over half of annuity purchases are made with funds from 401(k)s, IRAs, and similar pension plans.”

How can insurers capitalize on the rising demand for annuities?

According to Murray, to capitalize on the growing interest in annuities, insurers must develop affordable products that resonate with clients and support their financial objectives throughout various life stages.

“This includes not only the retirement years but also the earlier years when individuals are still accumulating wealth and families face vulnerabilities to unforeseen events, as well as middle age, when challenges like chronic conditions arise,” he said.

Murray said that “people are looking for straightforward products that not only assist with rising medical costs and aging-related needs but also provide the peace of mind that comes from having a steady income beyond retirement.”

He cited an innovative approach where insurers could combine life insurance protection with a cash value component and long-term care benefits that adjust flexibly based on investment returns and age-related life stages.

“Despite the inevitable challenges associated with innovations like these, they represent a promising avenue for meeting the changing needs of insurance consumers,” Murray said.