Life Insurance Firms in the Retirement Market: Is the News All Bad?
Anthony M. Santomero
The role of the insurance industry in the retirement assets market is examined. The popular image of the industry as one in decline is scrutinized by drawing upon various governmental and industry data sources. Our examination begins with the traditional area of corporate pensions, specifically, Defined Benefit and Defined Contribution Plans. It is demonstrated that this segment has remained relatively flat as proportion of wealth, but has declined in relation to the retirement market as a whole. This slow relative change masks a dramatic shift away from Defined Benefit Plans to Defined Contribution Plans. The primary driver of this change is the rapid growth of 401(k) plans. The shift from large corporate plans to individual retirement planning is most strongly demonstrated by the increase of IRA assets, such that they now comprise nearly a quarter share of the market. This trend is surprising in light of the fact that contributions have been low since a tightening of the tax code in 1986. More germane to our examination is the annuities market. With 55 million contracts in force, and total assets of $1.2 trillion, the insurance industry's domination of this area would seem to speak well of their present and future prospects. Indeed, annuities have grown as a percentage of wealth, but within the retirement sector, they have been outpaced by other instruments. This fact should be worrisome to insurance companies, as they have grown increasingly dependent upon annuities as a proportion of premium income. In summary, the picture for insurance companies is not as dire as the press has portrayed. But, comfort should not be taken in this fact. Individual retirement planning is driving the rapid growth of retirement assets. Annuities are, by and large, insurance companies' sole entry in this competition and, as of late, their record has not been exemplary. The low loads associated with mutual funds and their flexibility set a difficult paradigm for insurance companies to emulate. But, a lack of a successful effort will relegate insurance companies to the role of bit players in the retirement market.
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