The realities of annuities are being revealed to both buyers and sellers as interest rates in the United States creep along near 0%. Sellers are finding it harder to live up to promises of guaranteed return rates, and buyers are finding it harder to believe them.
As the Wall Street Journal’s Hester Plumridge writes, on Wednesday, ING Group “booked a €1 billion ($1.34 billion) charge to cover higher-than-expected liabilities on U.S. variable annuities.” Insurance companies have made a fortune selling annuities to unwary investors looking for what were described as “guaranteed” returns. As a result, today variable annuities account for $1.6 trillion worth of assets in the U.S. retirement product market.
ING’s increased liabilities estimates may not be high enough. Plumridge writes “ING says it has only just got enough data on policyholders’ behavior to start predicting their actions. Topping up reserves to an adequate level could cost ING a further €3 billion, estimates J.P. Morgan Chase. The uncertainty could complicate ING’s efforts to divest its U.S. insurance business by 2013.”
Plumridge explains that ING is not alone, and “Peers may be able to temporarily mask shortfalls with surpluses from other business lines. Insurers including MetLife, Prudential Financial and Prudential PLC all have large variable-annuity books that could be affected by changing behavior among policyholders.”
Since the Federal Reserve lowered rates as far as they possibly could, savers and retirees have had their wealth threatened. Those who purchased annuities received “guaranteed” returns, but those guarantees may outlast some of the insurers who gave them.