This year marks the 20th anniversary of the introduction of fixed indexed annuities (FIA). It’s been a ride of fits and starts . The history of the FIA passed the landmark 2014 juncture by marking an explosive threshold: $47 billion in FIA sales according to Beacon Research.
Since 1995, some $400 billion in fixed indexed annuities have been sold to millions of investors. As this history traces into the future, it’s instructive to explore the foundational roots of this powerful financial instrument.
From a conceptual standpoint, annuities can be described as the inverse of life insurance. Life insurance polices pay policyholders upon death. Annuities pay annuitants streams of income while they are still living.
These instruments trace back to the Roman Empire. Sure, the Babylonians and the Egyptians developed contracts guaranteeing periodic payments. But the first true annuities were Roman. Booty from military conquests was given to the Roman Emperor who in turn gave a portion to the soldiers and put another portion to military leaders to provide soldier pensions.
Later, the Catholic structured variable annuities, offering people lifetime incomes for their contributions. During the Middle Ages, feudal lords and kings deployed annuities to help cover the often debilitating costs of their constant skirmishes and wars.
Annuities were slow to catch on in America. The first emerged in 1759 as retirement pools for church pastors in Pennsylvania: the forerunner of widows and orphans benefits. Benjamin Franklin bequeathed an annuity in his will to the cities of Boston and Philadelphia. In 1812, the first commercial annuities were introduced to the public with the founding of The Pennsylvania Company for the Granting of Annuities. During the Civil War, The Union government used annuities to compensate soldiers as an alternative to land.
But annuities really got traction in the 20th Century as the number of multigenerational families began to decline. The 1929 stock market crash marked a period of tremendous growth in annuities, as did the Great Depression. As pressure disrupted financial markets and individual net worth in the early 1930s, investors turned to annuities as a safe place to put their money. Annuity premiums went from $11 million in 1920 to more than $400 million in 1939.
The 1990s marked a breakthrough in the history of annuities. Variable annuities offered more flexibility, more investment choices, and more benefits. In 1995, as a response to market volatility, fixed indexed annuities were introduced. FIAs offered the protection of a fixed annuity with the benefit of financial gain generated from upswings in equity markets. By the close of the year, sales hit more than $130 million.
One year later, fixed income annuities hit more than $1.5 billion in sales from 20 carriers. By 2000, FIAs racked up $5.25 billion in sales. FIAs generated positive appraisals from the business press in 2001, while that same year the courts ruled in Beverly S. Malone vs. Addison Insurance Marketing that annuities are not securities, and hence are exempt from federal securities laws.
Just two years later in 2003, FIA sales top $14 billion. That sales trajectory surged to $23 billion in 2004—an increase of 60 percent.
In 2008 the U.S. Securities and Exchange Commission began a public comment period on a rule that would classify FIAs as securities. More than 80 percent of the comments voice opposition to the idea. By 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act preserved the classification of FIAs as fixed products, not securities.
By 2014 FIA sales topped $47 billion. At the 20th anniversary of this financial innovation, annuity carriers have guaranteed more than $100 billion in lifetime income. While instruments such as FIAs provide retirement security for a huge influx of retirees, carriers continue to innovate breakthrough solutions to future income security challenges.