AIG 2015 Annual Report Download - page 70

ITEM 7 / EXECUTIVE OVERVIEW
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CONSUMER INSURANCE OUTLOOK AND STRATEGIC INITIATIVES
Market Conditions and Industry Trends
Retirement
Increasing life expectancy and reduced expectations for traditional retirement income from defined benefit programs and fixed
income securities are leading Americans to seek additional financial security as they approach retirement. The strong demand
for individual variable and fixed index annuities with guaranteed income features has attracted increased competition in this
product space. In addition, higher tax rates and a desire for better investment returns have prompted less risk-averse
investors to seek products without guaranteed living benefits, providing the opportunity to further diversify our product portfolio
by offering investment-focused variable annuities.
The sustained low interest rate environment has a significant impact on the annuity industry. Low long-term interest rates put
pressure on investment returns, which may negatively affect sales of interest rate sensitive products and reduce future profits
on certain existing fixed rate products. In addition, more highly leveraged competitors have entered the market offering higher
crediting rates. As long as the low interest rate environment continues, conditions will be challenging for the fixed annuity
market. Rapidly rising interest rates could create the potential for increased surrenders. Customers are, however, currently
buying fixed annuities with longer surrender periods in pursuit of higher returns, which may help mitigate the rate of increase in
surrenders in a rapidly rising rate environment. Low interest rates have also driven strong sales growth of our fixed index
annuity products, which provide additional interest crediting tied to favorable performance in certain equity market indices.
Consumer Insurance provides products and services to certain employee benefit plans that are subject to restrictions imposed
by ERISA and the Internal Revenue Code, including rules that generally restrict the provision of investment advice to ERISA
plans and participants and IRA holders if the investment recommendation results in fees paid to the individual advisor, his or
her firm or their affiliates that vary according to the investment recommendation chosen. In April 2015, the DOL issued a
proposed regulation that would, if enacted, expand the definition of "investment advice," which would substantially expand the
range of activities considered to be fiduciary investment advice under ERISA and the Internal Revenue Code. For additional
information on the DOL proposed regulation, see Item 1 – Business – Regulation – Other Regulatory Developments - ERISA
Considerations. The DOL proposed regulation has generated substantial attention in our industry. If the final DOL regulation
and related guidance were to be finalized as originally proposed, it may be necessary for us, and our competitors, to materially
modify product design, marketing, and compensation arrangements with distribution partners and financial advisors for certain
products and services. It could also impose additional requirements and/or limitations on certain services that our advisors
and employees could provide to ERISA plan sponsors, ERISA plan participants, and IRA holders. These changes could
materially affect our ability to sell or service certain types of annuities and other investment products. Once we have fully
evaluated the impact of the final rule, we intend to strategically invest in the most attractive post-DOL opportunities across the
market.
Life
Populations are living longer and have increased needs for financial protection for beneficiaries, estate planning and wealth
creation. The Life operating segment addresses these needs with a broad spectrum of products, ranging from the pure
protection focus of term life to indexed universal life and investment-oriented products such as variable universal life. Market
factors, primarily low interest rates and regulatory changes, have caused the universal life market to shift its focus from
guaranteed universal life to indexed universal life products that offer cash accumulation and living benefit options.