Annuities 101: A Course for Advisers & Clients

Chasing the retirement "savers" will require a technology- enabled focus on education to simplify the complex products being posed to them.

Insurance Networking News, 06/01/2010

By Pat Speer

It's no secret that the economy pummeled annuity providers. After record growth through 2008, the relatively long-tail nature of the business, coupled with erosion of existing capital, is causing insurers to rethink their 2010 business plans. In addition, many annuity carriers face mounting pressure: Should they continue investing in product lines that may offer lower statutory returns and margins than the usual insurance products? Consider that from 2000 thru 2008, the life industry average annual return on surplus plus AVR (the reserve for potential losses in invested assets) was 9.5%. In comparison, the individual annuity lines' average annual return on allocated surplus plus AVR was 4.0%.

The first priority for individual annuity insurers following the financial crisis has been to rebuild capital," says Scott Hawkins, analyst at Boston-based Conning Research & Consulting. Insurers have made significant progress in repairing their capital positions, but at the same time, premiums have actually declined, he adds. "Rebuilding will be a challenge. As insurers seek new growth, each will analyze and leverage their unique competitive advantages to position themselves for either organic or acquisitive growth."

Those insurers that end up staying in the game face yet another challenge: a competitive landscape dotted with fewer, stronger companies born of merger and acquisition efforts. Conning looked at 296 companies that reported direct individual annuity premiums in 1995, but not in 2008. Of the 296 companies, 197 were closed after being merged or acquired. Further analysis reveals that 97 were merged within their group and 100 acquired by other groups.

"Insurers that remain in the retirement market will do so because they recognize its potential profitability," notes Hawkins.

That potential profitability, say experts, relates to a market swollen by a class of client with potential dollars to invest. And it's a sweet pot. Conning estimates that existing combined group and individual annuity assets were approximately $3 trillion at the end of 2009 in a private U.S. retirement market of approximately $11.7 trillion.

Matthew Drinkwater, associate managing director, LIMRA Retirement Research, Windsor, Conn., notes, "most advisers say that retirement income planning is taking a more prominent role in their practices."

These advisers, say analysts, are using analytics and business intelligence to identify who the "untapped" customer is, what they want, and how best to approach them.

"Besides identifying new types of clients and putting marketing efforts to win them," notes Clark Troy, senior analyst with Boston-based Aite Group. "They also are looking outside their current geographic market to identify new growth opportunities."

Troy points to carriers using third-party data bureaus to identify clients who would fall into the "Walmart" customer set vs. the "Nordstrom" set. "By doing this, they can appeal to the different demographics and target them with appropriate products," notes Troy. "Ideally, automated underwriting streamlines the process further."

Deciding what's appropriate, notes Drinkwater, may be an exercise that benefits both adviser and client. "The advisers we talk to express a desire for simpler, more transparent products that they can understand and explain to their clients," he says. "They welcome education and training to learn more about holistic retirement planning, but not for the expressed purpose of obtaining another designation. While they don't want to be sold to, they were interested in learning how certain products could address the issues facing their clients."

CLARIFYING CONFUSION

Drinkwater backs his claim with results of a recent LIMRA study. The majority of financial advisers surveyed believe guaranteed income products are too complicated and confusing, and seek materials and support from wholesalers and companies to help explain the products to their clients.

Jennifer Warren, managing director of the Dallas-based Retirement Security Institute, agrees that education is needed. "The fixed income annuity is a commonly misinterpreted asset," she says, "and the insurance industry has done a better job at communicating the benefits of annuities than in the past. But the majority of Americans are still not fully aware of today's annuities-with their greater flexibility and value to retirees. Given a re-evaluation of retirement portfolios, they can be a formidable asset class to re-dress volatility and hedge downside risk."

Brett Wollam, SVP of marketing at Boston-based Fidelity Investments, says his firm understands why there is confusion. "We know it's important to begin by taking our messaging and product design down to the core elements of what's needed to supplement either a retirement saving plan or retirement income plan," he says.

Troy agrees that there is a need to simplify, but asserts that it could be worse. "There is a greater financial literacy than there was 20 years ago," he says. "And although the Internet as an educational tool has been helpful, there is still a lot of confusion over which product does what."

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