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."
Indeed, to educate and engage potential customers, the Internet tends to be the technology tool of choice for large and small insurers alike.
With assets under administration of $3.39 trillion and assets under management of $1.52 trillion, Fidelity Investments and its subsidiaries relies heavily on its Web presence to educate its existing and potential client base, using Facebook, Twitter and Fidelity Mobile applications.
Part of a larger strategy that includes support from LIMRA, the Insured Retirement Institute, promotions, phone-based reps and fee-based advisers, Fidelity's real strength, says Wollam, is in taking a simple product approach.
"We use the Internet and interactive tools, even videos, to provide basic information-to demystify the products, so clients can understand what their purpose is, but also how they fit into a broader retirement plan."
CLIENT TOOLS
Fidelity's VP of Web and Distribution Steven Hawes, says that while the company's primary website functions as a customer education and engagement tool, the company leverages metrics that enable them to track page views, length of visit, or if a portion of a video is watched or is completed.
"The "what are annuities" video pages get a lot of traffic, confirming the need for basic information," says Hawes. "We found that those videos are used far more than we would have expected when we were designing them."
Wollam says the website really serves two purposes-to educate and to capture new business. "Once the client shows interest, interactive tools such as our annuity calculator, retirement income planner or retirement quick check, provide a more customized view of whether the product is a fit or not."
Fidelity's more than 300 mutual funds, coupled with discount brokerage services, retirement services, estate planning, life insurance, wealth management, and securities execution and clearance, stands in stark contrast to the life and annuity products offered by Alpha Insurance Co., Montgomery, Ala., a farm bureau membership organization that, through 400 service centers, serves rural customers in Alabama, Georgia and Mississippi.
"Our agents and customer service reps are active in their communities, Alpha's director of IT, Jody Carroll, points out. "They go to the same church and belong to the same social groups. But that doesn't mean we don't have an eye on the technology and tools necessary to effectively identify new business and educate our customer base."
For example, the insurer recently partnered with the University of Alabama to create an iPhone application for life and property/casualty customers. Like Fidelity, Alpha also messages using Facebook and Twitter, and offers various interactive quoting tools on its website, tracks traffic, and assigns follow-up.
Having recently implemented automated underwriting, Carroll says Alpha replaced a process that required up to two weeks with one that now typically requires 60 seconds from the time the customer digitally signs the application to when the agent submits it electronically.
"The results have been positive," notes Carroll. "Because this technology enables our agents to collect the customer's information 100% complete and deliver it to the underwriter for review so quickly, our time to service the customer has improved, and the need to inconvenience the customer to collect additional information has been reduced. The intuitive technology prompts the application process, so the agent can focus on making sure the customer understands which life or annuity they are purchasing, and how it works and is comfortable that it meets their needs."
