Needham, Mass. - For firms of all sizes and models, annuity processing has not seen much innovation, until recently. But even today, significant challenges remain to the straight-through processing (STP) of annuity applications and distribution of annuities, notes a report issued today by TowerGroup, a Needham, Mass., research firm. The emergence of several solutions aimed at streamlining and untangling the complexities of annuity processing and efforts by industry groups to create standards for annuity processing may be exactly what is needed to improve efficiency in both distributing and processing annuities, notes the report's authors, research director, brokerage and wealth Matthew Bienfang, and senior research associate Matthew Macauley. TowerGroup predicts that the distribution of annuities will follow much the same path as the mutual fund industry and its products. As with many products, competition will drive efficiency, and given the increase in scrutiny by both consumers and regulators, it is clear that the industry could use some assistance. Financial services firms simply cannot afford to summon the regulatory specter again, the firm claims. The move toward automation of annuity processing in the financial services industry is being driven by cost considerations, efficiency issues, and compliance but also, and more important, by demand for annuities. Variable annuities can be extremely complex products because of the number of riders, guarantees, taxes, and income features and have therefore traditionally been sold by an agent. According to the TowerGroup study, the majority of annuities are sold by a mix of agent types, such as independents, captives and financial planners. However, brokers also represent a large portion of the annuity sales model. With the exception of the unique affinity sales model of TIAA-CREF and its relationship with educators, direct sales of annuities make up next to nothing because of the aforementioned complexities and options open to the consumer. The complexity of these products adds to challenges inherent in the annuity sale, i.e., processing time both at the point of sale and in the middle and back offices of the distributors. For a broker in a traditional firm, processing an annuity application takes 45 minutes or more. If the application is deemed to be not in good order (NIGO), the processing time in the middle office increases by hours if not days, quadrupling the cost. The introduction of technology in annuity processing can have dramatic results, improving the processing time, decreasing the cost, reducing the instances of NIGO, and lessening the regulatory risk associated with the distribution of annuity products. As an example, one leading distributor of annuity products implemented several technologies that have not only reduced the processing time from 45 minutes to under 10 minutes but also enabled the firm to operate with greater distribution control and supervisory oversight, thus reducing regulatory risk. TowerGroup reports that companies that focus on simplifying products and providing income beyond simple annuitization are succeeding, and predict that, because independent agents continue to be the fastest-growing channel for distribution of variable annuities, agents and advisors will require access to tools that allow for product comparison and configuration to better serve their customers. Finally, automation and the integration of product information are key drivers in reducing the risk of annuity distributors, say the report authors. Source: TowerGroup.
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