Tag Archives: annuities

Renaissance of the Annuity via Insurtech

The notion of paying out an annual stream of income can be traced back to the Romans. It’s a simple notion and one of the earliest forms of wealth management. Today, the simplicity of that notion has been replaced by the complexity of the annuity product. Rooted in a time way before the iPhone, the conventional annuity looks tired in the digital world. It’s an old world approach long overdue for a refresh and reinvention. To explore this further, Rick Huckstep spoke with Matt Carey, CEO and co-founder of Blueprint Income.

It’s a different world now 

The baby boomers are retiring. When they made their plans for the future, the world was analog. Individual advice was based on human judgment, the personal touch and “trusted, expert” relationships. This was how the world of wealth management worked pre-internet.

However, today, for many U.S. boomers, the prospect of actually giving up work is still some way off. This recent U.S. study by the Insured Retirement Institute reported that as many as two in five of American baby boomers have nothing saved for their retirement.

Increased longevity and the massive decline in employer pensions in the 21st century are major factors behind the prediction that as many as half of Americans will not be able to maintain their current lifestyle.

The point is that the baby boomer generation, and Gen X for that matter, have shifted from creating retirement wealth through a lifetime of work to protecting what they have for now.

Which means that the wealth management target client has changed. It’s no longer a baby boomer market, or a Gen X market for that matter.

Now it’s the millennials who are the core client (target) base for wealth management. With 40% of the global adult population under the age of 35 years old, this is a generation who has only known a digital world in adult life.

Rise of the affluent millennial

But it is more than a digital divide that separates the generations. Millennials’ attitudes and behaviors to creating their own wealth are different, too. These differences are shaped by factors such as: debt-funded education, greater levels of social conscience and engagement, a broader world view and higher levels of self-employment.

Which is a challenge for the wealth management industry as it adapts to a different customer profile. Building a wealth management proposition for the millennial generation has to reflect the different demographics compared with baby boomers and Gen X.

See also: How Insurance Fits in Financial Management

There’s tons of research out there that reports how attitudes and behaviors have changed over the generations, even back to the silent generation. In this 2015 survey of more than 9,000 millennials across 10 countries by LinkedIn and IPSOS, they found;

  • millennials expect to be financially able to travel and see the world,
  • 60% expected to be wealthy (even though they earn about 20% less than the baby boomers,
  • they do not rely solely on wages for their income (trader by day, Uber by night),
  • and are more likely to carry debt than Gen X (repaying student debt has replaced saving for retirement),
  • nine out of 10 millennials use social networks for input on financial planning,
  • as well as being more likely to take advice from family members,
  • and are heavily influenced by their peers,
  • millennials are half as likely to be married compared with baby boomers at the same age,
  • they are seven times more likely to share their personal information with brands they trust.

The financial literacy problem

There is another dynamic that is important to consider when looking at how the wealth management industry serves the millennial generation. Financial literacy, or the lack of it!

The millennial generation may be more informed than their predecessors, but not necessarily in everything. They are more likely to know who Kim Kardashian is than to understand the impact of inflation on their savings over time.

In itself, there’s nothing new in this, but the fact is that the level of financial literacy in the U.S. has been dropping for years.

According to survey results by U.S. regulator FINRA, the level of personal finance literacy has fallen every three years since 2009. They found that 76% of millennials lack basic financial knowledge. Which is hardly surprising when only 14% of U.S. students are required to take a personal finance class in school.

See also: Raising the Bar on User Experience  

The FINRA survey also reported a massive gap between the level of financial understanding and the desire to have one. The survey found that 70% of adults aged between 18 and 39 years old “know they will need to be more financially secure, they just don’t know how to get there.”

What is clear from the survey is that this lack of financial literacy is causing stress and anxiety among millennials (who, remember, now account for 40% of the adult population).

For the rest of the article, click here.

Life/Annuity M&A Is Heating Up

As life insurance and annuity carriers pursue greater market share and growth, a potential solution sits before them: M&A activity. This transactional path, leading to deep consolidation in the life insurance and annuity (L&A) sector in the U.S., is stoking much debate and discussion in company boardrooms.

The hunt for elusive growth and profitability for carriers in the U.S. has many players, creating a crowded marketplace for possible consolidation. The multi-headed acquirers come in three dominant forms: large insurance companies, private equity (PE) investors and foreign acquirers, driven largely by the Chinese and Japanese.

Insurance carriers intimately know about their competition and what companies in the sector would mesh well within their operations. Executives have the greatest amount of specific industry expertise and therefore can understand the pros and cons in a specific combination.

See also: How Life Insurance Agents Can Be Ready

Private equity investors have been turning to the life insurance and annuity field for several years to provide consistent returns, as these companies have predictable cash flows. Through these investments, investors can strengthen their returns for assets under management with steady growth. One caveat to this investment approach is the concern of the increasing regulatory state and federal pressures, as navigating through 50 individual state regulatory guidelines can be burdensome and difficult if a company moves out of a state and into a new one.

Foreign countries like China and Japan continue exploring opportunities to increase their presence in the U.S., the world’s largest insurance market. Reasons abound: Japanese insurance companies have found U.S. acquisition targets appealing to offset the aging of Japan’s population and to provide a more attractive interest rate environment. Chinese companies have been snapping up foreign companies, including in the U.S., searching for yield on their capital and economic growth.

Several reasons exist for this trend of M&A activity.

  1. Buyers are motivated by the current low-interest-rate environment and the opportunity to expand their assets and book of business. This has always been an essential piece of the M&A discussion as market conditions must be favorable to make any transaction worth its while.
  2. Sellers are suffering from the low return on their capital. By exiting less profitable lines of business, they can reallocate their capital for use in other capacities. As contemplation of one’s business clarifies, many carriers may conclude that selling, rather than buying, assets is the chosen path. Selling could stabilize or enhance a company’s bottom line as the capital obtained in a sale can be reinvested in its existing operations or be put to use for another potential acquisition.
  3. Increasing regulations are restricting the ability of companies to productively run their businesses; thus, they are looking for exits. Companies are often stymied by the sheer weight of complying with and managing regulations. Exiting businesses can become appealing.

Regardless of which direction is undertaken, one aspect paramount to success is the importance of ensuring that business continues to operate smoothly. In today’s environment, the role of technology, specifically at a time when companies are implementing and managing digital transformations, can be a beacon of light. And as acquirers delve deeper into possible transactions, increasingly they are employing an outsourcing model to extract more value.

See also: This Is Not Your Father’s Life Insurance  

Safeguarding a company’s operations and maintaining its continuity through powerful technology and servicing solutions, or what we call “future proofing,” has additional benefits besides the desired functionality. Companies must first build their vision and plans and then bolster them with end-to-end operational services. This step will then enable rapid expansion into new market segments, faster product launches and seamless servicing of open and closed blocks of business. By future-proofing through technology, carriers can drive greater efficiencies, lower costs and produce higher levels of customer satisfaction.

10 Insurance Questions for 2017

Love it or hate it, 2016 was a year that brought many surprises. And 2017 is looking like another year of unexpected outcomes. The saying goes, “May you live in interesting times.” And we are definitely living in interesting times, including in the insurance industry.

Here are 10 insurance questions for 2017:

1. Will this be the year that the U.S. insurance industry makes a definitive move toward level commissions or fee-based products across all product lines?

Most other professional service providers are paid on an hourly or fee basis, including accountants, attorneys, physicians, trust officers and the majority of financial planners. The Department of Labor fiduciary rule is driving some insurance companies to offer fee-based annuities for retirement plans rather than traditional commission-based annuities. See my take on this: The Fiduciary Rule: A Call To Arms for the Insurance Bill of Rights: Aligning the Insurance Industry With Consumers. The U.K. already has a commission ban, yet life insurance sales are now trending up. While, there are differences in the U.S. and U.K. markets, the core principles are the same. To learn more, visit the Nerd’s Eye View Blog for Bob Veres’ in-depth look. Commissions are not necessarily the bottom-line issue; it’s the premiums that really make the difference.

2. Will the Affordable Care Act stay in effect? 

While no one knows for sure, it is unlikely that the ACA will be completely repealed any time soon. President-elect Trump, along with leaders in Congress, have vowed to repeal and replace, but doing so will be challenging given the lack of votes in the Senate. And while there are significant issues with the ACA, consumers do benefit. Also, healthcare organizations and insurance companies having spent millions of dollars to adjust to it. What is likely is that changes will occur on a gradual basis. The bottom line is that one of the most important benefits to U.S. citizens is the ability to purchase health insurance if you have any existing (or past) health issues. Prior to the ACA, it was challenging to get an individual health insurance policy, which created a bigger issue for individuals and for our overall society. Yes, premiums are increasing, and there are fewer insurers participating. At the same time, it is estimated that there are more than 20 million people with insurance under the ACA. Change will happen, just gradually. If the ACA is replaced, there remains the questions of how to fund it, if the current mandates (taxes and penalties) are stripped out. The funding is one of the core issues and does need to be revised. Insurance companies have also left the federal and state exchanges in a number of states, and they will need to be given incentives to return to the marketplaces.

See also: Top 10 Insurtech Trends for 2017  

3. What will happen with long-term care insurance (LTCI)?

The need for long-term care insurance is not going away; people are living longer, and healthcare costs are rising. Medicaid coverage is minimal and does not apply to most long-term-care expenses. Older LTCI policies have experienced significant premium increases for many reasons, but since the passage of the National Association of Insurance Commissioners’ Rate Stabilization Model Act, there have been fewer increases on newer policies (Read more: “What’s ahead for long term care insurance” ). Currently, hybrid long-term-care/life insurance policies are experiencing growth, but these complex policies are not a solution, as they are a step away from providing a direct protection against the specific risk being insured, which means they are more expensive than a stand-alone LTC policy. A new issue coming up is that some states have “filial responsibility” laws that obligate adult children to financially support their parents and are starting to be used by some nursing homes.  Read about it here.

4. Will insurance agents go extinct?

No, insurance agents will not be going away. However, the way that insurance agents currently do business and have historically done business will be going away. With greater access to information and technology, insurance agents will become true advisers to their clients rather than simply transacting product sales. Professional insurance agents provide value to consumers when they help them understand how insurance policies work and when they assist consumers in making wise choices. The insurance agents who survive will be the ones who recognize that they need to align their interests with those of consumers and work in their best interests by recommending insurance coverage that consistently meets the needs of their clients. Insurance agents will need to follow the concepts outlined in The Insurance Bill of Rights. Mark Twain said, “The reports of my death have been greatly exaggerated,” and this certainly applies to insurance agents.

5. Will consumers finally discover the value of disability insurance? 

Disability insurance is the most overlooked financial tool. Disability insurance is a necessity for anyone who depends on their income. If we are discussing a mandatory insurance coverage, disability insurance should be at the top of the list. Three in 10 workers entering the workforce today will become disabled for some period before they retire (Social Security Administration, Fact Sheet, January 31, 2017). This point was brought home by the fact that Colin Kaepernick did not play this year for the San Francisco 49ers until they purchased a disability insurance policy for him. Read more here.

6. Has the annuity marketplace hit its turning point? 

The current annuity marketplace is filled with complex annuity options that are increasingly challenging for an insurance agent to understand, let alone being understandable for consumers, especially seniors, who are heavily marketed to. The annuity industry continues to face significant market conduct issues in terms of suitability and disclosures (Read about the investigation by the New York Department of Financial Services). Annuity companies that think outside the box and provide low-cost, easy-to-understand solutions will gain popularity. A number of leaders in the financial planning area are already discussing the value of single-premium immediate annuities in investment portfolios to help offset longevity risk (living too long). This will only happen with low-cost annuities and where agents can really provide value by recognizing and solving challenges that can only be addressed with annuities that serve the consumer by getting back to the core function of annuities.

7. Have we reached the tipping point for when the impact of the prolonged low-interest-rate environment will fully emerge on interest-sensitive life insurance policies? 

The majority of universal life policies issued are facing the hidden danger of terminating long before they are expected to. This is due to lower-than-projected credited interest rates, which has led to reduced cash values. If a life insurance policy reaches a cash value of zero, it will terminate unless it has a no-lapse guarantee. The only way to keep the policies in force is to increase the premium, however, life insurance companies, for the most part, are not advising policy owners that they need to increase the premium and specifying the amount by which the premium needs to be increased. This situation has been exacerbated by the fact that a number of life insurance companies have had to increase their mortality costs (cost of insurance charges) to maintain profitability. Continuing to ignore this issue is going to have significant long-term ramifications for the stability and trust in life insurance companies and life insurance agents. This is affecting all types of life insurance that are not guaranteed products, just not as directly. Read more: Will Your Life Insurance Terminate Before You Do?

See also: 10 Predictions for Insurtech in 2017  

8. Is there truly an insurtech company that can add core value to the insurance process?

The insurance industry needs evolution, and not revolution. The majority of insurtech companies are really bringing us more of the same; they are really just “dressed up” insurance brokerages and insurance insurance companies. And while some do make use of technological breakthroughs, they are not making insurance breakthroughs, which is an important distinction. The real breakthroughs will come from when consumers can more easily understand insurance products and pricing and companies can use data to provide truly customized insurance product pricing, streamline underwriting, simplify products and riders and provide insurance products that people need, thereby eliminating those that don’t have a useful purpose.

9. Is it time for insurance policies to finally be used primarily for insurance purposes?

The insurance industry will recognize that it must get back to its core function, which is protecting against potential risks. When this happens, it will lead to better-optimized insurance products for consumers and longer-term business for insurance companies. This will especially be true in the areas of life insurance and annuities when the trend becomes using insurance to address non-insurance issues. Insurance is just insurance.

10. Will the insurance industry discover excellent customer service?

Quality policy owner service is not something that the insurance industry as a whole is known for. Companies that provide top-notch customer experiences thrive, are well-known for doing so and can be easily named (think: Nordstrom, Disney and Apple). Other companies are known for poor customer service, while most remain in the middle. FedEx, which used to be known for top service, now delivers packages at any time and leaves them all over the place. The point is that a quality policy owner experience will revolutionize the insurance process. If the insurance industry can learn to “delight” consumers at every step along the way from the policy selection process, policy application and underwriting process, policy monitoring and claims service, then the insurance industry will really move forward.

The Bottom Line

Greater insurance literacy will benefit consumers and members of the insurance industry. Following the guidelines of The Insurance Bill of Rights is what will move the insurance industry forward. Ask your agent and insurance company if they’ve taken The Insurance Bill of Rights Pledge and look for the Insurance Bill of Rights Seal on their website. If they haven’t taken it, ask them why not or what they have to hide about fairness and disclosure — and join The Insurance Bill of Rights Movement by signing the petition to support The Insurance Bill of Rights (click here).

If you have any feedback or your own questions for 2017, please let me know. Thanks for reading.

Reinventing Life Insurance

Many life insurance executives with whom we have spoken say that their business needs to fundamentally change to be relevant in today’s market. Life insurance does face formidable challenges.

First, let’s take a hard look at some statistics. In 1950, there were approximately 23 million life policies in the U.S., covering a population of 156 million. In 2010, there were approximately 29 million policies covering a population of 311 million. The percentage of families owning life insurance assets has decreased from more than a third in 1992 to less than a quarter in 2007. By contrast, while less than  a third of the population owned mutual funds in 1990, more than two-fifths (or 51 million households and 88 million investors) did by 2009.

A number of socio-demographic, behavioral economic, competitive and technological changes explain the trends — and the need for reinventing life insurance:

  • Changing demography: Around 12% of men and an equal number of women were between the ages of 25 and 40 in 1950. However, only 10% of males and 9.9% of females were in that age cohort in 2010, and the percentage is set to drop to 9.6% and 9.1%, respectively, by 2050. This hurts life insurance in two main ways. First, the segment of the overall population that is in the typical age bracket for purchasing life insurance decreases. Second, as people see their parents and grandparents live longer, they tend to de-value the death benefits associated with life insurance.
  • Increasingly complex products: The life insurance industry initially offered simple products with easily understood death benefits. Over the past 30 years, the advent of universal and variable universal life, the proliferation of various riders to existing products and new types of annuities that highlight living benefits significantly increased product diversity but often have been difficult for customers to understand. Moreover, in the wake of the financial crisis, some complex products had both surprising and unwelcome effects on insurers themselves.
  • Individual decision-making takes the place of institutional decision-making: From the 1930s to the 1980s, the government and employers were providing many people life insurance, disability coverage and pensions. However, since then, individuals increasingly have had to make protection/investment decisions on their own. Unfortunately for insurers, many people have eschewed life insurance and spent their money elsewhere. If they have elected to invest, they often have chosen mutual funds, which often featured high returns from the mid-1980s to early 2000s.
  • Growth of intermediated distribution: The above factors and the need to explain complex new products led to the growth of intermediated distribution. Many insurers now distribute their products through independent brokers, captive agents, broker-dealers, bank channels and aggregators and also directly. It is expensive and difficult to effectively recruit, train and retain such a diffuse workforce, which has led to problems catering to existing customers.
  • Increasingly unfavorable distribution economics: Insurance agents are paid front-loaded commissions, some of which can be as high as the entire first-year premiums, with a small recurring percentage of the premium thereafter. Moreover, each layer adds a percentage commission to the premiums. All of this increases costs for both insurers and consumers. In contrast, mutual fund management fees are only 0.25% for passive funds and 1% to 2% for actively managed funds. In addition, while it is difficult to compare insurance agency fees, it is relatively easy to do so with mutual fund management fees.
  • New and changing customer preferences and expectations: Unlike their more patient forebears, Gens X and Y – who have increasing economic clout – demand simple products, transparent pricing and relationships, quick delivery and the convenience of dealing with insurers when and where they want. Insurers have been slower than other financial service providers in recognizing and reacting to this need.

A vicious cycle has begun (see graphic below). Insurers claim that, in large part because of product complexity, life insurance is “sold and not bought,” which justifies expensive, intermediated distribution. For many customers, product complexity, the need to deal with an agent, the lack of perceived need for death benefits and cost-of-living benefits make life products unappealing. In contrast, the mutual fund industry has grown tremendously by exploiting a more virtuous cycle: It offers many fairly simple products that often are available for direct purchase at a nominal fee.

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Reasons for optimism

Despite the bleak picture we have painted so far, we believe that reinventing life insurance and redesigning its business model are possible. This will require fundamental rethinking of value propositions, product design, distribution and delivery mechanisms and economics. Some of the most prescient insurers are already doing this and focusing on the following to become more attractive to consumers:

  • From living benefits to well-being benefits: There is no incentive built into life policy calculations for better living habits because there traditionally has been very little data for determining the correlation between these behaviors and life expectancy. However, the advent of wearable devices, real-time monitoring of exercise and activity levels and advances in medical sciences have resulted in a large body of behavioral data and some preliminary results. There are now websites that can help people determine their medical age based on their physical, psychological and physiological behaviors and conditions. We refer to all these factors collectively as “well-being behaviors.” Using the notion of a medical age or similar test as part of the life underwriting process, insurers can create an explicit link between “well-being behaviors” and expected mortality. This link can fundamentally alter the relevance and utility of life insurance by helping policyholders live longer and more healthily and by helping insurers understand and price risk better.
  • From death benefits to quality of life: Well-being benefits promise to create a more meaningful connection between insurers and policyholders. Rather than just offering benefits when a policyholder dies, insurers can play a more active role in changing policyholder behaviors to delay or help prevent the onset of certain health conditions, promote a better quality of life and even extend insureds’ life spans. This would give insurers the opportunity to engage with policyholders on a daily (or even more frequent) basis to collect behavioral data on their behalf and educate them on more healthy behaviors and lifestyle changes. To encourage sharing of such personal information, insurers could provide policyholders financial (e.g., lower premiums) and non-financial (e.g., health) benefits.
  • From limited to broad appeal: Life insurance purchases are increasingly limited to the risk-averse, young couples and families with children. Well-being benefits are likely to appeal to additional, typically affluent segments that tend to focus on staying fit and healthy, including both younger and active older customers. For a sector that has had significant challenges attracting young, single, healthy individuals, this represents a great opportunity to expand the life market, as well as attract older customers who may think it is too late to purchase life products.
  • From long-term to short-term renewable contracts: Typical life insurance contracts are for the long term. However, this is a deterrent to most customers today. Moreover, behavioral economics shows us that individuals are not particularly good at making long-term saving decisions, especially when there may be a high cost (i.e., surrender charges) to recover from a mistake. Therefore, individuals tend to delay purchasing or rationalize not having life insurance at all. With well-being benefits, contract durations can be much shorter — even only one year.
  • Toward a disintermediated direct model: Prevailing industry sentiment is that “life insurance is sold, not bought,” and by advisers who can educate and advise customers on complex products. However, well-being benefits offer a value proposition that customers can easily understand (e.g., consuming X calories per day and exercising Y hours a day can lead to a decrease in medical age by Z months), as well as much shorter contract durations. Because of their transparency, these products can be sold to the consumer without intermediaries. More health-conscious segments (e.g., the young, professional and wealthy) also are likely to be more technologically savvy and hence prefer direct online/call center distribution. Over time, this model could bring down distribution costs because there will be fewer commissions for intermediaries and fixed costs that can be amortized over a large group of early adopters.

We realize that life insurers tend to be very conservative and skeptical about wholesale re-engineering. They often demand proof that new value propositions can be successful over the long term. However, there are markets in which life insurers have successfully deployed the well-being value proposition and have consistently demonstrated superior performance over the past decade. Moreover, there are clear similarities to what has happened in the U.S. auto insurance market over the last 20 years. Auto insurance has progressively moved from a face-to-face, agency-driven sale to a real-time, telematics-supported, transparent and direct or multi-channel distribution model. As a result, price transparency has increased, products are more standardized, customer switching has increased and real-time information is increasingly informing product pricing and servicing.

Implications

Significantly changing products and redesigning a long-established business model is no easy task. The company will have to redefine its value proposition, target individuals through different messages and channels, simplify product design, re-engineer distribution and product economics, change the underwriting process to take into account real-time sensor information and make the intake and policy administration process more straight-through and real-time.

So, where should life insurers start? We propose a four step “LITE” (Learn-Insight-Test-Enhance) approach:

  • Learn your target segments’ needs. Life insurers should partner with health insurers, wellness companies and manufacturers of wearable sensors to collect data and understand the exercise and dietary behaviors of different customer segments. Some leading health and life insurers have started doing this with group plans, where employers have an incentive to encourage healthy lifestyles among their employees and therefore reduce claims and premiums.
  • Build the models that can provide insight. Building simulation models of exercise and dietary behavior and their impact on medical age is critical. Collecting data from sensors to calibrate these models and ascertain the efficacy of these models will help insurers determine appropriate underwriting factors.
  • Test initial hypotheses with behavioral pilots. Building and calibrating simulation models will provide insights into the behavioral interventions that need field testing. Running pilots with target individuals or specific employer groups in a group plan will help test concepts and refine the value proposition.
  • Enhance and roll out the new value proposition. Based on the results of pilot programs, insurers can refine and enhance the value proposition for specific segments. Then, redesign of the marketing, distribution, product design, new business, operations and servicing can occur with these changes in mind.