For Annuity Providers, ‘Finders, Keepers’ Is Name Of Game
Today’s annuity business is a game of ‘finders, keepers,’ with the winners hanging onto annuity assets and keeping lapse rates low, according to speakers at a conference co-sponsored by Lehman Brothers and A.M. Best Company.
As Jeffrey Oster, president of Client Preservation Inc. in San Francisco summed up, “it’s what you keep that counts.”
Oster offers some telling numbers to illustrate his point: 35% of annuity sales in 2000 were new money compared with 92% in 1990. But he adds that today’s pie is a lot bigger, approximately $140 billion.
Initially, it was thought that “shock lapses” or lapses after the surrender period ends would be in the 10% to 20% range, says Oster, but 50% was a “common number” and for some, the shock lapse rate was actually 90%. Many companies are actually in net redemption, he continues.
Oster cites reasons including: the end of surrender periods on old contracts crediting 8%-9% interest, new products and product features on the market, and a chance for brokers to earn another 6%-7% in commissions.
Additionally, he says, as the number of distribution channels increased, the loyalty of the career agent was not always present. “The stock broker is a transaction-based animal,” Oster adds, as an example.
And these newer channels also maintain that the client belongs to them and that the insurance company is just the manufacturer of product, Oster continues.
Insurers are “held hostage,” afraid to contact the client because they fear losing new money that they need, he explains.
Other problems, according to Oster, are that there are no background sales force to keep business on the books and that commission structures encourage the movement of business.
What exacerbates matters, he adds, is that most policies are not priced to be moved at the end of a surrrender period.
One reason, he explains, is that the product is priced so that deferred acquisition costs can be amortized over longer and longer periods.
There is a concern among insurers, according to Oster, that if a contract holder is approached and a proactive move is taken, that they will move the business. However, he continued, “far less than 1% move the business if a competitive offer is made.”
Bill Healy, managing director with Client Preservation, raises concerns about companies that only sell annuities. “If I was an insurance analyst and all a company did was to sell annuities, I’d short the stock.”
Healy adds that 35%-50% of profit comes after a surrender period and today waiting 15-20 years is considered “an eternity.”
If business is not retained, he added, companies could be headed for a significant writedown of deferred acquisition costs (DAC) and therefore the book value of those contracts.
Another problem he says that the industry faces is the sale of annuities for tax-qualified pension plans.
Oster says what insurers have to do is invest the time and money in building a system that will enable them to conserve business. The first step in achieving that is data mining, he says.
Then, he says, an insurer can try to reach out to an orphan business, partner with a distribution channel when a broker is no longer with that channel or work with an active broker in an active distribution channel. In order to take advantage of the first two sources of business, an investment must be made in a back-end sales team. In the third case, a broker can benefit by receiving a new commission while an insurer benefits by retaining a contractholder.
As for pricing a product, Oster says there is pressure to balance competitive marketplace demands and the need to keep the cost of a product to a consumer low with shortening the amortization of the DAC so that a product does not rely on extended periods of persistency in order to be profitable.
A study of annuity persistency in first quarter 2001 prepared by LIMRA International, Hartford, Conn., suggests improvement in persistency rates that continued a general downward trend that started in first quarter 2000.
The LIMRA report found surrender rates fell to 7.1% from 8.9% from first quarter 2000 to first quarter 2001.
Fixed annuity contract surrender rates dropped to 10.2% from 11.2% and variable annuity rates declined to 6.4% from 8.2%.
The LIMRA survey also found that banks had the highest surrender rates for fixed products with a total of 24% of contracts, followed by stockbrokers with 15.1%, independent agents with 12.5%, and career agents with 9%. Surrender rates for variable products totaled 9% for stockbrokers and 6.7% for career agents.
Reproduced from National Underwriter Life & Health/Financial Services Edition, June 29, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.