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.