Its an interesting time for variable annuities. Sales are soft, although theres some anecdotal indication that a rebound is underway from first-quarter doldrums. 1035 exchanges are increasing, scrutiny on suitability is very high, and insurers are scrambling for market share. Its going to be tough.
I expect that even some rebound will result in soft VA sales this year. Additionally, competition is fierce. There are now some 500 VAs, roughly double that of 5 years ago. Insurers will need to work more closely than ever with their distributors and be more cost-conscious than ever.
The winners in this environment will be producers and annuity buyers. The insurers who know how to please both will also be winners. Insurers who make products too producer-oriented will lose and those that ignore producers altogether will also lose.
What exists here is a classic rising supply, falling demand situation. There are some who believe that this is catastrophic. It will lead to too much pressure being placed on insurers to get business. It will lead to too much pressure being placed on brokers to get business. Corners will be cut, quality compromised, and buyers confused.
I dont agree. To be sure, it wont be an easy time, but increased competition has positive outcomes, not negative.
Increased competition leads to increased consumer choice. It serves to allow for more specific product fits for more buyers. One size fits all is never even contemplated. A particular product can uniquely fill a particular need. Consumers benefit.
Increased competition leads to lower costs. As more carriers compete for fewer customers, any fat in their products or processes will be cut out to allow for the best possible price. Weve started to see this with VAs, but I dont think its quite taken hold yet.
Cost-cutting on VAs usually translates to lower mortality and expense (M&E) charges. Recognizing that these charges are typically guaranteed for the life of the contract, even a small reduction can lead to significant additional retirement savings accumulation. Consumers benefit.
Increase competition leads to more targeted commissions. Youll notice I didnt say lower commissions. Targeting commissions will often mean lower, but not always. Specifically, targeting means more closely matching the commission with the required contribution of the distributor.
This means that in a highly competitive environment, brokers who require more time committed to the selling process (more training, more education, etc.) can receive a commission that is targeted to that effort. On the other hand, a distribution system that has certain efficiencies and/or economies (e.g., affinity group-direct) can be paid commensurate with its efforts. This may be a much lower level.
Targeting commission means that you neednt have a one-size-fits-all commission schedule, and money saved on commissions can go toward improved product features. Consumers benefit.
Increased competition leads to creativity. As insurers and brokers look for ways to differentiate themselves and their offerings, theyll get more creative. This leads to product innovation, more features, more and better benefits. Creativity also leads to finding new uses for products, thereby improving financial outcomes. Consumers benefit.
This all sounds pretty good. Is there any downside to intense competition? Those who believe that corners may be cut or that insurers or agents may behave inappropriately out of desperation do have a point. However, I strongly believe that any inappropriate behavior will be limited and isolated. I think it is also fair to point out that isolated bad business practice exists in the best of times; its not a product of competition.
Competition can be painful, but its necessary to push us all to our highest and best level. Use competitive times to search for better ways of helping your clients. Theyll have a better retirement and so will you.
Thomas F. Streiff, CFP, CLU, ChFC, CFS, is president of IAC Securities and Money Matters Exchange, Oak Brook, Ill. He can be reached at Tom.Streiff@mmexchange.com.
Reproduced from National Underwriter Life & Health/Financial Services Edition, August 13, 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.