2001′s Sea Change For Products
Will Continue Next Year
Sea change: That was the insurance product story in year 2001.
Life insurance sales swelled, fixed annuity sales took wing, equity index annuity sales hit a new record, disability income insurance inched up, and long term care insurance turned more heads.
At the same time, variable annuities swooned, corporate-owned life insurance sales skidded, health insurance premiums rocketed, and product innovators headed for cover.
The dramatic shifts gave proof to the words of Heraclitus, the Greek philosopher, who said that “everything flows, nothing stays still.”
Recession and terrorism get the blame or credit, depending on point of view. Whatever the reason, insurance leaders believe the product trends begun in 2001 will continue on into 2002.
For producers, that means less scrambling to find new types of products to sell in 2002, but more scrambling to find competitive ways to offer products that brought home the bacon in 2001.
For insurers, it means updating the newer product darlings, refashioning flagging product lines, and strategizing over how to maintain existing books.
“This year, we saw more sales of universal life with long death benefit guarantees, often out to age 100,” says one broker, Randy Bratton, principal of Bratton Companies, Memphis.
“People arent so worried any more about cash value build up,” he explains. “They know current cash value projections arent guaranteed, but that doesnt seem to concern them. Guaranteed cash values dont seem as important, either.
“What people are concerned about now is the death benefit being there,” he says.
The trend emerged even before the Sept. 11 terrorist attacks, according to Bratton. He says people starting looking for more security-oriented products earlier in the year, once the stock market started dropping.
That sparked growth in sales not only of UL with long term guarantees but also of fixed annuities, Bratton says. Meanwhile, sales of VAs, variable life, and mutual funds went “way down.”
It was the same at many other shops. “When the year started,” recalls Ronald A. Davis, of the Davis Life Brokerage in West Des Moines, Iowa, “I thought the new estate tax law would hamper life sales. But it turned out that people viewed the law as a temporary measure,” so they kept buying life insurance.
In fact, life sales were up at his shop in 2001. His explanation? People are pretty sure the estate tax will continue. They are also more aware of their own mortality, due to the terrorist events.
Annuity sales were up, as well, Davis adds.
But the types of life and annuity products that sold were different in 2001 than in previous years. The trend was toward products offering “safety and security,” he says.
For instance, fixed annuities were more popular than variable annuities. “And although rate of return was important,” Davis says, “safety of principal seemed more important. People wanted to know: How safe is the company? What are its ratings? How old is the company? What about its assets?”
In life insurance, UL drew more sales than whole life, according to Eric Marcus, president of the Marcus Agency, Sudbury, Mass.
Why UL? “People didnt want to pay the WL premium,” he suggests.
However, he adds, they didnt want any old UL. They wanted UL with a long-term death benefit guarantee, as noted above. “Traditional ULs, which lack such guarantees, make people ask, ‘How do I know its going to be there in the future?” he says.
Term insurance saw its share of the action in 2001, as well. “At the beginning of the year, we thought term sales would slow,” because the Triple-X (reserve) regulations would make the rates less competitive, says Jack P. Dewald, president of Agency Services, Inc. in Memphis.
“But that didnt happen,” he says. In the first few months, sales were dismal, he concedes. But it soon became clear that rate competition was continuing, so term sales ramped back up, especially on large cases.
Much of this happened well before Sept. 11, Dewald notes. Like the other brokers, he attributes some of this to the recession-inspired interest people have in owning traditional types of insurance.
The security-minded trends in 2001 pushed LTC insurance to the front burner, too. At the Davis Life Brokerage, for instance, LTC started coming into its own this year. “The adult children have become aware of it, and they want their parents to buy it. Asset preservation is the key,” says Davis.
“The potential market for LTC is very big, and the product has received a lot of favorable press this year,” adds Marcus. “Also, the products are much improved and more consumer friendly than five or ten years ago.”
So, he, too, has seen rising interest in LTC insurance.
Another morbidity-based product also saw some upswing in 2001, he points out. That is disability income insurance.
The DI business had some hard times in the early- to mid-1990s, Marcus allows, “but its starting to turn around now, and the DI companies have new products out that are more suited to the times.”
In fact, “industrywide DI sales rose slightly in 2001,” points out Brad Parks, product manager at the Hanleigh Companies, Dubuque, Iowa, and president of the Disability Income Advisor and Consumer Association. “Thats the first increase weve seen in the past 10 years.”
What happened, in Parks view, is, as the stock market dropped and VA and mutual fund sales fell, producers began looking for other products to sell. They wanted products that address financial worries about what happens if one gets sick during a rocky economy.
“DI traditionally sells well in economic downturns, for just that reason,” Parks says.
Although overall insurance sales did shift more toward general account products in 2001, “I think buyers still recognize the value of variable products,” says James R. Gelder, head of individual insurance and specialty markets at ING, Minneapolis.
“People are much more knowledgeable about the market today. Many have self-directed products like 401(k)s and they buy retail mutual funds. So they recognize that this is a market downturn, and that it wont last forever.”
When looking for long-term accumulation, such buyers will buy variable products, he predicts. In fact, he says, because the market is down today, “the products are a good buy right now.”
Still, he agrees that the long-term guarantees in todays ULs are very attractive to many buyers. For that reason, he predicts variable life policies will also begin sporting such features, more so than the few that do today.
What about equity index annuities? They were extremely popular in 2001, says Patrick Foley, president and CEO of Allianz Marketing, Inc, Minneapolis. His company alone expects to show about $1.5 billion in EIA sales for the year.
The volatile stock market and the extremely low interest rate environment were powerful forces helping this along, Foley says.
EIAs are fixed annuities that link their growth to increases in a stock market index, but have a guaranteed interest rate floor.
A relatively new product design, EIAs do have critics, including some insurance agents, Foley allows, but he maintains misunderstanding is the reason. The critics tend to compare EIA returns to those of VAs, he says. Thats not wise, he says, because EIAs are “bridge productstheir returns tend to fall between those of FAs and VAs.”
In 2001, he says, that message seems to have gotten through. “Weve had more financial planners and securities brokers asking about EIAs than ever, because of that and the protection features.”
The year 2001 also saw health premiums soar by “incredible” percentages, points out Dewald, who does a lot of health business.
And the “precipitous drop” in the stock market posed real challenges to VA insurers, many of whom saw sales sink dramatically, says Borden Ayers, principal of the Diversified Services Group, Inc., Wayne, Pa.
“This appears to have caused many insurers to refocus on shoring up VA sales and put off other product innovation,” he says.
The reason? The drop in VA portfolio values created an emerging net amount at risk in VAs having death benefit guarantees, Ayers explains, noting many modern VAs have such guarantees. This increased death benefit liability meant “VA companies had to increase their reserves,” he continues. And they had to do this at a time when they were also experiencing a decline in asset-based fees and in sales.
All this has propelled VA insurers to cut expenses and take other measures to stem the outflow. “Theyve had to rethink their game plan,” Ayers says.
As a result, VA companies have had less time to devote to “forward thinking,” particularly as regards developing strategies to meet income needs of the increasing number of people who will be entering retirement.
If the recession continues for a prolonged period, Ayers predicts “it will be at the expense of product innovation, and of using marketing resources to educate the public about annuities, especially immediate VAs.”
On the bright side, he says, a few companies have demonstrated they are committed to such development and education, despite the downturn. Thats good, he says, because retirement money in 401(k)s and similar products will roll, regardless of what the industry does.
Reproduced from National Underwriter Life & Health/Financial Services Edition, December 24, 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.