Want A Lifetime Annuity Customer? Zero In On Annuity Retention

Annuity companies today are experiencing “shock lapses” as blocks of fixed and variable annuity business come out of the surrender charge period.

Shock lapses refer the to lapse rates a company experiences at the end of an annuitys surrender charge period. The “shock” refers to the fact that the insurer often sees a spike in surrenders at that time.

In the early 1990s, these lapse rates did not pose a significant problem for the annuity business. For example, fixed annuity blocks at the time were seeing average shock lapse rates of 10% to 20%, up only slightly from the single-digit lapse rates typical of the surrender charge period itself.

But now, shock lapse rates on fixed annuities frequently represent 50% of the maturing block of business. Sometimes, they are as high as 90%. Whats more, maturing variable annuity business is starting to show the same trend.

In addition, several insurers, some of them major annuity writers, are actually in net redemption–i.e., theyre losing more money in surrenders than theyre taking in from new sales.

Clearly, the industry needs new strategies to address this very real challenge. In particular, it needs asset retention strategies that hinge on partnership between insurers and producers.

Implementation starts with the insurer. It should first analyze its existing blocks of business and segregate contract owners into three different groups of owners (see chart on page 11). Each group presents a different opportunity for asset retention, and each calls for a different approach.

Producer-insurer partnerships are pivotal in the largest group, where the contract owners still have an active producer and distribution channel appointed with the carrier. (The other two categories represent “orphaned” contract holdersi.e., those who have no channel and no agent, or an active channel with no agent, respectively.)

Here are some thoughts on approaches for each, starting with the segment that controls the most assets.

Contract holders who have active brokers and channels: Insurers that want to become actively involved with the conservation efforts of these channels and producers will face some significant distribution and regulatory challenges.

For instance, can the insurer itself play an active role in contacting existing contract holders and providing ongoing services? This raises the age-old questionwhose clients are they, and who is allowed to contact them?

The answer to such questions depends upon whom you ask. The broker, the agent and the channel (wirehouse, regional brokerage firm, or bank) would be quick to respond that the client is theirs. As for insurance companies, they often regard the producer as their primary client, rather than the customer.

My suggestion is for the insurer to take steps to obtain buy-in from producers and their firms on the proposed asset retention program. Such “conservation through contact” programs include add-on programs, newsletters, asset allocation reviews, and more.

The message for all is: Its in everyone’s best interests for the insurer to initiate, at the insurer’s expense, a variety of customer relationship marketing initiatives.

But it is imperative that all such customer contact communications include the broker. These programs should also result in additional compensation for the broker and channel if new money inflow results.

The advantages: If the brokers and channels are secure in knowing that they are not going to lose their clients, and that the compensation they receive from these efforts is competitive, many will allow efforts like this to occur. Indeed, some will welcome such programs, for brokers will almost always allow someone to help them market to their books, especially if there is no cost.

Whats more, as the brokers and channels benefit from new business generated without great effort or expense, they will develop a more favorable view of the insurance company sponsoring the program.

Meanwhile, with proper regulatory approvals, the carrier gets a chance to deliver a variety of messages to policyholders, resulting in greater loyalty and retention. In this way, it gains the opportunity to drive new business, even as it enhances retention.

Channel-controlled orphans: The second level includes channel-controlled orphans. These contract holders come from a channel that still gives new business to the insurer, but the producer who originally placed the business is no longer with the channel and no longer appointed with the insurer.

Here, insurers must develop a turnkey, centralized approach to working these accounts in partnership with the channel.

The advantages: This approach may generate high quality leads, which can be distributed back to the channel for cross-sales and other new money sales initiatives. Any solution must include compensation for the channel, retained ownership and the possibility of additional sales opportunities with these newly revived contract holders.

Contract holders with no channel or agent: This category has the smallest percentage of assets. Examples include policies distributed through banks that are no longer in business or other channels that are no longer active. In addition, the brokers or agents that placed these contracts are no longer appointed with the carrier.

Contract holders in this category are at risk of leaving, because there is no one from the insurance company or distribution channel to intervene. Many are well aware of other choices that are available, even if the competition doesnt let them know first.

For those reasons, this block of business demands “proactive conservation” on the part of the carrier.

Proactive conservation efforts not involving a new annuity contract can include add-on programs, asset allocation assistance, crosssell programs (involving products other than annuities) and optional rider additions (to the existing annuity contract).

Advantages: These types of programs tend to work well when the chief needs of the contract holder do not involve an upgraded contract. In other situations, a contract holder may be interested in, and benefit from, exchanging the current contract for one with enhanced features, despite the imposition of new surrender charges. Insurers must be aware that regulatory challenges may come into play in these situations.

In sum, when carriers partner with active brokers and channels or with distributors in orphan contact programs, the partners stand to generate revenue and new sales opportunities, all assets the channels did not even know they had.

Better yet, the programs signal that the industry is tending to the coverage needs of clients who may otherwise wind up with inferior coverage or no coverage at all. In this way, asset retention programs help build lifetime customers.

Jeffrey Oster is a registered principal and branch manager with Raymond James Financial Services, Inc., San Francisco, Calif. His email: joster@rjfs.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, February 4, 2002. Copyright 2002 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.


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