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.