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Get Ready: Those New Guarantees Mean New Risk-Taking

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A statement at the very end of last weeks cover story almost took my breath away.

“Primary insurers are back in the risk-taking business in a significant way,” said the author, Scott Machut, who is vice president-special risk reinsurance at ING Re, Minneapolis (see NU, May 13).

This observation was not only correct, in my opinion, but also very timely, for it provides an excellent starting point for the second part of a discussion begun in this column last month (NU, April 1). Thats when we looked at how the word “insurance” is coming back into favor, along with the safe-money solutions that insurance offers.

Now, we’ll explore how this shift puts risk-bearing back into the limelight, and how that may affect you as insurance marketer and/or developer.

Machuts statement–about returning to the risk-taking business–naturally resonates with that purpose. He was referring to risks insurers are assuming as they adjust to new market conditions. But it has broader application, too.

You see, while you may now be offering more “safe-money” solutions than previously, you may also be taking on risks you thought youd never see again. And some readers, who never before dealt with traditional policies and guarantees, may be meeting these risks for the very first time.

As youll recall, throughout the 1990s, the insurance industry “financialized” itself. That is, to keep step with the go-go economy, many players put as much financial punch into their world as they could.

Many variable insurers pumped up the number of subaccounts in their products, for instance. They expanded the number of retail money managers the products offer, too. Some ordinary life insurance marketers brought spread-sheet selling into staggering complexity. Some insurers debuted equity index annuities, only to find themselves chatting with agents about “how the options market impacts EIA pricing.”

Then too, there was the stampede towards adding “Financial Services” to marketing names; the race towards convergence of insurance, banking, and securities; and the forging of financial alliances of varied styles and descriptions.

Again and again, product wags barked about how the changes were putting more risk onto the shoulders of consumers–because a good many designs offered scaled-back guarantees or none at all. The risk the critics spotlighted is the risk a contract would fail to do what policyowners wanted or expected. The owners might be left holding an empty bag, critics warned.

To illustrate: When talking about variable life, the oft- cited risk was that the underlying subaccounts could drop so low the policy would crash, forcing owners to fork over more money or lapse.

Another example: When talking about fixed EIAs, which do have a guaranteed interest floor, critics had another complaint. They said the design presents owners with the risk the policy may never credit enough excess interest (via linking to growth in an equity index) to make the EIA purchase worthwhile.

No matter what product was mentioned, if it downplayed traditional guarantees, someone inevitably pointed out that the result was risk-shifting to policyholders.

But now, as we have said, many players are dusting off their guarantee-making skills and offering guarantee-rich (or richer) policies in all sorts of products. The preponderance of death benefit guarantees (in variable annuities) is one example. Others include various income payout guarantees, return of premium guarantees, premium guarantees for set periods, and more.

Where does that leave you? If youre recommending or selling products that include those new or enhanced guarantees, you are in a wonderful competitive position. You have what many buyers today want, as shown by the uptick in fixed product sales.

But you are also taking on some old-style risks. The primary one is the risk that the company you recommend and/or represent will not meet the guarantees it offers. (The related risk, of course, is that you may be swept into any lawsuits that ensue.)

Even if you have worked with guarantee-rich products for your entire career, you may face a new risk. This is the risk that todays guarantees may differ in important ways from the ones you sold in the pastwhich could carry the risk that you were not told about, or did not notice, the changes.

For those who have worked with few or no financial guarantees before now, your risk is the unknown. That is, you may be in the dark about not only what the guarantees offer and how they work, but also about how to position them to meet client need, how to help service them, and what Web site or person has the answers.

If you work in a home office or regional office of an insurer, you have the same sweet-spot opportunity producers have–the chance to sell what todays buyers want.

However, some of you will also shoulder risk at a more dynamic level. This is the risk insurers traditionally carry when offering guarantees–the risk of supporting the guarantee. Thats in addition to the legal, ethical, and public relations risk they assume in offering any product where customers develop expectations, whether guarantees are present or not.

If yours is one of the insurers that has resumed offering guarantees after a hiatus, you share with producers an additional risk–that you may make errors due to insufficient knowledge about guarantees or how to work with them.

Even if your company never left the world of guarantees, you still face the risk of errors. These could be errors resulting from lack of knowledge about any new guarantee designs your company may debut, and also about the guarantees your competitors have unveiled.

The topic of risk has gale-force potential. For now, the message is: Bone up on the guarantees now afoot, and do your part to help deliver what is promised. Its risky not to.

Reproduced from National Underwriter Life & Health/Financial Services Edition, May 20, 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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