What Will It Take For The VA Industrys Great Boom Ahead To Succeed?
For many variable annuity market veterans, 2002 marked a significant crossroad, as the focus on the retirement income management needs of Americans was punctuated by a noticeable increase in the number of retirement savings and risk surveys.
For the annuity industry, these studies provided continuing evidence to support annuity product focus on the payout or distribution side of the business. With many of the 77 million baby boomers facing significant retirement income shortfalls, the marketing opportunities going forward are significant.
While the leading edge of the baby boom generation will not begin turning 60 until the year 2006, the educational challenges to raise the awareness level of consumers and distributors alike to the advantages of income products will take a number of years.
Additionally, effective compensation models must be present for the products to be recommended in the first place.
Last year, sales of fixed annuity income products were estimated at $5 billion, according to LIMRA. And the Diversified Services Group (DSG) annual survey of the VA payout market noted total sales from both immediate VAs and annuitizations from deferred products to be approximately $2 billion. These figures are currently a very tiny fraction of the combined annuity sales nationwide.
For the payout or distribution side of the annuity to become a success, three challenges must be effectively met. I have often referred to these as the three-legged stool of the income product, since the stool will not stand with just two legs.
For annuity product issuers who have a focus on the payout side, the new paradigm in 2002 became one grounded in broker retirement income education. No longer was the product to be marketed as a stand-alone solution to a retiree or pre-retirees retirement income needs, but as an integrated solution within a holistic framework designed to address a broad range of identified retirement needs, from long term care to cost-of-living adjusted income.
Several companies launched broker education programs in tandem with new retirement income riders for both deferred VAs and fixed and variable immediate income annuities. In so doing, the first leg of the three-legged stool has begun to be addressed.
It is a well-documented fact that broker education has not kept pace with product development and proliferation, a primary complaint among VA product distributors. Time (and sales) will tell if the effort on the part of the nations issuers has been effective.
Signs of broker/agent retirement income education awareness are just beginning to surface in the media. Additionally, the newly formed International Foundation for Retirement Education has launched two professional certification programs–the Certified Retirement Counselor (CRC) and Certified Retirement Administrator (CRA) designations.
The second leg of the stool that must be solved is consumer education regarding the insurance solutions to the retirement risks faced by both retirees and pre-retirees. Seminal works like the 2001 Society of Actuaries Retirement Risk Survey (conducted by Mathew Greenwald & Associates and the Employee Benefit Research Institute) have identified many of the issues and challenges facing Americans. Continued focus group work by Greenwald reveals the lack of preparedness and lack of understanding of solutions that the majority of Americans actually have.
It will take a long-term concerted effort on behalf of the nations leading educational associations like the National Association for Variable Annuities and the American Savings Education Council, as well as an army of “retirement income specialists,” to turn around the national level of retirement readiness.
The third leg of the stool is effective broker compensation for the payout side of the business. While product issuers have solved the primary income product complaints voiced by customers and planners, with the majority now offering some form of commutation option as well as liquidity features, and nearly half now offering a “floor” on monthly income payments, only a very small fraction offer trail compensation once a client annuitizes.
The Diversified Services Group annual survey on the VA payout market reveals some startling facts. The DSG survey noted that only two out of 16 issuers that offer immediate VAs had trail compensations on their product after a client annuitized, and only six out of 14 issuers who offered deferred VAs, which are proactively marketed as an income product (VA substitutes), had such compensation arrangements.
Additionally, only 50% of the IVA issuers and 57% of the IVA substitute firms pay a commission or fee upon annuitization. Brokers representing these retirement income products understandably refer to selling these products with their lack of ongoing compensation as “annuicide.”
At the recent NAVA Retirement Income Conference, a breakout panel with three producers was asked to provide its recommendations for a typical retired couple, and not one directly included a payout annuity in its solution.
If the annuity industry is to successfully engage and capitalize upon the extraordinary opportunities ahead, it must do a better job in meeting the challenges of consumer education, broker training and product compensation. Those firms that are staking an early claim to this market will more likely than not become the income product leaders of tomorrow. With over $4 trillion available in IRA rollovers alone, the market potential is truly staggering.
is editor of the VARDS Report, a Roswell, Ga., publisher of annuity statistics, and managing director, professional services, for Info-One. He can be reached via e-mail at email@example.com.
Reproduced from National Underwriter Edition, May 5, 2003. Copyright 2003 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.