By Robert M. Baranoff
Theres convergence, and then theres product convergence. Theres a fair amount of the first but still very little of the second. Thats the finding of a recently completed survey of LIMRA Internationals North American membership.
Of 32 companies responding, including some of the largest in the industry, just over half distribute their insurance products through some other type of financial services company, such as a bank, wirehouse, regional brokerage firm or a mutual fund company. And that does not include sibling companies owned by the same parent.
Going in the other direction, 14 companies belong to families in which products from a non-insurance subsidiary (often mutual funds, sometimes bank products) are distributed through the insurers distribution channel.
Only one company claimed to have a true convergence product–a Treasury-linked annuity. This same company reported a sister company has a convergence product, too–a Treasury-linked CD.
As the industry gains experience in the deregulated financial services environment, imagination and creativity may yield some intriguing new possibilities.
Of course, many companies sell variable life and annuity products, and a number of others sell equity-indexed products. Indeed, since these products combine features of insurance with aspects of investment products, they certainly would qualify as convergence products in the true sense of the words. In the recent survey, however, these products were excluded, since the survey goal was to identify newer types of offerings, reflecting creative ideas spawned since enactment of Gramm-Leach-Bliley in 1999.
The above is not to say that there is only one non-variable, non-equity-linked convergence product out there. That is not the case.
In addition to the Treasury-linked products already mentioned, theres the much talked about CD offered by Jackson Federal Bank (subsidiary of Jackson National) whose rate of return is tied to the S&P 500 but with a minimum guarantee that the initial sum deposited will be returned if the CD is kept to maturity.
And, while it wasnt reported in the survey, another company is marketing an IRA product that, under one contract, allows a retiree to invest in both mutual funds and an immediate (albeit flexible benefit) annuity. The design is such that, over time, additional funds are migrated into the annuity, allowing for dollar cost averaging and better timing of investments instead of committing the entire lump sum at once.
The preceding suggests that, despite the fact that many insurers are now parts of financial conglomerates, the industry has not been rushing to market with new types of convergence products. It seems the cross-distribution of various types of financial products is certainly on the rise, but very little cross-pollination has taken hold at the product level.
Possible reasons abound. Convergence products may be seen as inherently complex, which may reduce the producers ability and desire to understand them, much less explain them to clients.
Also, depending on the design, a convergence product idea may seem very complex to administer, requiring major systems expenditure. If so, the pricing required to achieve profitability may result in poor economic value for the consumer.
Speaking of the consumer, there certainly doesnt seem to be any tremendous outcry for new products or options. Therefore, the lack of activity may simply reflect lack of demand.
Finally, silos within organizations may be preventing the cross-fertilization necessary to create these hybrid products. Or all of the above.
One cant help but wonder if another factor is lack of creativity. We all have a tendency to work “inside the box” and the longer we work, the more rigid the walls of the box often become. What would a new convergence product look like?
Back in 1999, pre-GLB, Steve Forbes of LOMA and I published a paper exploring alternative ways to address the middle market cost-effectively and with attractive product and marketing ideas.
One idea was to market life insurance as a holiday or birthday present–say, by contributing to an account that funds a life policy for a loved one or naming a loved one as beneficiary. Technically, that may not be a convergence product, but if sold with a “gift club” wrapper, it could be considered as such.
Or what about CDs or savings accounts–popular products for middle-income people–that offer some form of death benefit? Imagine, for example, a $5,000 five-year CD sold to a healthy 35-year-old male that pays only 1.5% instead of 3.1% interest but that comes with $100,000 of term life insurance (very possible, judging by rates currently available online). Or, how about a $10,000 CD that pays 1.9% but provides $250,000 of coverage?
The offering could clearly be more attractive at higher interest rates, and the life insurance element would have to be clearly disclosed. But when positioned as a unique benefit–the opportunity to obtain low-cost coverage for the price of a little interest on the CD–this would truly be a convergence product.
For now, convergence products seem to be taking a back seat to “transformational” products–the policies that morph from providing one type of protection to a different type of protection, as the customers needs change.
Spurred by the aging baby boomers, their impending retirement and old age, and the advent of long term care and critical illness products, transformational products seem to be garnering a large share of product development focus these days. That may put convergence products even further back on the burner.
Robert M. Baranoff, MAT, MBA, FLMI, LLIF, is senior vice president and head of research at LIMRA International, Windsor, Conn. His e-mail is [email protected].
Reproduced from National Underwriter Life & Health/Financial Services Edition, May 26, 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.