Products Are Changing, And A New Financial Order Is In The Making

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Yes, weve all heard that it is back-to-basics time and that products with safety and security features are the big winners.

The sales numbers support that. Just a few weeks ago, for instance, the first quarter 2003 sales report from LIMRA International, Windsor, Conn., announced that “fixed products continued to gain market share at the expense of variable products.”

But it would be a mistake to interpret this environment as a return to the old (i.e., pre-1990s-bubble) marketplace.

The market, and product, environment is starting to look a lot like a new financial order. All the pieces are not yet in place, but some are hard to miss. We will look at some in a moment and then consider the impact on you.

A news development in another industry will set the stage. This was the June 2003 announcement that Air France and British Airways are terminating commercial flights provided by their Concorde supersonic airliners. The craft was just too costly to operate in todays economy.

I couldnt help but feel a twinge of sadness at the news. The grounding of the Concorde seems to epitomize the crushed plans of many businesses today. To stay afloat, firms large and small are reining in bold and daring products in favor of the tried and true. The insurance and financial services sector is no exception.

But wait. There is more to the Concorde story. It seems that various business interests are looking at ways to keep the aircrafts flying, possibly for niche markets. And some aeronautics experts are talking about bringing out other high-speed jetliners to replace the Concorde but at lower costs.

Is the same type of renaissance thinking showing up in the insurance and financial sector? I think so.

Lets use the enhanced death benefit guarantee features in variable annuities as an example. As you will recall, these became all the rage in the second half of the 1990s. Most of the features were backed by some type of reinsurance agreement. But when the recession hit, the reinsurers saw their net amount at risk associated with the features mushroom as account values fell. One by one, the reinsurers stopped offering coverage for VA death benefit guarantees.

This effectively “grounded” the provision for many products. By the early part of 2003, some insurers stopped offering the guarantees altogether. Others debuted VAs with new types of guaranteesthey were similar to the others but were available for a price (i.e., so many basis points per option selected. One hundred basis points equals 1%.)

And, in the latter group, most debuted their new guarantees with statements saying something like this: The feature is guaranteed with the full faith and trust of the insurance company.

In short, they had decided to continue offering the feature and to take the risk head onwithin limits.

This same kind of trend is showing up in other product lines, too. In these other areas, reinsurers have also cut back, or steepened the price of, their offerings. These other primary carriers have responded, tooagain, by risk-taking within limits.

For example, some readers have noticed that the waiver of premium provisions in some life policies have been revised to have more limits on when the provision applies.

Some critical illness carriers are putting tighter limits on the amount of coverage they will write on an individual.

Many disability income and long term care insurers are putting their focus on guaranteed renewable contracts, which allow insurers to change prices on a per-class basis, if deemed necessary. DI and LTC contracts with stronger guarantees are still available but for a price.

If you look around, you will see the same thing going on in other industries. Personal computer companies are shortening their warranty periods, for example, and software companies are limiting the periods the offer of toll-free technical support.

Many who call me about these trends in the insurance and financial sector are angry because they say the products are not the Concordes of yesteryear. They are “less than.”

The customers dont benefit from this, they fume.

Some callers do concede that, in focusing on core products with curtailed, or priced-up, bells and whistles, insurers have at least maintained a market for state-of-the-art products. Still, they believe it is better to have the richer products more widely available (and/or affordable).

Fortunately, as with the real Concorde story, in the insurance and financial services sector, there is more to the story. A good number of insurance developers are looking at new ways of flying their full-featured products. New designs are on the drafting boards, or in the product hopper, even as I write this.

From what I hear, these new products do have lower-cost elements built in (often with the help of streamlined software and delivery approaches). But they have much of the richness of 1990s-style coverage. Further, they have features that are more tuned to the 2000s-style population.

When the recession lifts, some of the new designs just might take off from a financial runway near you. They may not look or sound like the old Concorde, but they might fly just as well.

For now, the smart money is focusing on reading each contract very carefully.

If you see that a familiar feature has changed or is now available for a price, note it. Point it out to your associates. Ask the insurer to explain it. Find a way to work with it until the cloud of the slow economy lifts. And be sure to incorporate the changes into your presentation to clients.


Reproduced from National Underwriter Edition, July 14, 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.