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