Retirement Income Planning Challenges: What Insurers Need To Do

By William Boscow

For many generations, the financial services industry has focused the bulk of its collective resources on the development and delivery of products focused on the accumulation of wealth. Overall, the industry has delivered on its promise to help people build the wealth required to satisfy their financial needs.

However, as reported in the May 24, 2004, issue of National Underwriter, an undeniable groundswell of change is now thrusting itself upon the industry. This is coming in the form of rising demand for solutions that will help people manage cash flow effectively during retirement, a period that can easily last more than 25 years.

Given the tremendous potential of this market, in terms of assets and number of prospects, every segment of the industry must determine what is required to be positioned effectively to meet the challenges and opportunities. This article will examine what manufacturers must do to achieve this goal.

Based on my observation of numerous companies over the past 12 months, the needed changes fall into 3 key categories: organization, innovation and technology.

Organization: Most companies have historically followed the traditional organizational model of “channelizing” their efforts according to internal, ongoing processes. Obviously, a channelized structure is advantageous because it allows management to identify and evaluate with ease various measures that gauge productivity, profit, loss, etc. However, in many cases, this approach also deters responsiveness to end-customer needs.

As you will recall, the repeal of the Glass-Steagall Act of 1933, via the Gramm-Leach-Bliley Act of 1999, gave insurers new opportunities to provide customer-focused, goal-oriented solutions via a diverse portfolio of products. However, most insurers have yet to implement the organizational changes that pave the way for successful customer-focused platforms. This is especially evident in many of the retirement income-related efforts.

Also contributing to the need for organizational change are the key changes in consumer behavior shown in the box. These changes already have spurred a few innovative companies to reinvent their manufacturing models according to customer needs and demands. But other companies still need to give serious thought to changes they must initiate. Given the size of the retirement income market, if these companies wait much longer, it will become more and more difficult for them to play “catch up” when boomers increasingly seek income planning assistance.

Innovation: Most retirement-related marketing or sales literature in existence today treats retirement as an immediate, abrupt event. It assumes the retiree is forever banished to the golf course, bridge table, etc., never to be engaged actively in the workplace or overall society again.

In reality, thats far from the actual truth for the majority of retirees. Studies show that over 80% of people close to retirement intend to continue working well into their retirement years. Yes, they most likely will ease their schedule and be more selective in how they choose to engage themselves in the workplace. But the fact is that very few retirees are interested in leading a physically or emotionally sedentary existence. In short, traditional retirement no longer exists for many current or soon-to-be retirees.

With the decreasing role of defined benefit plans, more reliance is being placed on the effective management of defined contribution plan distributions and personal savings to generate income. As a result, the marketplace is clamoring for retirement-oriented solutions that serve as an effective income management platform and support an active, ever-changing lifestyle.

The leading solutions will, among other things, feature lifetime income, investment flexibility, liquidity and ability to adjust income streams as needed. Can insurance products, such as deferred and immediate annuities, satisfy all of these needs? Quantitative studies suggest that fixed and variable annuities will substantially increase the probability of not outliving a reasonable retirement income stream and should represent approximately 20%-35% of a clients overall portfolio.

But other products, originating from inside and outside the insurance industry, should also populate the portfolio. Therefore, insurers must adapt their product development efforts to ensure their products are able to be integrated as part of an overall, holistic platform designed for the clients specific needs.

Technology: Companies electing to develop innovative products must ensure that all key stakeholders participate actively in the decision-making process. Failure to do so can cause obvious and severe consequences. One major company successfully designed an innovative income product, only to learn that its existing technology platform lacked the necessary horsepower to administer the offerings complexity as intended. As a result, the insurer lost any first-mover advantage it hoped to gain and has incurred a substantial loss in expected revenue.

To ensure against overpromising and underdelivering (or not being able to deliver at all), companies choosing to focus on the retirement income market must communicate across all key functions within the organization. Unfortunately, many insurers are burdened with archaic systems, impairing their ability to administer customer-focused income products. This lack must be addressed before the companies can offer customer-focused income solutions.

To maximize effectiveness, the companies should analyze what changes are necessary. Organizational structure, product innovation, internal communication and technology all need to be aligned to support effectively the needs of the customer. Just as the retail advisor must become better educated about the many retirement income planning issues, insurers wishing to establish a strong presence in the retirement income market must take the necessary steps to turn what may seem like significant challenges into an unparalleled opportunity.

William Boscow, CLU, a sales and marketing consultant in insurance and financial services, is based in Fort Wayne, Ind. He can be reached at bboscow@aol.com.


Reproduced from National Underwriter Edition, July 16, 2004. Copyright 2004 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.