At The Cutting Edge: Nascent Realism

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Time was when asset allocation and maximum performance were the cutting edge issues in life insurance and annuity product development. More recently, safety and guarantees took the lead.

But today, the frontier of insurance product thinking might better be characterized as nascent realism. That is, developers are concentrating on responding to the emerging realities of the 2000s. For example:

–Simplicity. While flexibility is good to have, producers are saying that customers dont always want the complexity or the cost that comes with it. So, insurers are stepping up efforts to simplify approaches and/or gain new efficiencies.

–Compliance culture. Increasing regulatory scrutiny is spurring greater focus on providing product transparency.

–Longevity. Now that the oldest boomers are fast approaching retirement age, developers are debuting new retirement income programs, features or products.

Guarantees are still hot, especially the so-called secondary guarantees on universal life policies. In fact, exhibitors at the annual meeting of National Association of Independent Life Brokerage Agencies, in Boca Raton, Fla., told National Underwriter that secondary UL guarantees were all the rage among visitors at their booths.

Still, the “whats-next” people are looking beyond.

One step that ING is taking is to make all products it offers available for distribution by all its channels, says Donald W. Britton, president of the U.S. Life Business Group of ING U.S., based in Atlanta. No more does the company offer one product for one channel and another one for another channel.

“Were offering open access to all our channels,” says James R. Gelder, president of Life Insurance Distribution at ING U.S., based in Minneapolis, noting this simplifies distribution arrangements. Street level compensation is the same, too, for all channels (though unique compensation arrangements, for support, continue by channel).

This change reflects a larger view that ING has regarding the product turf. Companies today must differentiate themselves by underwriting and service, contends Gelder, explaining that the insurers relationships up and down the food chain are vital. “There will always be some differences at the product and feature levels,” he concedes, “but that is only one part of the overall equation. A company cant just sweep the whole market with that. It needs to be a change agent, to help influence the buying decision.”

That is so even in the term insurance market where price is so important, he says. On a large term life case, for instance, if a company can deliver a rock-bottom price but takes 6 months to get the policy underwritten, “brokerage general agents wont sell that product.” Its a balancing act between product and service thats required, Gelder says.

The move to simplicity also impacts policy design. Take the proliferation of guarantees that now are available in UL, variable universal life and variable annuities. “Its getting far too complex,” says Andrew W. Hutchinson, vice president-product development at Mutual of Omaha in Omaha, Neb.

In the future, he says, “I think youll see simpler designs and options for people.” For example, he says Mutual of Omaha has debuted Priority Max GUL, a UL that offers a “dial a guarantee.” This allows clients to choose the secondary guarantee period they want. Not everyone thinks theyll live to age 100 or more, Hutchinson says, so this simplifies things for the buyer. “People can just choose the period they want.”

Likewise, at Lincoln Financial Group, Hartford, Conn., the company lets clients choose, in the same VA contract, between a 5-year step-up option and a new annual step-up option for its guaranteed minimum withdrawal benefit (GMWB). Now, says the firm, clients do not have to make their VA purchase decision based on which annuity is paired with which GMWB.

That is significant because, when new policy features, such as GMWBs, start to come out in different versions, manufacturers often tend to offer the newest version in a new policy. That means the financial advisor often has to keep up with multiple policies of roughly the same design.

Hartford Financial Services Group Inc., Simsbury, Conn., also offers 2 income protection benefits in its VAs. Both allow annual withdrawals, regardless of account value. The Principal First rider allows up to 7% of premium to be withdrawn a year, while the new Principal First Preferred rider allows withdrawals of up to 5% of premium for a “significantly lower cost.”

Simplification fosters greater transparency, too, notes Heather Dzielak, vice president of Lincolns variable annuity business, Hartford, Conn. And increasing transparency is definitely on the agenda at broker-dealers that sell VAs, she notes.

B-Ds always have been interested in understanding product value for the client, Dzielak says, but in view of this years regulatory investigations into insurance, the compliance environment is at a “whole new level.” Now, there is even greater focus on performing due diligence than in the past. B-Ds need to know what is the most suitable product for clients and transparency helps B-Ds have a better understanding.

This is leading to increased effort on the part of manufacturers to simplify policies in a way that clearly shows the value proposition, Dzielak says.

For example, rather than offering one B-share product and a similar C-share product, she says, insurers will be moving toward offering one product with different share classes in itsimilar to the way mutual fund companies offer one product with multiple share choices.

That means carriers will not direct any particular message or share class to a specific client or channel, Dzielak says. Instead, their offerings will be more transparent and simple. “I think youll see this trend unfoldwith one prospectus supporting all share classes, for instance.”

Other insurers are simplifying by using the same rider with several policies in a portfolio. For instance, John Hancock, Boston, now has added its LifeCare Benefit Max rider to 3 of its life policies2 UL contracts and a VUL. (The rider which doubles the pool of money available in event the life insured has long term care expenses.)

Others are beefing up the breadth of their product portfolios, so that its easier for independent advisors to work with one company for most placements rather than going to one company for, say, term insurance and another for variable life. Hartford Life is an example. The firm now offers the full spectrum of life policy types, from term and whole life on through UL and VL.

Noting that other insurers are moving in the same direction, Hartford says the days are gone when life insurers and agents can remain successful by focusing only on general-account-based products or only on equity-based products. Client needs and preferences have become increasingly sophisticated, the insurer says, so financial professionals now are selling a wider variety of life policies than they did in the past.

The insurers that offer broader portfolios in a product line say this not only simplifies the advisors life, it also has a benefit for the insurerthe practice helps the company deepen its business relationship with advisors.

Even so, companies are keenly interested in being more selective about how many and what types of policies they offer in each line. This trend is especially pronounced at insurers that have merged with, or bought books of business from, other carriers. In such cases, product portfolios often become bloated and redundant, so companies then prune the offeringsto simplify choice and strengthen competitiveness.

Still, another simplification is in the area of business process. Chase Insurance contends that, to succeed in todays competitive marketplace, the company must remain committed to simplifying the business process for agents and other distribution partners.

To that end, the company says it is making “significant investments” in the area of “efficient processing that will boost the sales prospects and distribution opportunities” for agents and brokers. Making insurance “simple” and providing “straightforward solutions” for customers are the goals for this insurer, which was formerly Kemper Zurich until JPMorgan Chase purchased its parent, Bank One, earlier this year.

The other cutting edge trend arealongevityis starting to have noticeable impact on products.

For example, among variable insurance executives surveyed this year, “we saw a growing enthusiasm for the retirement income opportunity,” says William Borden Ayers, principal of Diversified Services Group, a Wayne, Pa., firm that tracks income solution trends.

Most executives who were contacted realize that there will be no single-product solution to retirement income needs, he adds. “Rather, a range of products and approaches will be needed.”

Many VA insurers are using the GMWB features to address income planning needs. For example, Jackson National Life Insurance Company, Lansing, Mich., expressly states that its recently debuted GMWBsLifeGuard 4 and LifeGuard 5are instruments for creating an income stream. “Helping investors create a steady paycheck that will last through their retirement years is one of the most significant challenges facing financial professionals today,” explains Clifford Jack, executive vice president and chief distribution officer.

Likewise, at Lincoln Financial, the new one-year reset GMWB, referenced earlier, was designed to provide older pre-retirees with “a way to help them catch up [on their savings] and retire with dignity,” says Dzielak.

The “catch-up” phrase itself is gaining currency as a financial concept in many financial products geared to boomers. Some insurers even position life insurance as a catch-up vehicle, in the sense that it enables the boomer to reconstruct estate value, earmarked for heirs, that has not rebounded from market losses.

Dzielak uses some other terminology that is also gaining steam. Today, she says, many people aged 55 to 65 feel they cant afford the “downside” of investing in the stock market, but they do want the “upside.” The new GMWB feature addresses that, she contends.

Other products are addressing that downside/upside preference as well. Certainly, that trend is a driver behind the growth in index annuity sales, says Jack Marrion, president and founder of Advantage Compendium, St. Louis. He says index annuity sales rose roughly 60% in the first 3 quarters of 2004, reaching nearly $16.5 billion compared to $10.3 billion in the same year-earlier period. Most index annuities do not as yet target income planning solutions, but Marrion predicts this may change in the future.

Another income approach is to use VUL insurance as a source of supplemental income. Example: This fall, Principal Financial Group, Des Moines, Iowa, rolled out its Principal Variable Universal Life Income policy that has an “automated” supplemental income feature with structured withdrawals (percentage of net surrender value, a fixed amount, or a maximum withdrawals amount). The client puts 100% of his/her allocation into the Principal LifeTime Account that is closest to the year of retirement start date; the account then invests in underlying Principal Mutual Funds and automatically modifies the mix as the target retirement year draws near.

“We have over 70 million baby boomers heading toward retirement and they are living longer than previous generations,” points out INGs Gelder. Meanwhile, many of the accumulation products these customers bought during the 1980s and 1990s now have significant value inside them. This means boomers will need help managing this money, he says.

A September 2004 survey by ING notes that 65% of mid-Americans do not have a plan for paying themselves in retirement and do not even know what their monthly retirement budget should be. ING views that as a signal that Americans need to have more focus on “the finish line.” In this era of nascent realism, it appears that more and more insurers are striving to help clients do just that.


Reproduced from National Underwriter Edition, December 3, 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.