“Declared rate and indexed annuities are under attack on multiple fronts,” states a new position paper from the National Association for Fixed Annuities, Milwaukee, Wis.

NAFA “would like to set the record straight,” the document adds pointedly.

That feisty tone captures the mood of much of the insurance and financial product industry for 2005, and it sets the stage for the product environment to come in 2006.

Many insurance sectors saw industrywide sales in key product lines rise only modestly, stay flat or decline in 2005.

True, there were sweet spots. New variable annuity sales rose throughout the year, especially in the third quarter, leading to predictions that year-end VA sales should surpass those of 2004. No-lapse universal life had definite play, and health savings accounts now number more than one million. Also, some carriers reported big sales increases in certain lines, despite the ho-hum results of their sector industrywide.

Still, it’s been nip and tuck. For instance, earlier in the year, some VA watchers saw some flat-lining going on and wondered whether the industry could get enough bounce in 2005 to beat 2004′s year-end total (something that is now expected). In life insurance, fair to flat dominated, with growth showing most prominently in fixed and guaranteed contracts, not variables. Disability income insurance sales are largely flat, say industry leaders. Even index annuity sales, which enjoyed several quarter-over-quarter increases from last year on, took a dip in the third quarter of 2005.

As for long term care insurance, Phyllis Shelton, president of LTC Consultants, Hendersonville, Tenn., openly wondered in her new LTCI Harvest newsletter, “why on earth LTCI sales went from $1 billion in 2003 to $840 million in 2004 and we’re sitting at $340 million as of June 30, 2005.”

In some areas, sweeping laws and regulations have been siphoning off corporate energy from new product development and promotion.

Executives point to reserving regulations and estate tax reform proposals as examples. They also mention ongoing compliance with complex measures such as the Health Insurance Portability and Accountability Act, Gramm-Leach-Bliley, the Patriot Act and Sarbanes-Oxley.

The industry aims to comply and do what is right, but that takes time and money, say executives. The costs “ultimately get passed on to the consumer though product pricing,” says Melissa Millan, corporate vice president of long term care and disability income insurance at MassMutual Financial Group, Springfield, Mass.

The National Association of Securities Dealers’ August 2005 Notice To Members 05-50 is the newest challenge–to fixed products in particular. The NTM recommends that broker-dealer members treat all index annuities as securities, even though the products have not been so declared. Hence, NAFA’s new position paper seeking to “set the record straight.” The paper even suggests that the 3Q falloff of index annuity sales “may well be attributable to the unfavorable climate” resulting from the NTM.

For all these reasons, products people bit the bullet in 2005 and decided to defend, promote and reshape their offerings. They are betting what they set in motion in 2005 will bear fruit in 2006.

Defend the products–The index annuity industry is drafting statements, and organizing initiatives, to counter NASD’s NTM.

Already, some B-Ds are interpreting the NTM as a reason to require all fixed business–including traditional fixed annuities and fixed life insurance, some sources say–to flow through their firms. That has insurance marketers alarmed. Some are preparing for turf wars at many levels.

For instance, some B-Ds might try pressuring an insurer’s top contract, suggests Ben F. Ward, managing director of The Leaders Council Agency LLC, Memphis, Tenn. If that happens, he says, the large insurance marketing organizations will go elsewhere with their business.

Product defense is top of mind in the disability business, too. Several insurance associations recently took the bold step of suing the California insurance department over what they contend are “underground regulations” regarding long-term disability insurance. (The suit was filed by the Association of California Life and Health Insurance Companies, America’s Health Insurance Plans, American Council of Life Insurers and also the California Chamber of Commerce.)

“There is significant concern in the industry about what California is trying to mandate,” says Millan. Disability insurance “is not designed to be an annuity or a retirement product. It’s to take care of income needs if a working person becomes disabled.”

Increase the product focus–Efforts are under way to put more focus on a product line through organizational clout. Recent examples are this year’s formation of two disability insurance organizations, both aimed at growing business by clarifying what disability insurance is, does and needs.

o The new 12-member Council of Disability Insurers seeks to help increase consumer awareness of individual and group disability insurance, says Millan. Similar to the LIFE organization (for life insurance), the Council will use public relations and advertising to drive its public awareness initiatives, she says.

o The new 100+ member International Disability Insurance Society aims to be a forum for all key disability interests to discuss common opportunities and problems, says W. Harold Petersen, president, Petersen International Underwriters in Valencia, Calif.

Reduce complexity– “Across the board, the insurance companies are becoming more creative in the way they provide products, programs and value, and how they price the products,” says Gary Dworkin, president of Dworkin Associates, Rochester, N.H., and the new secretary of National Association of Independent Life Brokerage Agencies.

“They’re providing clients with better, and maybe fewer, products that have few or no moving parts,” he says.

That’s not always easy, say executives. For instance, in disability income and LTC insurance, rendering products less complex and more understandable always entails dealing with the push-pull, says Millan. That is, developers try to respond to consumer desire simply to be protected and producer desire to have products that differentiate them from competitors. Still, that is the direction the industry will need to go, Millan contends.

Even smaller carriers are getting into the act. For example, Fidelity Life Association of Oak Brook, Ill., decided to make simplification the focal point of its move into the mid-market.

The insurer is using a new process that cuts “to days” the underwriting time needed for mid-market life policies, explains chief marketing officer George Vlaisavljevich. The insurer also is offering a “fast, hassle-free purchase experience,” he says, via an accept/decline model, web-based technology, and active involvement of outsourced underwriters on recorded calls with applicants. Also, he says, “we avoid anything requiring full blood testing.”

Reach new target markets–Target marketing is by no means new to insurance, with attention in recent years on reaching women, Hispanics, African-Americans and Asian-Americans with tailored products and programs. But 2005 saw target marketing add new dimensions.

More annuity companies began angling for the retirement income market, for example. Also, disability insurers have taken positions as niche players, says Dworkin.

In the life insurance arena, some carriers are adding the mid-market to their playlist. ING U.S. Financial Services, Minneapolis, is one such company, and the story behind this move shows how multiple factors are influencing target marketing decisions.

Historically, ING’s variable and universal life policies were competitive in the large face amount, older-age markets, says Jim Gelder, president of ING Life Distribution. Many other carriers also have pursued the affluent market, he says. But all that high-end focus resulted in a migration away from the mid-market, he says, causing fewer (but very large) policies to be on the books, leaving carriers with fewer policies over which to spread expenses.

Since an insurer’s pricing advantage comes from spreading expenses over large numbers of policies, Gelder says ING decided it was time to “put more business on the books faster.” That led to a decision to target the mid-market by being highly competitive in the transactional term market, he continues. That also led to a decision to market its product via online quote services.

Ultimately, the halo effect from being perceived as a strong term player in the mid-market will carry over to getting even “more looks” at its higher-end VL and UL products, Gelder predicts.

Promote guarantees–”Guarantees are still king,” says Dworkin. In particular, ULs with long-term, even lifetime, no-lapse guarantees have been strong sellers in 2005. “I prefer to put people at comfort than at risk,” he observes. “That’s easier to sell to the client, too…Not many people are looking to make a killing these days.” Likewise, in variable and index annuities, advisors say it’s the guarantees that make the sale. “This should continue in 2006,” says Dworkin.

Deepen retirement income profile–More carriers have determined to meet retirement income needs, especially for aging boomers. (The next sub-point includes a few examples of features that have been coming out to address those needs.)

This increased commitment got a boost in late November, when the new Retirement Income Industry Association formed in Washington. Chaired by Francois Gadeen, president and CEO of Retirement Engineering Inc., RIIA aims to serve as a retirement income think tank and incubator for retirement income products and services.

Update product features and benefits–Carriers refined product features to track with the current climate. For example, Sun Life Financial US, Wellesley Hills, Mass., is offering an identity theft feature with many of its annuities (a one-year membership to a credit monitoring service). This ties in with the nation’s festering privacy concerns.

Other firms broadened or enriched features. For example: Phoenix Companies Inc., Hartford, Conn., unveiled a VA rider that extends the VA’s minimum withdrawal benefit to a surviving spouse. Both Phoenix and ING USA began offering guaranteed minimum withdrawals for life as a VA option. Symetra Life, Bellevue, Wash., debuted a period-certain annuity with an inflation-adjustment feature (allows a one-time payment increase starting in year six). Genworth Financial, Richmond, Va., introduced a return of premium term life policy that allows loans.

Still others are shortening annuity surrender periods; adding concierge, care coordination and other allied customer support services to policies; and increasing their “web tools” for clients and advisors.

Develop broad, holistic approaches–Focusing on only one product or product line is no longer sufficient, says Dworkin; today’s producers need a balanced, multi-product portfolio. “They need to take a holistic approach to what their clients need,” he says, which includes offering not only life but also annuities, LTC and DI.

As part of this, the term insurance fire sales of previous years seem to have “gone out of the business,” he says.

BGAs always have emphasized “selling the best product available,” Dworkin observes, adding that seems to be the direction the industry is taking.

Expand asset allocation usage–Half of the major VA carriers now require owners to take an asset allocation model if they elect death benefit or living benefit guarantees, says Stephen Scanlon, senior vice president-annuity and insurance of AllianceBernstein, New York.

One to two years ago, most VA carriers did not force the allocation, he notes, but the industry has since learned “it is the right thing to do.”

Advisors need to be sure the money will be there for 20 to 25 years, explains Scanlon. In fact, a recent AllianceBernstein survey found that advisors believe the right asset allocation plan would have added 68% to the typical investor’s return over the past 30 years. And, 83% of the polled group believes the proper allocation plan could have cut investor losses by at least half during the market correction of 2000-2001.

Some advisors, planners and reps do encounter emotional resistance to the concept, Scanlon says. “Some clients still want to buy the ‘hot dot,’” he explains.

So, advisors need not only to point out that allocation is the right thing to do, he says, “but also spend more time communicating with clients about why it’s important.” That is the direction the industry is going, he says.

Keep an eye on innovations and new product contenders–Combination products, such as annuities and life policies with LTC features, are innovations that developers keep following. They’re not new but “we think we can play on them,” perhaps by providing some administration benefit for financing LTC through a mutual fund, says Millan. Other firms are keeping tabs on health savings accounts, Medicare Part D, separately managed accounts and critical illness insurance. Even if firms do not sell those products, developers are trolling the market for how the products might impact what their firms do sell.

Educate, educate, educate–The nonstop focus on education–of agents and of consumers–continues.

The new Disability Council mentioned above is only one example. Others include the debut of the new nonprofit Variable Annuities Knowledge Center. Formed by AXA Equitable Life Insurance Company, this is a website (www.variableannuityfacts.org) that aims to give consumers information about annuities and retirement planning issues. Meanwhile, Sun Life Financial Wellesley Hills, Mass., has just rolled out a CD-ROM that gives producers tools to use in educating clients on index annuities and retirement planning.

Why keep going after the education issue? AXA Equitable Chairman and CEO Christopher M. Condron, in announcing the new VA Knowledge Center, sums it up: “We see a wide variety of perspectives on VAs in the marketplace, but these perspectives are not always accurate. That’s why I believe now is the time for leaders in the insurance industry to place a new focus on education. Consumers only can make responsible choices in their retirement if they have all the facts.”

In sum, in 2005, the life and health products sector decided to do something to counter its product foes and to meet its challenges. The products story in 2006 will show how successful these efforts were.