The year 2007 should see insurance products expand in several areas, according to industry experts interviewed by National Underwriter. The new Pension Protection Act of 2006 is paving the way, due to its provisions favoring hybrid life and annuity products. So is the advancing age of baby boomers, many of whom now need retirement funding products. The trend will also be fanned by continuing regulatory pressures for simplicity, suitability and transparency, and by new government initiatives as well.
In most cases, 2006 was the lay-up for what is to come. Here is the story, starting with several dominant product themes: hybrids, guarantees, simplicity, target markets, governmental initiatives, and reinsurance pressures.
Hybrids: Many industry leaders expect that the favorable tax treatment given to long term care riders in annuity and life products under the PPA of 2006 will stimulate a lot of development activity–and sales–in the area of hybrid products. Also called combination products, these feature annuities or life policies that have LTC coverage included.
“No question, that is where we are looking,” says Melissa Millan, senior vice president, insurance product management at MassMutual Financial Group.
The hybrids will appeal to the upper and upper middle income markets, she predicts, due to the tax advantage on the LTC piece. In addition, she says, the products “recognize that not everyone can afford a stand-alone LTC policy.” Customers will be able to balance what they can afford with what they want to insure against, she adds.
David Hayes, a planner and principal of David Hayes & Associates, Mt. Juliet, Tenn., agrees. For instance, he sees a lot of opportunity for sales of single-premium life policies with built-in LTC coverage.
About 20 years ago, Hayes recalls, the high interest rate environment made it so that people could buy dividend-paying life policies and use the cash buildup to supplement retirement expenses, including LTC, or for other purposes. But the low interest environment of more recent years stopped all that. Now, he says, the single-premium life policies with LTC built in are filling the gap.
The appeal is that the insurance company guarantees the contract, and people like that it’s a single premium, he says.
The design allows agents to exercise due care without customers having to take on risks they’re unaware of upfront, Hayes maintains. It also helps planners by taking care of needs (like LTC) that could threaten the financial plan, he says. “And the client does not pay extra; it’s whichever event–death or LTC–happens first.”
But Millan offers this caution: The industry “must be careful not to make the LTC riders complex,” as complexity would defeat the purpose.
Guarantees: Products with guarantees should be in demand again in 2007, as they were in 2006 and the year before, say experts. But which guaranteed products gain momentum may change.
For instance, in the last few years universal life policies with secondary guarantees were great sellers, recalls John Felton IV, president of Tennessee Brokerage Agency, a Knoxville, Tenn., brokerage general agency. They are still great products, he says, but in 2007 another UL with an embedded guarantee will probably create new sales opportunities.
That product is index UL insurance–a life policy that offers guaranteed minimum interest plus upside potential linked to gains in a market index like the S&P 500.
It’s the guarantee plus the upside potential that makes IUL appealing, Felton explains. IULs also offer cash value accumulation that generally is not available in traditional guaranteed ULs. In addition, he says, IUL costs less than another UL–variable UL with secondary guarantees–and is less cumbersome, too.
IUL should be a good product to use in private pension arrangements, he predicts.
But UL with secondary guarantees will still be in the picture in 2007, adds Millan. In fact, MassMutual is developing materials to help consumers and advisors understand the differences between such products and traditional whole life.
Another guarantee that promises to turn heads in 2007 is the return of premium guarantee in term life insurance, says Felton. The cost for the coverage is higher than for traditional term, he allows, “but for a certain market–say for key man or buy-sell situations–the benefits are huge.”
Because of this, more carriers are talking with him about entering this market in 2007. In 2006, there were only 3 or 4 major carriers involved, he says.
Fueling the continuing focus on guarantees is the fact that baby boomers are fast approaching retirement, says David Macchia, president and CEO of Wealth2K Inc., Hingham, Mass. “Boomers are moving from loss averse to risk averse.”
Knowing that, many annuity carriers will be bringing out new designs in index annuities that also offer upside potential and “absolute” downside guarantees, as well as liquidity, Macchia says. The costs in the new designs will have parity with other annuities, such as VAs, he says.
When that happens, “advisors who first shunned index annuity products will start selling them,” Macchia predicts.
Meanwhile, in the VA world, “there will be continued high election of products having guaranteed living benefit features,” says Lisa Plotnik, senior analyst at Cerulli, Boston. The reason: The feature’s guaranteed accumulation and withdrawal benefits.
The “guaranteed minimum withdrawal benefit” provisions will continue to be especially popular, concurs Michael DeGeorge, general counsel with the National Association for Variable Annuities, Reston, Va. Such provisions were a key driver of VA sales in 2006, he notes.
“Consumers are attracted to the guarantee of principal protection the GMWB provides,” he says. It protects them from losses due to market downturns. That means they can stay invested in the market and benefit from the upturns.
The “for life” version of the GMWB has appeal because it offers lifetime income without having to annuitize and give up control of the money, DeGeorge adds.
In 2007, he predicts, there will be further growth in developing other sources for lifetime income using the VA platform.
Fixed immediate annuities are also becoming a crowd pleaser, says John P. Smallwood Sr., a principal at Smallwood Capital Management, Shrewsbury, N.J. Once again, guarantees are the reason.
When sales of the product started rising in 2006, it surprised him, he says, because immediate annuities are not new. But, “once we explained how it works, people age 70 and up were interested,” he says. They like the attractive yields as well as its guaranteed income, he explains.
He predicts this “sleeper” product will continue seeing sales growth in 2007. When you’re retired, he notes, “you have finite assets,” so guaranteed income is important.
Guarantees of a different kind have appeal in health insurance, too. Rick Young, principal of Rick Young & Associates, Rochester Hills, Mich., points out that individual health sales got a boost this year after he started offering a new individual policy that is guaranteed issue.
The product, a PPO plan, does limit benefits to control costs, he allows. For instance, it pays for only 2 doctor office visits a year, and its prescription drug plan pays at 50% coinsurance up to $2,500 a year. But the product also pays at 100% for up to $500 a year in preventive care, he says. And, in return for the restrictions, the coverage is affordable for many customers who otherwise would have no coverage.
Simplicity: In 2007, look for more insurance products that are simpler for consumers and advisors to understand and handle, several experts say.
For instance, while guarantees often contribute to the growing complexity of products, and while many companies avoid simplification because they don’t want to commoditize their products, research suggests that products can be simplified in ways that are innovative, says S. Michael McLaughlin, principal and global leader-actuarial and insurance solutions for Deloitte Consulting LLC, New York.
In a December 2006 webcast, he pointed out that value can be derived from combining features. An example would be letting producers “assemble” a complex solution by selecting items from a portfolio of simple products.
The PPA provisions allowing life and annuity combinations with LTC may help lead development this way, he suggested.
Moves by entities such as the National Association of Securities Dealers are spurring more simplicity-oriented thinking, too, indicates Macchia.
For instance, the NASD’s Notice to Members 05-50, issued to member broker-dealers in August 2005, has been the impetus for redesigning many index annuities. The goal is to make them simpler and compliant with B-D standards, he says.
As an example, the newer index annuities do not have the long surrender charge periods (of 20+ years), heavy fees and high commissions of certain earlier index annuities. In addition, several now emphasize the product’s income benefits.
“There will be no putting the genie back in the bottle on this,” Macchia predicts.