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.
Meanwhile, competition itself continues to be a driver toward greater and greater simplification. Consider term life insurance products. They continue to be simplified and commoditized, says James Gelder, president and CEO at ING, in the Minneapolis office.
“People do need pure death benefit protection,” he says, and for the mid-market–say, a 40-year-old needing $250,000 of protection–the term quote shops are responding. ING uses the quote engines, he notes. It also has introduced an online term product for institutional employees to sell. The simplicity is key for such products, he indicates.
Simplification is important in the disability income insurance market, too, says W. Harold Petersen, president and chairman of Petersen International Underwriters, Valencia, Calif.
“In 2006, the industry trend focused on improving the time it takes to get a product into the consumer’s hands,” Petersen says. That entailed streamlining, both technologically and ideologically.
One result is that some DI insurers have begun looking more favorably at multi-life DI cases (5 lives and up), he continues.
For instance, some have given “significant discounts” of 10% to 15% for such DI cases, depending on premium volume and how many lives are written, he says. And, depending on the case, the underwriting can be guarantee issue or guarantee-to-issue, subject to modification based on certain conditions.
In tandem with this, the 2-year-old International Disability Income Society, Seal Beach, Calif., has made improving DI speed-to-market one of its goals, Petersen says. “The long delays in some states are costly to everyone, including consumers and taxpayers,” he says.
Target markets: Time was when it seemed that the entire life and health industry sought only high-net-worth buyers. No more. Companies are targeting other segments, too.
For example, ING is trying to encourage life insurance agents to resume writing the mainstream market at all ages, says Gelder. The company still writes a lot of older age affluent business, he allows, but it wants to round out its book with more business in the 40- to 45-year-old group of healthy individuals, and others below age 60.
“We think there’s lots of opportunity there, and we want to shine a light on it,” he says, citing business owners and key person cases as examples. To this end, the company is now developing marketing strategies, products, and education and training programs aimed at equipping agents to work in that market.
Meanwhile, the DI industry has begun experimenting with “mass production” initiatives, says Petersen.
Also, most carriers and associations continue to put priority on education and training of producers so they can deal with the product changes coming down the pike.
In 2007, the DI industry will continue its newer focus on mid- to upper-income people, predicts Millan of MassMutual.
This market may be uninsured for DI right now, and it won’t be drawn to it with bells and whistles, she says. It needs products that address the real needs people may be facing. So MassMutual, she says, is marketing “guidance resources” with individual DIs for the underprotected market. This helps people obtain debt counseling, nursing home referrals and other resources people often can’t find on their own. The company also offers counseling and assistance separate from the claims process to insureds who become disabled.
The point is “to add value beyond the contract’s product features,” she says.
Initiatives by government and other bodies: Product developers say they are expecting products and sales to respond to moves by government and other bodies.
Developing hybrids in response to the PPA of 2006 is just one example. Other examples include: the Deficit Reduction Act of 2005, which opened the door to more state LTC Partnership programs and products (nearly half the states had passed Partnership legislation by mid-2006); the joint federal/state LTC Insurance Awareness Campaign (widely viewed as a boost to LTC sales); and the 2006 start of Medicare Part D prescription drug plans (viewed as freeing up dollars for purchase of other senior financial products).
The shift to the 2001 Commissioners Standard Ordinary Mortality Table is impacting products, too. “For instance, term insurance rates came down slightly in 2006 as more companies adopted the 2001 CSO,” says Douglas Mishkin, president and CEO of Algren Associates, a New York BGA.
Michael Kaster, a senior consultant with Watson Wyatt in Berwyn, Pa., and the secretary/treasurer of the Society of Actuaries product development section council, concurs. “There is still a modest amount of transitioning from the 1980 CSO to the 2001 CSO going on,” he says, and it is improving rates for UL as well as term.
But, he adds, life insurance developers are still waiting to see what happens with adoption of the principle-based reserving approach. There has been a big push for this to happen, but it is not imminent right now, he says, adding that some people don’t even want it to happen.
For 2007, Kaster predicts that “more insurers will seek out solutions on their own, concerning funding what they think are redundant reserve requirements.” Previously, they used reinsurers for this, but now he predicts many will set up their own reinsurance outlets and fund them through investment banks.
The result? Depending on the solution, “term and UL insurance will become more competitive or more profitable,” Kaster says, and that will open up more opportunities for customers and their agents.
Another development–setting up organizations to promote awareness of specific product types–shows no sign of abating. The newest entry is the Council for Disability Awareness, which formed in mid-2005 and named its first executive director, Robert G. Taylor, in February 2006. CDA is now using its website () to launch educational information. The goal is to help raise awareness of disability and proper disability income planning, says Millan.
Reinsurance pressures: Both life and DI products have been impacted by reduced reinsurance capacity and by players, say industry executives.
For example, reinsurers have pulled back on older age life insurance business–a move Gelder believes reflects a desire to avoid over-concentration in age 75+ cases.
The life insurance business “OD’d” on older age sales starting in 2004 and peaking in the first quarter of 2006, he points out, noting that stranger-owned and investor-owned cases fueled a lot of this. Reinsurers did not want any part of it, he says, since it is unlikely that such cases would lapse–a problem, since most products were issued with lapse-supported pricing.
In response, many carriers, collectively and individually, have taken steps to curb older age volume–for instance, by increasing over-75 rates, Gelder says.
Mishkin, the BGA, says life underwriting and pricing has become “a challenge.”
“It’s now much harder to get top rates, especially for preferred risks, and underwriters rarely grant exceptions anymore,” he says. “In 2007, I expect more of the same. So now, more than ever, agents should not quote the top rates.”
In the DI business, there are now only 2 active reinsurers, notes Petersen. As a result, DI policies tend to have “very similar issue and participation limits, definitions, and policy features,” he says.
What’s more, the business has fewer players than in its expansion days in the 1980s. In 2002, in fact, DI carriers numbered just 26, says Petersen. The market became so limited that DI marketers “shouted” about it to commissioners, company presidents, and anyone who would listen. They also started the International DI Society as a forum to air concerns.
Not coincidentally, Petersen thinks, the industry now has 32 carriers, making for broader product opportunities.
Some other product trends follow. They are arranged by contract type.
o Critical illness insurance: In 2006, 3 CI designs were prevalent, says Daniel Pisetsky, president of U.S. Living Benefits LLC, Old Lyme, Conn. These were individual CI with portability; a hybrid group chassis with limited portability; and an annual-renewable-term type CI for voluntary sales, with limited or no portability.
Pure individual CI was not a major player, he says, and overall CI industry did not show significant growth. “A few of the companies are committed to pushing CI,” especially for filling liquidity gaps in financial plans, he adds.
A future strategy may be to position CI on a continuum with LTC insurance, he adds, explaining that the CI would be for the insured’s working years, and the LTC for ages 65+. Another strategy under discussion is to sell CI for mortgage-related business, as is done in the United Kingdom.
o Fund of funds: These investment options will be a “tremendous growth area” for deferred VAs, predicts Plotnik. Many VA insurers require contract holders to choose such a fund if they elect the VA’s living benefit guarantee, she explains. “Also, people like the convenience. The fund of funds options are professionally managed and balanced, so advisors and clients don’t need to go in and modify the choices every so often.”
In 2007 and beyond, Plotnik says, these funds may start showing up in immediate VAs, too. This may help make investing for retirement income less intimidating than, say, choosing from 70 different options, Plotnik suggests. In turn, this may encourage more people to consider IVAs.
o Active conservation programs: Many VA players are getting the message from critics about having too many 1035 exchanges, observes Plotnik. So, several have already begun narrowing their activity here. Meanwhile, VAs with GMWB features will serve to lock in more owners to existing contracts, she says. The combined effect could be “more insurers will start monitoring net sales regularly, not just gross sales, and taking steps to conserve existing business. They’ll also be checking to ensure that exchanges that do occur are needed and suitable.”