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Life Health > Health Insurance

Innovation in Insurance

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Retirement income distribution — it’s the talk of the trade. And no one is in a better position to capitalize on the ?ber-dollar opportunity than the insurance industry. But can the staid, risk-averse insurance sector rise to the challenge? Can it give advisors, and their clients, what they want?

As Clifford Jack, executive vice president of Jackson National Life Insurance Co., bluntly puts it: “The industry generally has not had the foresight to anticipate long-term trends or had the willingness to break out of the box that will be required to be successful here. It’s a mature industry that has done things a certain way because that’s the way it’s always been done. This is not the time to guard the status quo. It’s our game to win — if we don’t screw it up.”

The insurance industry finds itself on the leading edge as a result of one unassailable advantage: It’s the only industry currently that can guarantee income you can’t outlive.

But some industry observers are taking a cautionary view.

“They are very well-positioned, yes, but it’s not a sure thing. Companies that view this as an opportunity to push variable annuities, that view this as a PR campaign for variable annuities, will not be successful. That I’m quite sure of,” notes Laura Varas, a research partner with Financial Research Corp. “It’s too narrow of a focus, and too blatantly commercial.”

The winners in the retirement income challenge, according to Varas, will create solutions that address financial planning and investing along with health care and lifestyle concerns. “They won’t succeed if they get trapped in their old habits,” she adds. To ensure true innovation, Varas says insurance companies need to bring in outsiders — academics, critics, institutional asset managers. “Otherwise, they’re not going to come up with anything new.”

Advisors themselves are very clear on what they do not want: products that are same-old same-old and empty sales pitches. What they do want: strategic combinations of products built across platforms that are based on process, not the ka-ching of a sale. They’re also looking for transparency and training.

“There’s a huge void in follow-up training. What typically happens is a packaged solution is announced, a lot of excitement is built up around it and there’s nothing after that to help advisors once they are in front of the client to implement the package,” according to certified financial planner Phil Lubinski, who heads First Financial Strategies in Denver. “Training has been so product-oriented for the last 20 years, and not process-oriented. When you’re talking about a retirement income portfolio, process is critical. Advisors are starving for process training — and it’s just not there yet.”

An Advisor Bias?Some industry insiders suggest that insurance companies, in order to be successful, must confront a dirty little secret: A lot of advisors don’t particularly like doing business with them.

As Jack, who also serves as chairman of the National Association of Variable Annuities, notes: “As an industry, we have to look at the fact that many advisors don’t like insurance companies and don’t like insurance company products. We have the choice of continuing to try to focus on those advisors who have accepted insurance into their practice or take a much more holistic approach and go to where the assets are.”

Those firms that will prevail will successfully identify the reasons insurance companies are not more generally accepted by “the wider population of the advisory world” and “pursue that very significantly,” according to Jack.

One of the chief strategies to achieve wider acceptance: advisor training.

The insurance industry needs to take what amounts to extraordinarily complex products and simplify them through education and training, Jack says.

“The heavy lifting needs to happen through education. It’s easy to walk in the door of someone who’s already selling variable annuities and pitch them on a new living benefit feature,” he adds. “It’s far more difficult to ask someone to make a material change in the way they do business because it takes a lot of meetings and it’s asking them to take on some risk. If it takes seven meetings to fully educate a rep, so be it. That’s the type of work we need to do. We need to plow the field.”

Tod Phillips, an LPL advisor in Southfield, Mich., grew up in the insurance industry, as did his father. He believes the industry is uniquely positioned to develop retirement income distribution products — and he has observed over the last two years a more positive stance on annuities from a once decidedly negative press. [Jack, in fact, says the press has moved from "skeptical" to "intrigued."]

But even Phillips says, “All these contracts have different variations that can make your hair hurt. What the advisor wants is education — and transparency. Is there a value for the cost? The danger the insurance industry has is the advisor not explaining all the costs. They need to provide accurate marketing materials and training.”

Chip Roame, managing principal of Tiburon Strategic Advisors, believes insurance companies will deliver the goods the marketplace is seeking as a result of three forces.

First, he says, true insurance representatives — meaning the 20,000 or so captive agents working for firms like New York Life, Mass Mutual and Northwestern Mutual — have been trained in more holistic planning than have investment advisors.

“The insurance industry is more holistically focused. Granted, it’s money grubbing — to sell more stuff — but they are more likely to help with Medicare, disability policies and long-term care,” says Roame. “These individual agents have a broader skill set, albeit a salesy skill set, than most investment advisors.”

Next, he says, insurance companies are the only ones that can offer a long-term guarantee. “That’s a fact,” Roame adds. “No one else has figured out how to do that. Even if you conclude that they are archaic institutions, until you can do that they still have a leg up on you.”

Finally, Roame says that because the insurance industry’s core business is under threat, it will encourage firms to be more innovative about retirement income issues.

“The view of a lot of people that insurance companies are boneheads, I’m not sure that’s correct. The point is insurance companies have a huge embedded basis of insurance. They have to be conservative. Before we throw stones, remember they make a fortune. These are very lucrative companies,” says Roame. “The industry loves to talk down insurance agents, but who are you talking about? These are no plaid-jacket losers.”

New Combo ProductsIf for no other reason, Northwestern Mutual’s Chuck Robinson says the insurance industry is well suited to respond to the retirement income challenge because many of the major risk-related issues people face in later years are those that financial reps who sell insurance deal with day in and day out.

How do I pay for health care? What do I do in the event of catastrophic illness? What about long-term care? How do I make sure I won’t outlive my income? And, for the affluent, how do I transfer my wealth to the next generation?

A disconnect becomes obvious, according to Robinson, when you survey investment advisors who say they don’t feel at all prepared to advise clients on health care. “This is a huge gap,” says Robinson, senior vice president in charge of Northwestern’s investment products and services division. Advisors, he adds, are focused in on asset allocation and selecting securities — which he says isn’t good enough when it comes to retirement.

“When you ask retirees to rank what’s important to them, way down the list is asset allocation — and what funds ought to be a part of that asset allocation isn’t even on the list,” Robinson adds. “Health-care, long-term care, inflation, outliving assets, longevity risk — those are the things that are top of mind.”

Robinson looks for a “whole raft of new products” to emerge, to include second- and third-generation versions of annuities with guaranteed living benefits, the hottest selling product in the annuity marketplace today.

Also in play: fallout from the Pension Protection Act of 2006, which allows insurance companies for the first time to create combination products, starting in 2010. At that time, a person, for example, will be able to take money out of an annuity tax-free to pay long-term care premiums. Another product would link life insurance and long-term care.

“You’re going to see products that do more than one thing, a combination,” he says. “You’re going to see companies start to put together wrappers around multiple products that will make it easier to manage all of these issues in retirement.”

Scott Stolz, who heads up Raymond James Financial Services’ insurance area, also looks for insurance companies to offer lifetime guarantees on mutual funds. “Somebody’s going to do it. It’s just a question of time,” he says. “But can you do it on a mutual fund on a cost-effective basis? There’s no question the insurance industry believes it has the right product for the right time and they fully intend to run with the concept. It bears watching.”

A study by Financial Research Corp. suggests that the top products with income features that will become part of the product solution set are: mutual funds with “predictable” but not guaranteed income; mutual funds with SWIPs–structured withdrawal plans; principal protection vehicles; and deferred variable annuities.

One possible area of weakness the insurance industry faces: non-insurance approaches to guaranteeing income. This is a huge point of interest right now with 71 percent of firms throughout the financial services industry reporting in an FRC study last fall that they are actively working on such product development, as opposed to just 44 percent in 2005. Varas says she expects to see some regulatory filings for non-insurance approaches in the coming year.

Chris Grady, president of Genworth Financial’s retirement income business unit, predicts that in the next six to 24 months the industry will bring the value proposition that exists in a variable annuity to other platforms — mutual funds, separately managed accounts, even ETFs.

“If you think of the platforms that hold assets, that’s the focus. I think it’s going to be surprisingly fast. The boom is coming and people need guarantees,” says Grady. “Advisors are going to have to offer these solutions or they’re not going to be able to give proper advice to their clients.”

Jack agrees.

“I believe we’re on the cusp of the next phase of these types of guarantees to the consumer that would allow them to be more fully invested and allow them to sleep well at night. What we’re really saying is the consumer ought to have the ability to invest their accumulation assets the way they and their advisor believe are most suitable — but have the benefits of these flooring mechanisms or guarantees underneath that,” says Jack. “Who is best suited to address these issues? By definition, it’s the insurance industry. The market has come back into our sweet spot.”

Freelance writer Ellen Uzelac is based in Chestertown, Md.; the former West Coast bureau chief and national correspondent for The Baltimore Sun, can be reached at [email protected].


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