Innovation in Insurance

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.”