Fasten your seatbelts. The year 2008 promises to be a fast one where insurance and allied financial products are concerned. Following are the trends as seen by industry experts around the country.
Retirement is the Big Kahuna, since the oldest baby boomers will turn age 62 in 2008, thus qualifying for Social Security. Many will start retirement planning in earnest, if not retirement itself. This is driving all sorts of product activity.
For instance, it will trigger substantial growth in fee-based managed accounts, predicts Charles Roame, managing principal at Tiburon Strategic Advisors, Tiburon, Calif. Boomers will go to advisors asking for help managing the money from their rollover 401(k)s or sale of their businesses and homes, he explains. “They’ll want help liquefying assets, and advisors will do it for a fee.”
Meanwhile, for boomers of modest means, “annuities will be the packaged product of the decade,” he says, citing both variable annuities with guaranteed income and withdrawal benefits and also single premium immediate annuities. “They will need (the annuity) for the guaranteed income it provides.”
Greg Olsen, a partner at Lenox Advisors, New York, agrees. The VA living benefit guarantees will be the main reason people buy the product, especially since the stock market was so volatile in 2007, he says. “They like that their (VA) savings will have a guarantee.” In response, “companies will be as aggressive as they can with their guarantees.”
As for SPIAs, Olsen says advisors and consumers now have a better understanding of how SPIAs work. Some advisors are devising SPIA laddering strategies for retirement income, he adds, and predicting this will continue as more boomers retire. Agents typically get commissions up front on each SPIA sale, but a few carriers now offer trailer commissions–a recognition, he says, that the agent needs ongoing compensation for these sales.
Retirement planning is spurring index UL activity, too. There are now 32 carriers in the market, and more large carriers are about to enter, says Sheryl J. Moore, president of Advantage Group Associates, Inc., Des Moines, Iowa. Her firm’s recent IUL figures demonstrate what is happening: In the 3rd quarter 2007 alone, target IUL premium rose 55% over the previous quarter. Year-to-date IUL sales were nearly $350 million in target premium, and she is expecting around $500 million by year end.
“A lot of IUL buyers are middle-aged, mid-affluent people who are planning for retirement and/or for funding a grandchild’s college education,” Moore says. They are looking for a cash accumulation product with flexibility and potential for greater internal growth than traditional whole life, she says, and IUL meets the need.
Another life product that will grow more due to retirement is second-to-die UL, says Roame. The top 20% of U.S. households will have estate planning problems that the product helps solve, he explains.
Disability income insurers are responding to retirement planning issues, too. “In 2007, three announced they will boost the amount of DI they’ll issue to customers, for purposes of contributing to retirement income,” explains Harold Petersen, president of Petersen International Underwriters, a Valencia, Calif. firm that has a similar system.
In these products, the DI insurer forms a trust. Upon the insured’s disability, the insurer pays the retirement portion of the DI benefits into the trust, which credits interest tax-deferred. When the insured reaches retirement age, the trust pays out supplemental retirement income, he says. Group long term disability plans have similar features, to replace missed 401(k) deposits in event of disability; now the concept is coming to DI, says Petersen.
Will retirement trends impact long term care insurance? Roame thinks the product “could” boom. It’s the right product for many people, he says; however, some boomers have resisted it because they think they’ll never use it. But if LTC is bundled with annuities or life policies, as allowed under the Pension Protection Act of 2006, this could help LTC catch on, he says. Moore, of Advantage Group, points out that 2 IULs already have LTC features.
Regulatory change and convergence is pushing product trends too. A notable example is the July 2007 merger of the National Association of Securities Dealers and New York Stock Exchange Member Regulation. The combined entity–the Financial Industry Regulatory Authority, or FINRA–bills itself as the private-sector regulator for all securities broker-dealers in the U.S., but it is monitoring not only insurance products that are securities (VAs and variable universal life) but also those it thinks might be securities (fixed index annuities, or FIAs).
Meanwhile, many non-insurance regulators in the states, such as state attorneys general, have taken actions too–sometimes in tandem with state insurance commissioners and sometimes not.
Experts contacted for this story expect this heightened regulatory interest to continue in 2008, since government officials and regulators like to grab headlines in election years. It may go on for several more years, adds Roame.
The impact on products? FINRA’s broadened oversight should help foster clarity at advisory firms that have not been careful about suitability, predicts Olsen. It’s sad to have more governmental intervention, he allows, but “some advisors need another layer of questions to go through to justify the (sale of the) product.” This will make those advisors “pay attention,” he says.
Others say the various regulatory actions will likely spur greater attention to advisor education and training, with obvious benefits for consumer protection.
That’s not a universal view. Katherine Vessenes, an attorney and president of Vestment Advisors, Chanhassen, Minn., says some of this activity is duplicating regulations already on the books.
“It’s also drawing attention to VAs, making them look like the red-haired stepchild,” she says, “as if something is wrong with the product, not the sale.” Besides, she says, FINRA has received 14.5 more complaints about individual equities than VAs, and 4.5 times more complaints about mutual funds than VAs.
There is spillover from this. Several industry professionals say consumer media pick up on the regulatory actions and the reports exacerbate image problems for the products. This is seen as a continuing concern, and not just for annuities.
Vivian P. Gallo, an LTC insurance specialist at Choices for Long Term Care Insurance, Hartsville, N.Y., believes negative reports about LTC insurance products hurt the LTC business in 2007, making it harder for specialists to address LTC issues with clients and to be viewed as ethical and honest. Often, she says, the stories focus on 1 or 2 companies and unique problems, and they contain inaccuracies that are never corrected. She worries this will continue in 2008.
On the other hand, Gallo says, this has spurred industry efforts to make the products easier to understand. For instance, she says 2 LTCs now use 80/20 co-pays–a simplification because the 80/20 concept is commonplace in health insurance. Meanwhile, states that have adopted LTC Partnerships are also working on allowing reciprocity with other Partnership states, easing concerns of owners who move from state to state.
Other regulatory actions have served to set new product standards. For instance, 10 state insurance departments have now adopted the so-called “10-10 friendly policy” for fixed index annuities, says Moore. This says an FIA should have 10-year surrender charge, starting at 10% in year one and declining to zero after year 10.
“It’s a guideline, not a rule, that resulted from perceive market abuses,” she says. Still, it is catching on. Some carriers are making all their FIAs fit 10-10, she says, and “this is affecting competitiveness on rebates, caps, service and/or commissions to the marketing organization. Furthermore, broker-dealers have started using 10-10 as a screen for the FIAs they allow on their approved products list.” And, because of the interstate compact, she predicts other states will pick up 10-10 in 2008.
Technology continues paving the way for product developments and opportunities. For instance, to make inroads to the underserved mid-market, ING decided to apply various technologies that would increase efficiencies and therefore make it cost-effective to serve that market, says Dan Mulheran, president of ING Life Distribution, Minneapolis. Examples are web-based data entry, and outsourcing of backroom work and fulfillment. ING also brought out new products in 2007–return of premium term and IUL–and in the process “reengineered our factory” for both the level term and ROP term products.
With computers and systems so sophisticated today, life carriers need to use them to differentiate products, and to be able to respond to consumer needs, says Gary Dworkin, a brokerage general agent in Rochester, N.H., and the chair-elect of National Association of Independent Life Brokerage Agencies.
This will be happening with UL, he says. For instance, the agent can design no-lapse guarantees for any period of time the client wants and needs, Dworkin says, not just for 10 years or 25 years. Also, agents can apply cash accumulation riders to no-lapse minimum cash value ULs, so these ULs will function more like cash accumulator ULs, he says. Such “UL crossovers” will make the product more appealing, he maintains.
Expansion of guarantee periods is also showing up in term life policies, Dworkin says. It’s not restricted anymore to 10- or 25-year level term, he says. Now, “advisors can offer term for 10, 11, 12, or 13 years, or whatever period the customer needs.”
This is good for serving the mid-market, he contends, noting that many such customers have a specific need–and budget. The agent can adjust the term to 17 or 25 years, or whatever will fulfill the goal with the available dollars, he says.
Product combination is a parallel trend. Today’s ever-more-sophisticated systems are enabling carriers to combine products and features in new ways. Most often cited are the nascent offerings of LTC features with annuities and life policies.
But other types of combinations are occurring, too. For instance, more voluntary insurance is being handled on group platforms even though voluntaries are payroll deduction plans, says Gil Lowerre, president of Eastbridge Consulting Group, Inc., Avon, Conn. But individual worksite plans, also payroll deduction, have become less distinct, to the point that his firm refers to both worksite and traditional voluntary cases as “voluntary.”
Meanwhile, many true group insurance carriers now also offer voluntary products, Lowerre says, and almost all employee benefit brokers sell both voluntary and core insurance products.
On the disability side of the house, brokers are starting to design coverage in a way that fits the individual DI protection around a client’s group LTD, says Petersen. That’s not new, but now it’s more prominent, he says.
In annuities, advisors are increasingly using SPIAs to pay for 10-year LTC plans, says Olsen.
In LTC insurance, “we’re seeing LTC policies bring in features of other products,” says Gallo. For instance, one LTC has a death benefit (like life insurance) and another has a return of premium if death occurs before a certain age (like ROP term).
Innovation is in the air for 2008, as well. In life insurance, the adoption of the 2001 Commissioners Standard Ordinary mortality table (by 2009) will “override everything,” predicts Dworkin. Permanent life carriers will need to review, re-price and re-file their products, he says, “so it will be an intensely active period, and innovation will result.”
For the same reason, 2008 will also see a fire sale of products using the 1980 CSO, predicts ING’s Mulheran.
As for niche markets, Mulheran sees more efforts to bring life insurance not only to the mid-market but also to multi-cultural and foreign national markets. “Companies are working hard to shape product delivery and approaches to meet these needs.”
In the voluntary market, enrollment systems will increasingly offer employees personal advice (face-to-face or call center) on the numerous benefit options their employers now offer, says Lowerre. A couple of carriers have started doing this, and employers like it, he says.
In FIAs, carriers are starting to offer not only guaranteed withdrawal benefits, says Moore, but also bonuses on these benefits (not on the account value).
Roame sees some “collision” of investment products occurring. One involves sale of rights to appreciation on one’s house. Another involves use of “account annuities” which guarantee a payout on one’s brokerage account until death, at which time the estate could sell the underlying asset.
In view of the above trends, product complexity is bound to be a continuing issue throughout 2008. For that reason, say experts, the industry must make education and training a top priority.