For years, annuity products have been crafted following the classic give-and-take between an insurer’s product experts and its internal and external sales and marketing leaders.
Customer focus groups sometimes are convened to gain the perspective of real buyers. In other instances, marketing and sales leaders provide the customer’s perspective during new product creation.
But as annuity products become more complicated with more moving parts, policyholder options and available features, the need is soaring for all parties to understand the priorities and needs of the others.
That requires deeper and more meaningful upfront dialogue about what a new annuity is trying to accomplish.
By understanding and focusing on the primary needs of the other parties, insurers have a greater likelihood of selling profitable, de-risked products, and producers have a greater likelihood of addressing the major client concerns and being paid adequately for it.
As variable annuity insurers attempt to create products with better risk profiles, this issue is moving front and center. For example, is the guaranteed withdrawal benefit sold as a) an income management tool for the client, or b) more as a performance safety net?
For some companies, the answer is: b, more as a performance safety net. If confirmed through research and discussion, this changes dramatically the way an insurer may view treatment of policyholder options. It may mean the guaranteed lifetime income can only be activated on policy anniversaries, or at other defined window periods, for instance. Or, it may suggest a longer waiting period before guaranteed income can be engaged.
In either event, other design elements, pricing, or sales compensation can be sweetened by virtue of the more limited client options, but this is “optionality” that clients in this example won’t miss.
The need for a deeper understanding of trade-offs works both ways. For example, sales leaders and reps who appreciate the substantial impact of policy persistency on annuity pricing can better help fashion creative and profitable designs.
As annuities are combined with other coverages (e.g., long term care) with complementary lapse economics, the ability to “hedge” persistency risk allows for exciting new benefits at reasonable costs. These could be death, disability or hospitalization coverages that have pricing advantages when coupled with annuities.
Of course, there has always been the need for annuity “scientists” and marketing professionals to compromise and work together to trade off pricing, product design, and compensation.
But the stakes are much higher now, and products contain many more moving parts, any of which can inflict damage on an insurer’s stability, if it becomes a vulnerable soft spot.
Living benefits alone on fixed and variable annuities contain the following moving parts: minimum and maximum ages, waiting periods, subaccount restrictions, roll-up rates, resets, joint life provisions, withdrawal rates tiered by age, charge structures, partial withdrawal provisions, and many others.
It is no longer sufficient for product designers to look at the menu of products available from competitors and say “I’ll take one of those, two of those, and…”
Actuaries and other product artists can help annuity companies to develop well-targeted and profitable annuities by talking with home office and field sales personnel to understand in detail how their products are sold and the culture in which they are sold. This will lead to a better grasp of priorities for product features and prices.
Some have suggested that product actuaries should join sales representatives on sales calls with actual clients. What a brilliant idea that is.
On the flip side, sales personnel need a clearer understanding of how the carriers they represent make money, the importance of hedging, and the nature of managing capital. To facilitate this, some carriers need to be more transparent in their financial management and to stop shrouding their financial processes in mystery.
What is possible with annuity product development executed in this way? Better, more profitable products.
When the partnership between sales and financial is working well, both sides feel the excitement that comes from crafting a true iPod-type breakthrough. A-share annuity possibilities, new approaches to indexed products, inexpensive living benefits with real market appeal, and immediate annuities that advisors want to sell are just a few specific examples.
Timothy Pfeifer, FSA, MAAA, is president of Pfeiffer Advisory, LLC, Libertyville, Ill. His email address is email@example.com.