I was a bit surprised when I checked out industry data from the Insurance Information Institute earlier this year that had pegged industry earnings for 2010, because for the first time that I can remember, life insurance became the smallest sector in this business. Annuities came in with nearly half of total industry revenue, health insurance came in at just over a quarter, and life insurance picked up the rest, as just under a quarter. I found myself thinking that we often refer to this as the life and health insurance industry, but in reality, we ought to call it the annuity, health & life insurance industry. And even though health and life may jockey places over the next coming years, neither can hold a candle to annuities, which have become the heart and soul of this business.
Annuities, as I like to describe to my friends, are like a do-it-yourself pensions. And as a recent article by Linda Koco points out, that’s pretty much how the U.S. Government Accountability Office likes to think of them, too. In fact, they went so far as to suggest that with programs like Social Security increasingly being seen as a potentially unreliable form of retirement funding (ask anybody under 40 if they think they’ll ever collect on Social Security, and you’ll see what I mean), annuities might be the best bet for Americans to successfully cash in on the new American Dream: a long and financially comfortable retirement.
This is easy to sell to. After all, everybody wants to make it to retirement. Most of us imagine that we will certainly live that long, and when hit with the notion that whatever we save, coupled with Social Security (if it’s even there) won’t be enough to sustain us, the thought of dropping a ton of money into annuities becomes pretty compelling. Certainly, it is an easier conversation to have with people who would rather not talk about dying prematurely, let alone buy additional coverage against it.
And so we find ourselves in an industry that is more devoted to retirement funding than anything else. There is nothing wrong with this. It is where the money is at for the current distribution system, and as the first Boomers turn 65, we are on the cusp of seeing a wave of retirement the likes of which modern America has never seen. And that is the scary part.
It is scary because for years, the industry has been selling annuities hand over fist, but it has never really had to pay for their guaranteed benefits at a level it will have to increasingly live by over the next decade and beyond. I had lunch with some asset managers for the insurance industry yesterday, and when I put this conundrum to them – can the life insurance industry really afford to pay out on all of the annuities it is selling? – the answer was not one you want to hear.