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Save the Whales

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It is an analogy I like to make often: the shark is one of the most fearsome predators in the ocean, on a relentless search for food. The fish it goes after, such as tuna, are fast and wily, and require a huge amount of energy to catch and kill. The shark is good enough that it can survive on it, but it’s an awful lot of work. Meanwhile, the largest predator in the ocean is the blue whale, which gets that way feeding on some of the smallest and most defensless creatures in the ocean – plankton. The same is true of other species of whale, which live on huge numbers of easily found and eaten prey. Both species can live this way. But which is better?

I make this analogy to point out the benefits of the whale model in business – earning a profit by selling lots of low-cost products or services to huge numbers of people, thereby reducing the risk of a single blown sale. This is not perfect, of course, since every business has transactional costs and the like which makes a simple shark-to-whale comparison easier said than done. 

I bring it all up because lately, I have been thinking about annuities. There have been a bunch of news releases on this market over the last few days, and they paint a picture that is encouraging for the variable market, if not all that surprising. Warren Hersch reports LIMRA figures that show yet again the variable annuity market is well outpacing the rest of the annuity market. To such a degree in fact, it’s getting to the point that when somebody mentions the annuity market, I automatically assume they mean the variable annuity market.

This comes on the heels of news by the Insured Retirement Institute that variable annuities sales are set to top $150 billion this year and that over the next five years, annuity options are only going to continue to flourish.

This is already borne out in recent days new product offerings from the Hartford, National Western, New York Life, the Phoenix Companies, and Sun Life, just to name a few. Whatever difficulty the fixed annuities space is having, the variable side is more than making up for it, especially as Boomers are looking to make sure they have enough income to keep their soon-to-be-realized retirement dreams from being totally derailed by the financial crisis that got started back in 2008.

Of course, the news isn’t all good. John Hancock just annnounced to its broker-dealers that it would be paring back its annuity offerings as well as laying off staff in its annuity unit, noting that it wanted to limit its exposure to the risks variable annuities pose. This follows efforts by MetLife, Prudential, MassMutual and others to reduce its overall VA business in what is seen as an effort perhaps to cool off an overheating market. 

Even sharks get indigestion, I suppose. What I keep wondering is how come nobody has tried to configure the annuities market toward the whale model, though. Annuities are seen as a retirement vehicle. But what if you made them a pre-retirement vehicle, or as a form of supplementary working income, selling really small-value annuities to folks without a huge amount of assets to work with, but who could see themselves needing this kind of income stream, say, as do-it-yourself unemployment insurance? We are in an environment where job losses at all levels are especially scary because not everybody thinks their job will come back if it’s gone. How hard would it be to sell somebody a product that built value, if slowly, that kicked in the minute you were unemployed and kicked off again once you had a job?

Surely smarter people than I have considered this, but I would love to hear it get discussed more openly. For as much money is being made by the variable annuity market selling to people on the edge fo retirement, any business model based on the silver tsunami is an inherently limited one. And if the only people in this business are content with a model that will only last another 10 years, then what does that say about their fitness to really have their client’s long-term needs at heart?