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Ernst & Young's Doug French prognosticates on advanced sales in 2013

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NUL Senior Editor Warren S. Hersch recently chatted with Doug French, a managing principal of the insurance services practice at New York-based Ernst & Young. The interview explored, among issues, prospects for advanced markets sales in 2013, the evolution of agent compensation and challenges that advisors will face in the year ahead. The following are excerpts.

Hersch: How would you assess prospects for advanced markets sales in 2013?

French: Advisors engaged in advanced markets will face challenges in the year ahead, including threats to the tax-favored treatment of life insurance products and low interest rates, which will force up prices to the consumer.

Also, advisors can look forward to product rationing. Low interest rates negatively impact insurers’ balance sheets, which in turn affect the companies’ ability to make good on product guarantees. So we’ll see a rationing of guarantees, both in terms of less generous living benefits and higher prices paid on GLBs.

Hersch: What more can we expect from the carriers given current economic conditions?

French: If low interest rates persist, some carriers will decide to exit certain insurance markets, so we can expect further industry consolidation. There will also be a greater focus on trimming corporate expenses and, thereby, enhancing financial results.

Hersch: To what degree are technology advances, in particular the growing access to product information via the web, a threat to advisors?

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French: The technology threat doesn’t apply to advanced markets, as advanced planning remains too complicated to be supplanted by an automated advice model. But the Internet will make part of the advice model for life insurance sales outside of advanced markets obsolete.

Hersch: You foresee a recalibration of compensation for life insurance professionals. Can you elaborate?

French: The life insurance market can be visualized as the three legs of a stool: the consumer, distributor and the insurance manufacturer. Given insurers’ current focus on boosting financial results, in part by cutting costs to offset the effects of low interest rates, it’s clear that advisors’ compensation will be affected. In particular, I anticipate a progressive shift from up-front or heaped commissions to a more levelized payout on product sales.

Longer-term, life insurance professionals may need to consider adopting a fee-for-services business model. Particularly for those who are looking to move into advanced markets, fee-based comp is more in line with the product-neutral advice and annual plan maintenance that high net worth clients expect.

Hersch: How can advisors distinguish themselves from competitors in the advanced markets space?

French: They can do so by deepening their expertise, bringing in quality business and providing more value to the end customer. Also, by enhancing of their practices, advisors can also secure greater access to carrier products—including longevity products.

More and more baby boomers are now approaching or transitioning to retirement. The number of people over 65 will increase by two-thirds over the next decade; those over age 55 will increase by 21 million over the same period. This group needs guaranteed income streams, which points to longevity products, among them fixed, fixed and variable annuities. Insurance professionals aiming to serve the retirement market space therefore need to incorporate these products into their portfolio of offerings.