It’s true – many do not immediately think of the insurance industry when they think about product innovation. But, among other things, we’re trying to change that stigma. From a breast cancer tumor calculator to health care ministries to annuity mobile apps, the insurance industry, whether deservedly recognized or not, is an innovation juggernaut. And we are here to bring you these top innovation in our inaugural insurance industry innovations spotlight.
The May issue of National Underwriter Life & Health will mark the innaugural “Insurance industry product innovation” feature. Within it, we profiled three innovations in the life, health and annuity industry. Below are the annuity industry innovations we selected.
Contingent deferred annuities
Though not considered a new innovation, Contingent deferred annuities (CDA) have experienced a recent spike in interest, both from consumers and agents. Investors flock to CDAs because it’s designed to offer protections similar to those provided by a guaranteed lifetime withdrawal benefit (GLWB), but does not require the purchase of an underlying variable annuity. Basically, investors get a product that provides an annuity-type guarantee without having to buy an annuity.
Designed to offer longevity risk protection, the CDA also offers investors protection from the ordinary income tax that they would normally pay after withdrawals from traditional annuities. It is linked to the performance of an investment account that is not a life insurance company separate account. To some investors, it’s a win-win.
These are “the Silicon Valley of the annuity world,” said Stan Haithcock, also known in the financial world as Stan the Annuity Man. “Most people hate the sound of the word ‘annuity,’ but they like guarantees.” What makes the CDA innovative is that it allows investment in a real portfolio with an attached income guarantee that can be cancelled at any time.
According to a study by Milliman, Inc., the inclusion of a CDA in the investor’s portfolio improves the desired retirement income stream by: guaranteeing the funding of essential living expenses for life, reducing the probability of a shortfall in desired income, delivering a higher investment portfolio IRR, increasing overall cash flow and increasing legacy benefits.
But like most investments, there are weaknesses. “The only downside, in my opinion, are the current limitations of the portfolio holdings you can have with an attached CDA strategy,” said Haithcock. And while progress has been made on both the tax and regulatory front with regards to CDAs, the product is still striving for market acceptance. Even so, the CDA is an annuity unlike any other, and consumers have – albeit slowly — started to take notice.
Annuity mobile apps
According to Pew Research Center, 58 percent of American adults have a smartphone and 42 percent own a tablet computer. Additionally, 43 percent of cell phone users have used their smartphone to download a mobile app, an amount that doubled from 2009 to 2012. For many insurance and financial services companies, innovation translates to digital products or services.
CUNA Mutual Group is no exception. The company recently launched its ZONE annuity app to present investment options for CUNA Mutual Group’s new, registered index annuity, MEMBERS Zone Annuity, using easy-to-understand terms and visuals. It also helps advisors get a better grasp of features associated with the product. To say it has helped is an understatement.
Mobile application usage among licensed advisors increased more than 400 percent in the last quarter of 2013, and the bounce rate was reduced by more than 50 percent from existing apps. Sales of the MEMBERS Zone Annuity reached $22 million in the first month after launch, with first-year sales exceeding target by more than 300 percent for 2013.
Lincoln Financial has also gotten into the game with the launch of its “Lincoln Annuity Visualizer,” a Web-based app developed to help advisors “visualize” and demonstrate their clients’ needs for retirement income. The app incorporates hypothetical situations and case studies to help wholesalers and advisors quickly explain the various options available to their clients.
Even with these innovations, the life and annuity industry remains behind the times. A recent Celent research study noted that while the startup phase of P&C consumer-facing mobile apps has progressed rapidly, the startup phase for life insurers will take much more time to develop. With more and more consumers – especially those in the higher income bracket – downloading and using mobile apps, and more and more using mobile apps to manage their banking and personal finance activities, annuity issuers may want to increase their presence in the underserved annuity mobile app sphere.
Deferred Income Annuity
DIAs apply the concept of a longevity annuity to better meet the needs of pre-retirees for guaranteed income when they retire. They allow buyers to convert a lump sum into a pension-like series of payouts for life. They work in contrast to an “immediate” annuity, which starts issuing checks almost instantaneously, a deferred annuity requires owners to pick a start date for payments – usually from 13 months to 40 years or longer.
“Longevity annuities were a product that academics loved, but no one really bought,” said Dave Simbro, senior vice president of life and annuity at Northwestern Mutual. “Addressing DIA needs of a younger market also created the opportunity for more innovative product design. Thus, we launched our DIA product: Portfolio Deferred Income Annuity.”
According to the LIMRA Secure Retirement Institute, year-over-year sales growth of the product jumped 113 percent in 2013. Though the DIA is still a diminutive player when compared to the total premium volume of the annuity industry as a whole, there remains rapid growth – and confidence in the future of the product.
“DIAs are going to take more market share from income riders because they are easy to understand by the client – and the agent – they are transparent and efficient. In addition, the big carriers play here – New York Life, Guardian, Mass Mutual, Northwestern Mutual, Lincoln, etc. The name recognition game alone will drive the train,” said Haithcock.
“The innovation that exists in deferred income annuities today comes from the product’s flexibility,” said Ross Goldstein, managing director, New York Life. The company offers the “Gauranteed Future Income Annuity,” which affords consumers the flexibility around how they fund the product, the ability to change their income start date, riders that provide a money back guarantee, inflation protection and the ability to accelerate payments if cash is needed for an emergency.
New York Life pioneered the innovation in this category in 2011 by turning what was once mistakenly referred to as “longevity insurance” into what pre-retirees now see as their own “personal, pension-like product offering higher payouts than any other income strategy on the market, and one that provides a more sustainable, fulfilling retirement,” said Goldstein.