The last several years have been very turbulent for the individual annuity industry, especially for traditional insurance providers and the advisor community. Coming out of the financial crisis of 2008, lingering low interest rates, non-traditional new market entrants (including private equity firms and start-ups) and changing regulatory requirements have proved extremely challenging. Significant shifts of the competitive landscape, with significant consolidation and several large players exiting the variable annuity (VA) market have further complicated matters.
The impacts of these shifts have been felt quite acutely by advisors, as reflected by their current skepticism toward insurance companies and wariness regarding their annuity offerings (most notably VAs). As the industry is aware, sales per advisor have drastically shrunk over the past 20 years. But, despite the setbacks, underlying demand for guaranteed income streams and higher yields remains strong, even as trust in insurers has been considerably weakened.
Indeed, the trust factor should not be underestimated. The frequent changes in pricing and funds, coupled with high-profile firms exiting the market, have seriously undermined the credibility of the insurers in the eyes of advisors. (Of course, consumers share these concerns, and for many of the same reasons.)
As a result, many analysts and observers have been asking what the industry – including large insurers, broker-dealers and distributors – can do to rebuild trust with advisors, seize current opportunities and establish a foundation for future success.
So where do we go from here? Are there better ways to deliver the guaranteed incomes that the market is demanding?
This article will highlight specific recommendations for insurers. Based on more than 100 hours of interviews EY conducted with insurers, distributors and others in the annuity industry, these recommended actions are designed in the spirit of our discussions to more clearly define the market, expand profit pools, create new bases of competition and generally improve the outlook for all annuity market participants.
1. Acknowledge the need to rebuild trust with advisors.
To a large extent, the industry is still suffering from the fallout of recent actions by large players. The constant variations and modifications of living benefits, prices and funds leave advisors wondering if they can strongly recommended products to their customers. It’s a dire situation, but EY research suggests that many in the industry have not yet acknowledged the gravity of these actions and their negative impacts.
There were intense financial pressures from low interest rates and depressed market conditions that forced insurers to make some drastic changes. All of the modifications were also “fair game” in the sense that they were featured in prospectus language. But these justifications have done little to placate a disgruntled and skeptical community of advisors. Only when insurers and suppliers fully come to terms with the consequences of their actions can they begin the process of rebuilding trust. The business case for rebuilding trust rests on the strong influence distribution channels have over the end customer. Their strong bargaining power must be recognized.
2. Continue to simplify and rationalize products.
In the past, many buyers of annuity products simply didn’t know what they bought just six months after making the purchase. In some cases, a single product might have had a dozen or more versions and permutations. Advisors unsurprisingly felt frustration from this as well. To put it bluntly: the more complicated products are, the harder they are for advisors to recommend and sell.
In the past several years, progress has been made. Some variable annuity products have become more rational, as companies are no longer acting aggressively to gain market share, but rather balancing their own needs and objectives with those of advisors and clients. However, manufacturers still have farther to go in developing simpler products. Irrational pricing still exists.
Take fixed-index annuities (FIAs) as an example. FIAs are very difficult to understand, and are often further complicated by the addition of new riders. Some have equated the “froth” in the FIA market – it’s estimated that they may overtake VA sales within a decade – to the early days of the VA market. All this suggests that the sins of the past may be repeated. It’s unclear if advisors truly understand these products. There are also concerns about long surrender charges and high commissions.
Again, the more indexes and crediting strategies are involved, the harder it is for distributors to understand and, ultimately, sell a product. Thus, there is a real competitive imperative for insurers to develop simple, stable products with long life cycles. Such products compare well to substitute offerings, such as mutual funds, and defend against new competitors from outside the insurance industry. That’s why advisors are clamoring for such products.
3. Focus on service and experience – and de-emphasize price.
Traditionally, players in the annuity market have competed on complex features and price. Moving forward, however, the emphasis will shift to performance, service and experience. This shift aligns to the stated preferences of advisors for simple products, with easy-to-understand features. Further, anything that insurers can do to support advisors in their service delivery to clients is likely to pay off over the long term.