For those familiar with current demographic and economic trends, it would appear the stars have aligned for an uptick in annuities growth. With the Pew Research Center projecting 10,000 baby boomers turning 65 every day for the next 15 years, juxtaposed with a decline in defined benefit pension plan availability to support them in their golden years, the pool of prime prospects for longevity-focused solutions should theoretically be deepening.
Annuities, with its core feature of long-term, guaranteed income, should be uniquely positioned to help more people alleviate retirement funding concerns. Yet despite these seemingly optimal growth conditions, individual annuity sales have been fluctuating over the past decade — 11 percent lower last year compared to their peak in 2008, according to the LIMRA Secure Retirement Institute.
Part of the problem is that persistently low interest rates have been a barrier to annuity providers trying to generate enough of an investment return to profitably cover their guaranteed income commitments. As a result, some carriers have intentionally scaled back their annuity writing, de-risked their portfolios, reassessed underwriting and pricing models, and adjusted product mix, terms, conditions, and fees to better position themselves for sustainable growth.
With interest rates expected to start rising later this year or early in 2016, this retrenchment trend among many annuity providers will likely be reversed before long. However, a recent Deloitte Center for Financial Services survey titled “Voice of the annuities consumer: New approaches to growing the annuities market” identified several more fundamental, systemic challenges for insurers to address if they expect to consistently increase market penetration, widen their prospect base, and propel sales on a steeper upward trajectory over the long term.
Which new approaches should annuities writers consider?
The key takeaway from Deloitte’s survey data can be summed up with the phrase, “What got you here won’t get you there” — at least when it comes to connecting more effectively with a wider range of annuities prospects.
To grow the overall “annuity pie,” carriers will need to consider a number of options to change the game both in terms of gaining market share within standard target groups as well as enhancing visibility and attractiveness among non-traditional prospects.
Based on Deloitte’s analysis of the survey data, industry practices, regulatory changes, and market developments, there are at least four opportunities for annuity writers to bridge the gap with a broader pool of prospects in traditional and underserved markets:
1.Increase focus on repeat buyers and capitalize on cross-selling opportunities
2. Repurpose the product to broaden the utility and appeal of annuities
3. Appeal directly to consumers with proactive education, marketing, and sales initiatives
4. Leverage the workplace channel to significantly increase group sales as well as facilitate more individual purchases within retirement accounts
1. Increase focus on repeat buyers and capitalize on cross-selling
One opportunity may present itself in the form of recurring annuity purchases, as 42 percent of the annuity buyers Deloitte surveyed already owned at least one other annuity prior to their most recent acquisition. Even more encouraging is that 73 percent of these repeat buyers bought an annuity in addition to, not as a replacement for, their prior purchase (click image to enlarge).
Familiarity with the annuity writer and seller may create additional cross-selling opportunities as well. Nearly half of annuity buyers surveyed had already owned at least one other financial product from their annuity company, while about two-thirds said they also had purchased other financial products from the intermediary who sold them their most recent annuity.
This means that buyers of life insurance or other types of coverage, as well as various investment products, might be more amenable to adding an annuity to their portfolio from the same provider and/or intermediary.
2. Repurpose the product to broaden the appeal of annuities
To build bridges to traditionally overlooked segments, it may be pragmatic for insurers to consider augmenting their traditional retirement focused-product line with innovative elements to appeal to a wider — particularly younger — audience. Deloitte’s survey indicates that life events other than retirement could motivate a younger person to buy an annuity. For example, 35 percent of annuity buyers in the youngest age group said they had purchased one because they “came into a sum of money,” while 23 percent cited the birth of a child as a reason for buying an annuity.
To capitalize on the high potential for repeat sales, prospects need to first be sold their initial annuity, preferably early in their financial life cycle.
However, insurer success at penetrating untapped market segments will likely require a comprehensive understanding of the product characteristics that can ultimately discourage an annuity purchase for some — product complexity and investment objectives.
For example, annuities are often perceived as relatively complicated. While half of both buyers and non-buyers surveyed say they have a basic understanding of annuities, only a small portion (11 percent of non-buyers and 18 percent of buyers prior to purchase) said they understood the product and its features very well.
Product simplification could have a two-fold impact: Reducing uncertainty stemming from complicated features and charges, while simultaneously preparing first-time buyers who are not yet “retirement focused” for the future purchase of a more sophisticated annuity offering a lifetime income component.
Nearly 40 percent of non-buyer respondents said they wanted to wait until they are closer to retirement to purchase an annuity. Getting this segment interested in annuities earlier may require changing the conversation from pure retirement security issues to other potential uses for the product. For example, a lower-cost, less complex, and more limited “starter” annuity for younger age brackets could provide annuitized outlays for a child’s eventual college tuition, or even help recent graduates and/or their parents pay off student loans after graduation.
Another possibility is to broaden the purpose and appeal of annuities by introducing more “hybrid” products, such as a policy that offers life insurance protection today with the option to trigger annuitization features when the buyer gets closer to retirement.
3. Appeal directly to consumers with more proactive education, marketing, and sales initiatives
While our survey indicates that intermediaries are likely to remain the lynchpin in annuity prospecting and sales, that should not discourage insurers from directly communicating with consumers more often. The goal is not necessarily to disintermediate, but instead to better inform prospects about the benefits annuities offer and thereby develop warm leads for the insurer’s sales force.
To overcome the lack of awareness and understanding of the product that was highlighted in Deloitte’s survey, carriers need to be more proactive in getting their message out about what annuities can do, how they work, how much they cost, and how they stack up against other investment options. Ideally, this shift in approach would be implemented both as a company-specific and industry-wide effort.
With only 2 percent of surveyed buyers prompted to consider buying an annuity by insurer advertising, carriers might consider following the more action-oriented ad approach of the pharmaceutical industry, which lays the groundwork for increasing demand by making more people aware of their particular products, explains what they do, outlines their potential risks, and ultimately drives consumers to ask health care providers whether a particular product may be right for them.
Moreover, as younger respondents in particular were inclined to rely more on Internet-based sources for annuity information, online efforts, including social media campaigns, could be effective as part of a wider, more holistic digital direct-connect program.
Given that non-industry online sources are often replete with mixed reviews on annuities, insurers should find ways to drive more traffic to their own websites to help them better control the messaging about their products. One way to achieve this might be to add elements of scenario analysis to provider sites, fueled by tools that help calculate how much buyers can earn from an annuity while illustrating other features of annuities as well as potential advantages over alternative investment options.
In addition, while the Deloitte survey revealed that only 17 percent of current annuity owners were either somewhat or very likely to consider buying another annuity directly over the Internet without a professional financial intermediary shopping for them or advising them, 45 percent of these were buyers from 30 to 44 years old, which should prompt providers to experiment with direct sales, at least to younger prospects.
4. Leverage the emerging workplace channel
The accelerating transition from defined benefit to defined contribution plans makes the 401(k) market a natural conduit for annuities writers to connect with more individuals looking for longevity solutions. Indeed, among those surveyed by Deloitte, a number of respondents offering open-ended commentary spontaneously cited the worksite channel as a potential motivator in spurring a future annuity purchase.
Recent federal regulatory actions may help generate more interest in the annuity option through employer plans. In July 2014, the Internal Revenue Service (IRS) issued new rules allowing individuals to buy longevity annuities in both their 401(k) and individual retirement accounts. The IRS also put out a notice in 2014 allowing employers to include deferred-income annuities in target date funds used as a default investment option in 401(k) plans. The Department of Labor confirmed that possibility, and laid out how plan sponsors can meet fiduciary standards when appointing an investment manager to select specific annuity products and providers to meet the lifetime income guarantee.
Even if plan sponsors decide to include annuities as an investment option rather than an automated default choice, the potential increase in annuities’ availability through workplace plans could still put carriers in a prime position to better educate employees about the need for reliable retirement income streams, as well as the potential for annuity products to meet that demand.
Meanwhile, over the past few years, a number of carriers have bolstered their annuity sales on a large scale by executing pension risk-transfer deals, in which insurers take over the longevity exposure of an employer’s defined benefit plan via a group annuity arrangement. The number of such buyouts rose 28 percent to 277 last year, while the value of the transfers more than doubled to $8.5 billion, according to LIMRA’s Secure Retirement Institute.
Where do annuities writers go from here?
The annuities market remains in a state of flux. This status quo is unlikely to remain viable over the long haul for insurers seeking opportunities for bigger, more consistent annuities growth.
Companies will need to change this dynamic by developing a new mindset to break free of the constraints — both internal and external — inhibiting a robust expansion in prospective buyers and, ultimately, sales.
Long-term, instead of competing in a zero-sum market share battle over the same narrow target segments, carriers should be rethinking their business models to appeal to a wider array of consumers, create a more receptive audience for their messaging, and ultimately make a more compelling case for annuities.
That way, they stand a stronger chance of expanding the available market while differentiating their brand in the process.