The Life and Annuity Guarantee Frog Is Boiling

We are all familiar with the fable. It’s about a frog being slowly boiled alive.

For financial professionals, the way I see it is that, if the life and annuity industry were suddenly put into a pot of boiling water (diminished product guarantees), it would seek to offer consumers other product solutions or create new product offerings very quickly.

On the other hand, if the industry is put in tepid water (bearable but consistent product downgrades and changes), which is then brought to a boil slowly, it will not perceive the danger. Customers needing these guarantees to protect their financial futures will be cooked. (In other words: They will not be able to purchase the guarantees they need). The story is told as a grim metaphor for the industry’s reaction to change or its awareness of survival threats that arise gradually rather than suddenly.

In my view, the pot’s water temperature for diminishing of life and annuity guarantees is rapidly increasing. The first action to increase the temperature has been the economic impact of the pandemic. The pandemic has brought a sea change to all aspects of our lives, how the industry does business and the economy. It has brought forward the work impacts of the Fourth Industrial Revolution and exposed companies that at best, had business models that had not been digitally transformed.

The second major action to turn up the guarantee destruction burner several degrees was disclosed in Jerome Powell’s Aug. 27 presentation of the Federal Reserve’s new position on interest rates and employment targets.

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At minimum, it looks like the Fed will keep interest rates at near zero levels for at least the next two years and likely much longer. Lower risk-free interest rates set the foundation for rates on all forms of debt. The Fed is looking to allow increased inflation with the hopes of lowering the high levels of unemployment created by the pandemic.

We have been seeing the impact of lower rates across the spectrum of life and annuity insurance product solutions — lower initial crediting rates, lower contractually guaranteed minimum rates, lower renewal rates, lower product commissions and carriers beginning to selectively withdrawal products or from product lines that can no longer be profitably priced for an adequate return. If these actions exacerbate, the key advantages of all type of fixed annuity and certain life insurance products — product guarantees — could be much less beneficial to the consumer.

You only have to revisit the real-life example of what has transpired to long-term care insurance after a period of substantially lower interest rates. That product segment has undergone massive reduction of product guarantees, underwriting restrictions, new business pricing increases and price increases for in-force policies a good chunk of which was necessitated by lower interest rates. These are all actions that could impact annuity and life insurance policies also. The closer new money rates come to contractual guarantees the less room for any adverse development.

If you have not heard the pot boiling as yet, you should begin to get out of the pot and have your clients buy the guarantees they need before they are not available.

The alarm bells should be ringing for anyone who makes their living selling these products. In this time of near zero interest rates and a pandemic impacted economy we are in a new economic reality.

One of the casualties could be the life and annuity guarantees we sell every day.

It’s time for awareness that this change could happen. It may be time to jump off the burner and plan a course for this new reality.

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Harry N. Stout has been the president of Fidelity & Guaranty Life, deputy chief executive of Old Mutual Financial Network, and managing director of Insurance Insight Group. He is also the author of The FinancialVerse personal finance books.