The pandemic has exposed the weak financial foundations of American families. Emergency funds have been depleted, retirement funds prematurely accessed, the lack of individual, non-employer based life insurance protection exposed and the politically charged availability of government provided safety net benefits made clear for all to see.
Most families have come to the realization that they cannot depend on the government to be the last resort protector for their major financial risks.
This is where expanded, more easily accessed private sector solutions are needed. The insurance industry can provide solutions to help minimize or eliminate many of the personal financial risks Americans face. This can only be done, however, if consumers can have wider and better access to the industry’s products and services. In so many ways our current business practices and regulatory framework have a post-World War II look and feel to them.
Despite growing consumer needs for protection and retirement solutions, industry sales of life insurance and annuity products has been stable to declining for decades. New individual life insurance sales do not usually grow at the rate of GDP increase or in excess of the rate of inflation. At the same time individual life insurance ownership continues to decline year after year.
Recently, the pandemic has increased consumer demand for protection products, which is long overdue. The industry’s retirement offering of annuity products has suffered a similar fate with new sales remaining around the quarter of trillion dollar level for a decade.
However, if you really look at new money sales (not including 1035 exchanges), I think we would all be surprised at the amount of new money flowing into the annuity industry. This is occurring at a time when protected lifetime income and tax deferral are more important for consumers than ever before.
So what can be done to expand the industry’s sales pie? Here are eight ideas.
1. Financial Education
We mandate more training to get a driver’s license than we do to manage our personal financial affairs. Most Americans of all ages do not understand the basics of personal financial management. Mandated and expanded financial education is obviously needed. A consumer will not look to purchase a financial protection product if they do not understand the risks they are protecting against.
2. Regulatory Rebuild
We have a state-based regulation system that needs a shot in the arm to promote innovation and creativity. How can the industry deliver Fourth Industrial Revolution solutions when dealing with an underfunded and overworked regulatory framework?
3. Redefining Fixed Products
With risk-free interest rates hovering around zero it is clearly time to rethink what a fixed insurance product looks like. For example, minimum fixed annuity contract guarantees could be reduced to allow for losses of principal of up to 10% to 15%.
If this were the case, the large population of life only contracted agents could sell some form of buffered annuity products that currently offer a very good combination of upside and downside protections for the consumer.
A regulatory environment should be created that promotes actions taken to use available technology tools to improve consumer product access and service delivery. The speed of technological change will pass the industry by if it does not have the ability to use FinTech tools that are being created.
5. Simple Products
A new category of simple products that allow easier consumer access and purchase availability (with fewer regulatory requirements) should be investigated. For example, simple life, fixed rate and indexed products could be brought to market with lower dollar minimums and simpler contracts. These products should be designed to be sold over the internet with all related contract provisions and regulatory needs streamlined.
6. Combination Products
A new category of products could be created that covers life, health, wellness, disability and retirement risks in a simpler to understand and purchase framework. Consumers need to accumulate more assets to fund their longer life expectancies and related costs.
7. Trust Building
The industry needs to have a focused effort to improve its image and trust scores. We see each year that consumers have a lack of trust in buying certain of the industry’s products.
8. Sales Practice Reform
We need to decide on our regulatory model for sales practices as the current environment confuses the consumer. How can consumers deal with the ever evolving flow of sales practice regulations, including Reg. BI, a changing DOL Fiduciary Rule and new NAIC model annuity sales practice requirements? We would all be better off with a holistic cost/benefit review of how product sales are regulated.
Growing the industry sales pie to better address consumer needs will take a combined effort of legislators, regulators, insurance carriers and distribution organizations of all shapes and sizes. America needs more private sector financial protections in place as our government cannot provide complete personal financial safety nets for everyone. Given the reset opportunity the pandemic has given us, the time is right for collective action.
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. His new book, Today’s Annuities — A Tool to Create Protected Lifetime Income. is coming out soon.