Thursday, June 26, 2008

What Will SEC Regulation of Indexed Annuities Mean for Insurance Marketers?

On June 25, the Securities and Exchange Commission announced that it will propose a new regulation regarding indexed annuities (Release number 33-8933, Proposed Rule 151A). The details provided by the SEC regulators made it clear that essentially all currently popular indexed annuities would be considered securities once the regulation goes into effect.

To back up the need for the new regulation, the regulators showed clips from the April 2008 Dateline NBC report called “Tricks of the Trade,” which purports to show abuses in the sale of indexed annuities. The regulators also mentioned the role of surrender charges in exposing purchasers to the risk of loss.

Without question, the insurance companies who write indexed annuities and the insurance industry lobbying organizations that they work with will attempt to vigorously oppose this proposed new regulation. They may even be successful in modifying the regulation or stopping its adoption altogether.

However, if I was the owner or CEO of an insurance marketing organization heavily dependent upon the sale of indexed annuities for my profitability, I would not wait to see how that process plays out. The risk to my business is too great not to work on a solution starting right now.

There are two primary courses of action that an insurance marketing organization can take. One course is to attempt to build the segments of its business that are not under regulatory attack, such as traditional fixed interest rate annuities or life insurance. Fortunately, in today’s environment of low bank CD rates and declining equity returns, traditional fixed interest rate annuities have tremendous appeal. The other course is to become securities licensed by setting up an RIA firm and/or a broker/dealer firm. This will not only allow me to offer indexed annuities, but a whole variety of securities as well.

The problem for annuity marketing organizations is that many agents will choose not to become securities licensed. So, the primary challenge for these annuity marketing organizations will be a training and motivation challenge – to induce as large a portion of their existing agent force as possible to become licensed and productive in the sale of securities.

As in any environment of intense change, there will be firms that aggressively embrace the changes taking place to grow and profit, and there will be complacent firms that suffer dramatic declines in sales and profit. The key question for each marketing organization principal is this: are you willing to make the effort?

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Monday, June 16, 2008

Annuities Are Never Stupid

On June 12, 2008, The Motley Fool published an article by John Rosevear entitled “Are Annuities Ever Not Stupid?” The article mentioned that “we [the Motley Fool] really don’t like most annuities,” and it referred to equity indexed annuities as “ugly.”

In our opinion, Mr. Rosevear did not adequately answer the question he posed, so here is our answer. We believe that our answer does a better job of explaining why annuities are popular financial products.

Are annuities ever not stupid? Of course. Immediate, fixed, indexed, and variable annuities all provide an attractive value proposition to certain customers.

Immediate annuities: Retirees face a dilemma. They have a limited amount of savings, and if they dip into the principal to provide an adequate cash flow during retirement, they face the prospect of running out of money one day. Immediate annuities are the one financial product that can allow you to liquidate your principal yet be guaranteed not to run out of cash flow, no matter how long you live. This is because insurance companies pool the longevity risk across a large number of annuity owners, ensuring that there is adequate money to pay those who live a long time. As Mr. Rosevear mentions, the March 2005 issue of the Motley Fool’s Rule Your Retirement newsletter includes an article showing how adding a lifetime income annuity to your retirement portfolio can help ensure you don’t outlive your retirement savings.

Fixed annuities: Fixed interest rate annuities include so-called “CD-style” annuities. They are available in a variety of durations with a variety of interest rates. They are very comparable to bank CD’s and are often sold by insurance-licensed employees of banks. Because of the different investment strategies employed by banks versus insurance companies, there are times when fixed annuities offer much higher interest rates than bank CD’s of the same duration. When they do, fixed annuities are a smart choice for consumers who would otherwise put their money in bank CD’s.

Indexed annuities: Indexed annuities get some bad press because some writers and consumers by mistake think that these annuities are designed to replicate stock market returns. They are not designed to do that. They are designed to have similar safety of principal features as bank CD’s, money market funds, and savings accounts. They are an excellent choice for consumers who are looking for safety of principal yet the potential for a higher return than those other comparable products. You can even make a good argument that indexed annuities are more attractive than bond mutual funds. See our article, “Turning the Fixed Indexed Annuity Critic into an Advocate.”

Variable annuities: Variable annuities get some bad press because some writers (including most at the Motley Fool) believe that all customers should be willing to bear stock market risk in order to achieve stock market returns. But there is some risk of losing money in the stock market, even over long periods of time, and many consumers cannot stomach bearing that risk. So, variable annuities offer a way for such consumers to put money in risky securities. Consumers give up some of the return in the form of fees to the insurance company, which provides various guarantees to protect the invested principal. This provides a way for risk-averse customers to achieve some element of stock market return at a risk level that is comfortable for them.

Why do you think most commentators ignore the fact that annuities are a good option for consumers who are looking for safety of principal? What can we do as an industry to better educate these commentators? Click the “Add Comment” link below to share your thoughts.

Saturday, June 7, 2008

Positioning Annuities for the Retirement Wave

The June 2, 2008 issue of the Wall Street Journal includes an article entitled “Riding the Retirement Wave.” It is an article about the latest trend in mutual fund product development: managed payout mutual funds, which are designed to help boomers turn their savings into a steady stream of checks.

The advantages of the new managed payout funds are that they invest in multiple asset classes, they allow investors to withdraw their money at any time just like a traditional mutual fund, and the account balance can be passed along at death. The catch is that the funds’ values and payouts will fluctuate based on market returns. The funds can plan and promise projected payouts, but ultimately there are no guarantees.

According to the article, “most firms quickly point out that these [managed payout fund] products shouldn’t be considered substitutes for guaranteed annuities. For those whose nest egg is just sufficient to cover their expected cost of living, annuitization is likely the right decision because these retirees can’t tolerate much risk.”

This begs the question, what do some customers find unsatisfactory about annuities? The article answered that the disadvantages of annuities are that consumers fear the loss of liquidity, they feel that annuities have hidden fees, they don’t know how their money is being used (lack of transparency), and they feel that many annuities are too complicated.

So, as an industry, we can see our challenge. Part of the challenge is positioning. Annuities are criticized as complex and non-transparent, yet managed payout funds are surprisingly complex and non-transparent products. Regular statements are needed for these managed payout funds to show investors what fraction of each payout came from income earned by the fund, capital gains, and what was made from return of capital. The amounts paid out by the funds will fluctuate based on market returns.

Also, just because a fund carries a certain label, it does not necessarily make that fund consistent with other funds carrying the same label. For example researchers, at Financial Research Corporation in Boston recently looked at the assets of 58 mutual funds designed for workers planning to retire in 2020. Their findings were that the amount of holdings invested in stock, stock funds, and related instruments varied from 51% to 95%!

So, we must conclude that the mutual fund industry has taken very complex financial products and successfully positioned them as easy for the consumer to understand. Also, annuities are criticized as having hidden fees. Yet, every so-called “no load” mutual fund has an expense ratio that is never revealed on an account statement, only in a prospectus.

The payout phase of life is the phase where annuities should take center stage over mutual funds because of annuities’ guarantees and other safety features. If the mutual fund industry manages to capture the lion’s share of client assets during the payout phase of life, it will leave our collective retirements less secure, which could be a tragedy for us all.

What can we, as annuity creators and marketers, do to position the benefits of our products more successfully? Where should we focus?

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Wednesday, June 4, 2008

Whatever the Name, an Annuity Is A Much Needed Financial Product

On May 29, 2008, the Iowa Insurance Commissioner published Bulletin 08-07, which outlined procedures that insurance carriers should follow for annuity illustrations.

Interestingly, there has been an NAIC Model Life Insurance Illustration Regulation on the books for over a decade now, but there is no similar regulation on annuity illustrations. Fortunately, most carriers have carried the spirit of that life insurance regulation over to the annuity side, in that they have included detailed disclosures on their illustration output and have limited the latitude agents have in projecting future product performance. But apparently there have been some exceptions.

The most interesting aspect of the Iowa bulletin is this directive: “Illustrations for fixed annuities which contain a ‘fixed interest rate’ which is specified in the annuity contract must clearly state whether or not the ‘fixed interest rate’ is actually permanently fixed or based upon an index. Consumers must be told if the ‘fixed interest rate’ may in fact vary, as determined on a contract anniversary.”

What makes this interesting is that indexed annuities were originally called “equity indexed annuities” by the industry. Then, when some in the securities industry started asserting that these annuities should be regulated as securities because of the equity link, the industry switched its terminology to “fixed indexed annuities” and started emphasizing that they are a form of fixed annuity. Apparently, this has led to some confusion with consumers who expect the annual interest credit to be steady, i.e. “fixed”, from year-to-year.

The wonderful thing about equity indexed annuities, fixed indexed annuities, or whatever you would like to call them, is that they are innovative and much needed financial products. Wouldn’t it be wonderful if we could come up with a brand new name to describe them, one that would not confuse consumers, agents, or regulators? A rose by any other name would smell as sweet.

Click on the “add comment” link below to suggest a name or leave a thought.

Sunday, June 1, 2008

Let's Make Insurance Product Marketing More Personal

Since I have an insurance license, every couple of weeks I get some big package in the mail from some random insurance carrier. It usually cost the carrier about $4.80 to mail and I’m willing to bet, especially for the last one I received, anywhere from $5 to $10 to print (the last one was really nice). My first thought is, “Wow. Someone just spent close to $15 to market their insurance product to me and they don’t even know me.” They usually get my name and address from some list they bought.

So what do I do? Well, I usually take a quick look at the material and skim the cover letter. I usually give it at least that much attention because I am an insurance marketing strategist and I am interested in how other people market insurance products. My next step after that is to usually pitch it into the recycling bin. Then I usually wonder how many of these product promotions go into the trash and wind up in a landfill. It makes me a little sad to tell you the truth. Sorry, I’m here to focus on insurance marketing and not saving the environment. Let me get back on track.

Is this “spray and pray” marketing really effective? To me it’s kind of the equivalent of randomly meeting someone on the street and offering a marriage proposal all at the same time. Call me old fashioned, but where is the courtship? What about letting me get to know you and building a relationship? After all, isn’t marketing and sales about relationships?

I have a problem with this type of marketing and producer recruiting. One, I think it is overwhelming to the recipient. How is someone supposed to digest all that information all at once – and why would I want to? And, honestly, if I have that much time to review all that material I’m probably not setting any sales records. Two, I believe it is very impersonal. You have to have a pretty big marketing budget for that kind of marketing. Why not use that marketing budget more strategically? There are so many options to create a marketing strategy that can be viewed by your audience more effectively and seen as being more personal.

As attention spans get shorter and shorter we should all be looking at ways to engage our audience in a way that makes them feel like they are the only person we are communicating with at that time. The communications can be concise, targeted, economical, and still get our point across.

What are your thoughts? Click on the “add comments” link below to share your thoughts.