The Preventable Demise of the Fixed Annuity Business: Part Three of a Multi-Part Series
In Part Three of this series I will suggest specific actions to repair both the current hostile regulatory climate and the challenging marketing environment which together pose a significant threat to the future success of the fixed annuity industry. Readers should know that my day-to-day work is wound around developing solutions to such problems. Click here for Part Two, and here for Part One of this series.
Reduce Complexity, Set Standards and Create an SRO
Because it severely limits comfort and confidence among annuity buyers, not to mention an accurate understanding of an annuity product’s realistic performance capability, it’s time to end the ever-expanding complexity in fixed annuity product design.
Complexity for complexity’s sake can easily cross the line into the territory of gimmickry in product design. It’s happened far too often in an industry which is by its very nature more difficult for people to comprehend. Gimmicky products are unlikely to possess any inherent performance advantage over simpler products. In fact, they may often times signal poorer results for consumers. The industry should consider the adopton of standards which would eliminate products that are overly complex and opaque.
I’ll cite the example from a few years ago of an indexed annuity with an S&P 500 participation rate of 125%. What was the management of that company thinking? The kindest analysis would hold that the provider introduced without malicious intent a product that was inherently misleading to both its sellers and purchasers. At worst, unleashing such a product on a naïve agent population that solicits business among a largely trusting customer base comes uncomfortably close to criminal behavior.
Is the urgency to attract new premiums so desperate and otherwise so nearly impossible to achieve that a company would have to hoodwink all involved? Did the senior management of this company genuinely believe that some of its agents wouldn’t say to prospective purchasers, “This product will provide you with 125% of the S&P 500 without the risk of investing?”
Yet when you looked under the covers of this product it was easy to show that its inherent design would likely produce interest earnings that were inferior to other simpler products which may have offered, say, a 60% participation rate. Such is a real-world example of the tendency of some life insurers to exploit both their agents and contract holders through the design of products that shouldn’t be allowed to see the light of day. When it acts this way the industry shoots itself in the foot. I’ve often said that this happens about every three minutes.
When running for President in 1980, Michael Dukakis famously said, “A fish rots from the head.” Let me paraphrase Mr. Dukakis and say that the fixed annuity industry rots from not having a head. After 30 years of observing annuity product providers, I believe that what’s needed to place the industry on a solid footing for robust growth is something akin to an NASD-type SRO (self-regulatory organization). Now I know many in the industry will bristle at the reference to the NASD. But just look at the numbers.
Consider the growth of the securities industry in comparison to the life insurance industry since the time I entered financial services in 1977. When I joined the business, life insurance companies “owned” America’s pension assets. They lost that business to mutual fund complexes that were regulated differently.
I believe that there are too many regulators of life insurance companies, and I believe that a single strong SRO would make for a better result than we have at present. Think about the fact that the extraordinarily misleading indexed annuity product I mentioned above (and dozens of other products I didn’t mention) was reviewed by multiple state insurance regulators and approved for sale in almost all 50 states!
Transform the Consumer Education and Communications Process: Make it Enjoyable and Modern, and Compliant.
While I call on life insurers to reduce the complexity in annuity products, it’s also true that the very nature of “insurance” products presumes a greater level of complexity than, say, many investment products. This is not a bad thing. But it places a special burden on providers to wrap their products in communications tools which convey balanced explanations of the products being marketed to purchasers who are generally 60 years of age or older. I have to give a lot of credit to some carriers who understood this beginning several years ago and acted to enhance both consumer and producer education. They have enjoyed nothing but good results as a result.
I had the privilege of being at the forefront of a movement to create fair and balanced educational presentations using rich motion graphics burned to CD ROMs. Providers such as ING, Jackson-National, Sun Life Financial, and Aviva packaged their new annuity products with engaging educational presentations. They not only increased sales, they also helped their agents understand how to present their products in a superior (compliant) manner. This lowered market conduct-related liability risk for these carriers as they were able to drive, for the first time, consistency in product explanation over large networks of producers.
I believe we’ve come to a point in time where no purchaser of an annuity product should be allowed to purchase it unless he or she has viewed an objective educational presentation designed to explain both the advantages and disadvantages of the product. The reasons for requiring this given today’s regulatory environment extends beyond common sense; they reach a level of urgency in protecting shareholder value.
Multiple points of value accrue to all participants in doing just as I’m suggesting:
• Consumers gain clarity, confidence, and true understanding of the product they are purchasing; the format is easy to understand, not off-putting legalese.
• Agents’ long-term career interests are well served by the development of closer and more meaningful relationships with their clients. A fuller, needs-based relationship will take root resulting in consistency and satisfied clients.
• Product providers benefit by establishing perfect consistency over the explanation of their inherently more complex products. They benefit by lowering financial liability and by having distributors who become better able to up-sell and cross-sell their other product offerings.
With the widespread adoption of broadband connectivity, it’s now possible to abandon the CD-ROM format in favor of web delivery of the educational presentations. Sun Life Financial has done just this recently through their creation of distributor-personalized microsites capable of delivering streaming video educational presentations on its new fixed annuity product. Whose interests are not well-served by this development? And it’s even less costly than duplicating CDs.
In the next installment I will address a key issue: the self-defeating, growth-limiting attitudes held by many defenders of the annuity industry status quo.