The life and annuity industry is showing overall growth in Q1 2008. Mergers and acquisitions are expected to increase as companies seek economies of scale. Product focus is shifting to more investment-oriented variable products. Regulatory oversight is increasing and complicating this shift. Advances in risk management and client segmentation technologies are a priority alongside developing web services to meet different generational expectations.
1. Life and Annuity Industry Update (Q1 2008)
The industry is fairing well, showing growth across all lines and resilience to the subprime
mortgage issues. Top line comments of note:
o Mergers and acquisitions are expected to increase over 2007 as the consolidations bring
economies of scale and horizontal diversity.
o Channel competition from banks and direct sellers continue to pressure the agency and
brokerage systems, compoiunding the upcoming talent deficit when baby-boomers retitre.
o Product focus has shifted to more investment oriented variable and flexible products,
including new concepts like immediate annuity/401(k) wraps and an accelerated growth in
life settlement business expected to continued into the foreseeable future.
o Increased regulatory oversight, particularly in the variable products arena and suitability,
complicating the shift to more investment oriented products and the increase in channels
o Advances in risk management and client segmentation technologies, paired with a focus on
web services, take priority over legacy investments
I. Market 2
II. Strategy 3
III. Regulatory 5
IV. Distribution 8
V. Technology 9
2. Market
o U.S. individual life insurance premium increased twenty percent in third quarter 2007
resulting in an eight percent increase for the first nine months of 2007 over 2006.
o Increased service to and expansion into new distribution channels (BGAs, MGAs,
and wholesalers) affected sales tremendously.
o Total face amount in the third quarter rose by six percent over 2006, while the total
number of new policies sold declined by one percent.
o All products were up through the first nine months of 2007, especially universal and
variable universal life, which were up 9 and 10 percent (23 and 55% for the quarter).
o Year-to-date, term life grew seven percent and whole life grew three percent.
o The biggest portion of the sales increases seen through the third quarter stem from the
brokerage channel. In fact, with the exception of WL, all products were up especially
UL and VUL which were up 16 and 19 percent for the year and 28 and 110 percent
for the quarter.
o Universal life continued to hold lion's share of annualized premium through Sep 2007
at 40% while term and VUL remained steady at 23 and 15% respectively.
o The nation's largest insurers have been able to post strong numbers despite a difficult
investment environment. life and health sector was significantly more optimistic with fifty-
four percent expecting premium growth
o Next great frontier for retaining and expanding the revenue dollar resulting from qualified
and non-qualified fund accumulations. This frontier involves retaining and garnering the
highest amount of revenue during distribution phases.
o For the 1st quarter of 2007, the top 5 companies/fleets—John Hancock, Hartford Life, Pacific
Life, RiverSource and Lincoln National—captured 55% of all variable life sales (including
single premiums at 10%), while the top 10 companies/fleets garnered 79% of VL sales.
o 95% of all variable annuity sales have some form of Guaranteed Life Benefit (GLB)
o Career agents and independent broker-dealer firms dominated flexible-premium variable life
sales, capturing 45% and 36% of the market, respectively and also dominated second-to-die
variable life sales, capturing 40% and 38% of the market, respectively.
o Insurance company rating agency A.M. Best Co. said on Thursday that the subprime
exposure of the industry was "modest," and it did not expect to downgrade most of the
companies it covers.
o New York life expands presence in China as other insurers consider growing offshore to
escape cumbersome U.S. state by state regulations.
3. Strategy
o Product innovation was cited by thirty-three percent of the executives as an important driver
for future growth, while fourteen percent cited distribution and eleven cited technology
o Insurers’ strategic model needs to change as Boomers begin to retire.
o The pivot point for potential changes to the insurers’ strategic landscape will be 2011,
when the first Baby Boomer turns 65 and the retirement market begins to change
from the accumulation of assets towards distribution of retirement income.
o As this change accelerates because of the number of aging Boomers, insurers will
come under increasing pressure to adapt their business model and products to a new
strategic landscape.
o Developing a response to this challenge requires understanding two related questions:
How will retiring Boomers impact the multi-product and multi-market strategies
currently used to accumulate retirement assets? What operational challenges will
accompany changes in those strategies?
o As it explores these questions, this study develops some strategic and operational
responses insurers may consider as they plan for competition in a post-2011
retirement market
o An increase in mergers and acquisition activity in the next 12months, with more than 40
percent of the executives saying their highest priority for investment would be strategic
acquisitions followed by 30 percent who said technology.
o For 2007, deals totaled more than $1.4 trillion of assets under management (AUM)
acquired and $135 billion in securities firms (including exchanges).
o Private equity firms deployed $69 billion of capital in 122 financial services deals.
o As 2007's subprime upheaval migrates into the corporate credit markets in 2008,
major opportunities will arise for established, well financed firms to consolidate their
leadership position, bringing major changes in the strategy for the financial services
industry.
o 2007 represented two distinct halves: a growth phase followed by a stressed phase. In
2008, we expect to see activity driven initially by the market stresses, including
divestitures and continued minority investments followed by more strategic
acquisitions and cross border deals later in the year.
o An enormous opportunity exists for life insurers to participate in providing retirement income
for consumers.
o In the next 3 to 5 years, annuity sales will double to $300 billion from $150 billion
o There is more than $9 trillion of money in motion
4. o Companies should be ready to provide innovative products to the market, but they
also need to make sure innovation does not outstrip prudent risk management
o Consider the explosion of 500 living-benefit products and the opportunity they
represent to insurers
o Life settlements anticipated to grow about $1 billion in additional volume per year for the
foreseeable future. On the life insurer side, as those annual transactions accumulate, the
impact on in force business becomes a more significant profitability issue for the insurer.
o Several institutions, including Bear Stearns & Co. Inc., Credit Suisse, Goldman,
Sachs & Co., Mizuho International plc, UBS AG, and West LB AG have launched a
new organization called The Institutional Life Markets Association, Inc. or ILMA.
Created to encourage the competitive growth of the life settlement and
premium finance industries.
ILMA stated that it seeks to establish industry best practices and disclosures,
encourage standardization of documents, and advocate for the appropriate
regulation of the rapidly evolving life settlement and premium finance market.
It listed promoting transaction transparency, protecting the identity of
insureds, supporting longstanding insurable interest principles, and advancing
public understanding of the life settlement and premium finance industries.
o The National Conference of Insurance Legislators, Troy, N.Y., is in the final stages of
developing its Life Settlements Model Act.
o About 60% of top insurance executives expect the secondary market for life insurance
to be significantly larger in 5 years than it is today.
5. Regulatory
o Federal charter: distributors (IIA) against fed charter, mutuals (NAMIC) against, other
carriers (AIA) for it, change in political climate expected to change focus on charter
o Sen. John Sununu, advocate for the charter, switching from Banking to Finance
Committee, leaving a gap in advocacy
o Barney Frank, chair of House Financial Services Committee, contemplates splitting
life and annuity from p&c so that life optional charter could be done separately.
o Estate tax changes likely in 2008, raising exemption from 2 to 5 and increasing farmland
exclusions, with cap at 25 million estates, those over taxed at 30%
o Under the current law, the federal estate tax disappears in 2010, for just one year, and
then reappears in 2011 in its 2001 incarnation. Congress is unlikely to resolve this
mess until after the 2008 election.
o State insurance regulators are starting to put their approval for the new Straight-Through
Processing standards initiative in writing.
o Change to principle based reserving ,which industry wants so as to advance reserving
practices, received an encouraging tax treatment private letter ruling from the IRS which will
give momentum to the transition
o Viatical Settlements Model Act near completion by NAIC, which targets specifically the
STOLI (STranger Owned Life Ins) segment that sells to individuals with no insurable interest
in the policy owner.
o TRIA (Terrorism Risk Insurance Act) is renewed for 7 years. Does not include Group Life as
hoped, but did include internal as well as external terrorism, a cap for insurers, and
recognition that weapons of mass destruction (NBCR – Nuclear, Biological, Chemical,
Radiological – events) were uninsurable.
o NAIC Life Panel areas of focus
o Producer licensing reciprocity and easing of accelerated death benefit rules are two of the
issues surfacing at the National Association of Insurance Commissioners Life Insurance
and Annuities Committee.
o Getting the Interstate Insurance Product Regulation Commission up and running and
cutting approval times for some products to less than 30 days. Fees may be a bit steep for
smaller companies.
o Addressing the issue of standardized producer licensing practices, which the industry is
perceived as falling behind on (linked to GLB compliance issue that is required to
prevent a nationalized licensing approach).
6. o Discussing the NAIC’s new viatical settlements model law that imposes a 5-year ban on a
very limited group of transactions that the NAIC feels require extra scrutiny.
o Considering whether and how life insurers can use information about legal foreign travel
and travel plans in underwriting.
o Look into marketing of annuity products to seniors and the use of professional
designations.
o VA Suitability Rule 2821 creates heightened suitability obligation, expanded principal
review and approval requirements, and supervisory and training requirements for VA
transactions. This rule is pending additional rulings so it is not yet in effect. When it does
take effect, absent modifications, financial advisors selling VAs will be required to determine
and document:
o The customer has been informed, in general terms, of various VA features.
o The customer would benefit from certain VA features, such as tax deferred growth,
annuitization, or a death or living benefit.
o The following are suitable for the customer: The particular VA as a whole; the
underlying subaccounts; the riders and similar enhancements; and, in the case of an
exchange, the transaction as a whole.
o In the case of exchanges, there must also be consideration regarding whether:
- Customer may incur a surrender charge, be subject to start of a new surrender
period, lose existing benefits, or be subject to increased fees or charges.
- The customer would benefit from product enhancements and improvements.
- The customer’s account had had another deferred VA exchange within the
preceding 36 months.
o Requires that a registered principal review a transaction and determine whether he or
she approves of it prior to transmitting the customer’s application to the issuing
insurer for processing, but no later than 7 business days after the customer signs the
application. The registered principal may approve the transaction only if he or she has
determined there is a reasonable basis to believe the transaction would be suitable
based on all of the factors noted above.
o The registered principal reviewing the transaction must document and sign the
determinations as required regardless of whether he or she approves, rejects, or
authorizes the transaction.
o Requires firms to develop and maintain supervisory procedures that are reasonably
designed to achieve compliance with the proposed rule.
o Firms will be required to implement surveillance procedures to determine if financial
advisors “have rates of effecting deferred variable annuity exchanges that raise for
7. review whether such rates of exchanges evidence conduct inconsistent with the
applicable provisions of [t]he Rule, other applicable NASD rules, or the federal
securities laws.”
o Firms will also be required to have policies and procedures reasonably designed to
implement corrective measures to address inappropriate exchanges and the conduct of
associated persons who engage in inappropriate exchanges.
o Will be required to develop and implement training programs tailored to educate
registered representatives and registered principals on material features of VAs and
the Rule’s requirements.
o Some industry groups say states have diverged from producer licensing uniformity enough to
fall out of compliance with the Graham-Leach-Bliley Financial Services Modernization Act
of 1999.
o The GLB Act required states to establish uniform producer licensing requirements or
else cede responsibility for producer regulation to a new National Association of
Registered Agents and Brokers.
o The states met the act requirements well enough initially to avoid triggering the
creation of NARAB, but are now seen by some as having fallen out of compliance.
8. Distribution
o Agent and adviser's roles expected to transition to more of a coach or a sounding board, not
someone making the final decisions for the investor.
o The move has to be to a more collaborative environment, where you can't just assume
that these somewhat paternalistic business and advice models are going to transition
well. Flexibility is key.
o Numbers from The Insurance Information Institute (III), Washington, D.C., support the
theory that the distribution system is changing.
o Insurers using independent agents also sell directly to the consumer, either over the
Internet or though the mail.
o Direct writers are strongest in the personal lines, accounting for two-thirds of the
market. Agency writers account for the remainder. The ratio is reversed for
commercial lines where agency writers account for two-thirds and direct writers
account for one third of the market.
o This change in the market doesn't just affect agents. Without a united effort to make
independent agents more efficient, carriers face diminished effectiveness in their
distribution system.
o Bank Annuity Sales increase- Fixed Annuity Sales Up 12%, Variable Annuity Sales Up 15%
o Financial institutions sold $4.2 billion of fixed and variable annuities in October, up
from $3.7 billion in September and $4.1 billion in August.
o Total bank annuity sales hit a 19-month high in October, and have improved 45
percent since the beginning of 2007
o Year-over-year, total bank annuity sales were up 24 percent. Fixed annuities gained
momentum in banks late in the summer, as evidenced by a 31-percent sales increase
from July to August.
o By offering a broader range of retirement products and planning services, banks are
taking a more holistic approach when working to meet the retirement income needs of
their customers. Fixed and variable annuity products are an integral part of meeting
those needs, since annuities can provide tax deferral and a reliable stream of income
during retirement
9. Technology
o With $9 trillion in retirement income in play, and annuity sales expected to double to $300
billion in the next 3 to 5 years, life insurers will need the correct technologies in place.
o New retirees educated, require Web-based services that meet the generational differences like
automatic plan features, use of the web, and the coach vs parent agent role (nonconformity).
o Once you move from the boomer generation to Gen X and Gen Y, the Web and
automated services are not a nice-to-have, but a need-to-have.
o Technology-based solutions benefiting clients will play a critical role in supporting
the complex activities regarding retirement.
o "You've got to have flexibility for the boomers and for Gen Y. If you have a
lot of legacy point solutions that are hard to try to adapt and evolve, it will be
difficult for you to provide new functionality."
o Annuity writers improving service by spending new project dollars on service portals, with
40% spending "some" new project dollars on contact centers
o Annuity insurers are being held to customer service expectations set by banks,
brokerages and mutual funds rather than the traditional life insurance models.
o VA contract holders expect to be check values and change positions as easily as they
can with their brokerage accounts:
o 28% of consumers over age 60 reported checking their insurance policy
values online regularly, 38% reported checking their investment values online;
o For Generation X, 47% use the Web as preferred method for communicating
with financial services providers, 75% use their brokerage firm's Web sites.
o 2007 was about efficiency and cleaning up the back office (core system replacement
projects); for 2008, customer-facing initiatives take center stage.
o Customer experience projects a big trend. Every company has one going on, GEICO
touting their customer service initiatives has forced other carriers to follow suit.
o Offering an integrated customer experience is paramount, the online experience must
be similar to the experience you get from the call center or if an agent stops by.
o From the traditional focus on sales growth to a more customer and agent-centric
approach, carriers should start measuring customer experience. Companies need to
know where they stand vis-à-vis the competition.
o Another trend likely to be big 2008 is the move to beef up risk management capabilities
using location intelligence solutions combined with maintaining underwriting discipline.
o Predictive Analytics and Complex Event Processing Technology Move to Cutting Edge of
Financial Services Industry
10. o Used to segment valuable customers and anticipate the types of products and services
that will attract their new business or increase their loyalty.
o Becoming more pervasive around the operations of financial services companies,
beginning with customer focus -- as we go from a product-based industry to a
customer-focused industry and from a product profitability standpoint to a customer
lifetime value ambition,"