Feel the relief? It’s the collective sigh from the insurance industry as it survives a historic economic storm and looks to smoother sailing ahead.
But that does not mean agents and advisors should get too comfortable. This is not a case of them settling back into their deck chairs and enjoying the ride. This is a new journey.
Analysts see emerging new worlds on the horizon. Some seem intriguing, others a tad treacherous.
What’s out there? Here is a broad map of what we’ll explore:
ECONOMY: The economy itself is obviously the biggest factor. Volatility is down and many indicators, particularly the stock market, have returned to pre-crash levels or better. But consumers are in a different place. Much like the survivors of a disaster, they bear scars and are stowing bad memories in their baggage.
DEMOGRAPHICS: America is changing rapidly. Every corner of the country is becoming more diverse, but the insurance sales force still looks like a company brochure from the 1950s.
PRODUCTS and MARKETS: New products are answering old objections, such as the expense and the sense of throwing away money on premiums for a product people won’t use. How consumers get their information is changing as well, with more people shopping for insurance online and even at supermarket kiosks. But here’s the thing – it’s not working, at least not that well.
REGULATION: Every year, we say next year will be the one in which legislators and regulators take a good look at insurance and financial oversight. The Federal Insurance Officer and the Securities and Exchange Commission have been gathering information for some purpose. We will likely see what that is in the next 12 months.
BIG DATA: Become comfortable with terms such as “predictive analytics.” A whole lot of science is elbowing in on the art of selling.
Let’s unpack some of this.
As always, interest rates occupy the center of attention as the industry’s main sustenance. If rates continue to bump along the bottom of historic lows, companies will become more desperate for even a meager gain to cover ever-more innovative guarantees and protect reserves. Advisors have seen this manifested in rolled-back variable annuities and other products. But the pressure also has pushed companies to greater creativity, particularly in riders.
Now, after years of hoping, carriers are seeing mounting evidence of modest growth in the economy and corresponding interest rates. The latest indicator is a report from the well-respected Conference Board, which predicted world economic growth of 3.1 percent in 2014, up from 2.8 percent this year.
That is despite a slowdown in the most populous nations of China and India. That’s a good thing, cooling down to a more manageable level. In the meantime, the U.S. economy is expected to grow at 2.6 percent next year, up from 2.3 percent in 2013. Even the eurozone is expected to limp out of its multidip recession.
Stephen Hoopes, industry research analyst at IBISWorld, said that the slowly rising tide will lift insurance also.
“We don’t see anything – at least from 2014 to 2019 – that would really shake that stability,” Hoopes said.
That smooth sailing would be on honest currents such as increasing income and stable price rather than crazy bubbles.
“Over the five years to 2018, industry revenue is forecast to grow at an annualized rate of 3.4 percent to $935.4 billion,” according to IBISWorld’s report, “Life Insurance & Annuities in the United States.” “Premium growth will be supported by increasing household affluence, an aging population and households taking on a greater role in retirement planning. Investment income is anticipated to get a boost from stronger financial markets and higher interest rates over the second half of the five-year period. In addition, industry operators are expected to continue to consolidate in order to operate more efficiently and boost profit margins.”
So, all good, right? Not so fast, said Gary Shaw, the insurance sector leader at Deloitte.
“There are obviously positive signs within the economy, but I still think there’s a hesitation for people to commit among other discretionary income choices to planning for their retirement to making insurance purchases,” Shaw said. “There is a disconnect between people continually ranking high the need to plan for retirement and their failure to actually do that.”
How can insurance companies and producers make that connection? A key is in understanding how demographic groups want to be advised.
The insurance industry has been gaping at the boomers’ “silver tsunami” with awe over the past few years. After all, 10,000 boomers turn 65 every day and they are sitting on a good portion of the $3 trillion in 401(k) plans alone to convert into retirement income.
But it’s the wave behind the boomers that fascinates Shaw. He said Generation X is actually more attuned to the insurance message than advisors might imagine, and they also have some serious money to protect.
“The next wave, just entering their peak earning years, is about 40 percent of the workforce,” Shaw said. “There have been surveys saying the opportunity is about $3.6 trillion of the gap between current insurance levels and what they may need.”
They already are sold. Gen Xers know they need coverage and, even better for advisors, they have a high propensity to buy. Earn their business and they are also brand-loyal, Shaw said.
But companies and advisors have to get them where they live – online.
“The No. 1 way to reach them is making a connection via the Web,” Shaw said. “They use the Web for research all the time. They want to have control of the process, to be educated when they want to be educated, and to not be pushed by sales.”
So, what’s the problem? Well, besides the technological problem of reaching prospects without appearing to sell them, there is the endemic problem of disconnected demographics. The oldest Gen Xer is 48. The average age of an insurance agent is 57. Insurance is typically a peer-to-peer sale. Hence, the disconnect.
Agents tend to be on the pale side as well, about 80 percent white, according to the U.S. Bureau of Labor Statistics. Shaw said he frequently hears about this problem from insurers.
“It’s a big obstacle,” he said. “I was meeting with an insurance executive from the Midwest the other day and he just happened to throw out this story where they were reviewing call center comments and saw that there was a need for Spanish-speaking agents in a certain geographic area. But they didn’t have one in a 50-mile radius.”
But it’s more than just speaking Spanish that insurers need to do, said Scott Hawkins, vice president of insurance research and consulting at Conning & Co.
“Are we growing distributors who can effectively reach into this diverse consumer market?” Hawkins asked. “Can we effectively provide advice beyond just the book knowledge of understanding products and financial planning, and actually understand the needs of a diverse range of customers?”
Not quite yet, Hawkins said, adding that some companies are doing better than others. Overall, though, the industry has not been catering to the middle market where lower-income and younger consumers live.
Companies and advisors have been targeting the big cases, producing the phenomenon of having the lowest percentage of people in the United States covered by life insurance since World War II. But the industry itself is having its best year ever, with $39 billion in projected sales, according to Conning.
The overall sales figure finally has surpassed the precrash high of $37 billion in 2007. Another first since 2007 is an increase in the number of insurance agents, up 1.8 percent.
PRODUCTS and MARKETS
More good news for agents and advisors: They are still far and away the key distributors of life insurance and annuities. The broker/general agent/independent agent channel accounted for 78 percent of the industry’s first-year and single premium life insurance sales, according to Conning. They also sold 77 percent of all annuities.
Whole life is still the shining star of life sales with a 6 percent increase in premium in the first half of 2013, although the policy count was down 3 percent compared to last year, according to LIMRA. At 33 percent of the market, whole life still has a smaller share compared to universal life’s 40 percent, but whole life is hot on UL’s heels. Universal life sales slowed in almost all areas, but an up-and-comer saved the first half for the products – indexed UL. IUL premium vaulted 23 percent in the first half of 2013 as compared to 2012.
Indexed is the star on the annuity side as well, along with variable. That is relative because annuity sales are strong overall, with a 9.9 percent increase for the second quarter over the first, according to Beacon Research. Indexed annuities have grown to take more than half of the fixed annuity market and have been a shooting star since the economic collapse.
Variable annuities increased 7.8 percent quarter over quarter and would have been even stronger if more companies were willing to sell them. Consumers like VAs but the products have been troublesome for reserves, and companies have been pulling back, cutting off supply and buying back contracts.
Companies will continue to pull back on VAs, analysts said.
“There’s still strong consumer demand, but the de-risking of VAs is causing an unwillingness to meet all the demands for the products,” Hawkins said. Why? Call it Post-TARP Stress Disorder. If another market collapse comes, U.S. taxpayers might not be so quick with the bailout bucket a second time.
But indexed annuities don’t pose as big a danger to companies, and the surging stock market has provided a strong marketing message for the product line –
base protection plus a possibility of gain. That still resonates with many consumers haunted by the memory of 2008.
Also fueling growth is that retirement wave we noted earlier.
“As an advisor you have what I refer to as ‘two bites of the apple,’ ” Hawkins said. “The first happens at age 65 – the traditional age of retirement. Somebody’s leaving work and asks, ‘How do I turn my savings into income?’ ”
In that case, immediate annuities are certainly one thing that you should have a conversation about, he said. The second bite is when that person turns 70.5, when people have to take mandatory withdrawals from personal retirement accounts.
“This is especially true as more and more people have 401(k)s and IRAs,” Hawkins said. “That’s when clients say, ‘Look, I have to start liquidating this. Is there any way I can do it and put it on automatic pilot?’ If you’re selling indexed annuities, that’s great. There’ll be a growing demand for people who can help provide what I refer to as the ‘retirement income’ solutions.”
Companies and insurance advocates are reorienting many of their models to retirement services. LIMRA is branching out from its life insurance roots to focus on a demographic rather than on products. The research organization recently announced the opening of its Secure Retirement Institute, which it said will “focus on advancing research and education as catalysts for innovation within the industry to help improve retirement readiness and promote retirement security.”
The burgeoning retirement need along with low interest rates have guided companies to look to product features rather than simply being a better deal than certificates of deposit. Consumers have shown they are eager for the products.
For example, some insurance policies have an early-payment option built into them, where policy owners can collect a death benefit early if they become seriously ill. These life combination products have tripled in a few years, growing from about $800 million in 2009 to $2.5 billion last year, according to LIMRA.
Even though an enormous and growing senior population is headed for a vast territory of unfunded long-term care and critical care needs, LTC and critical illness insurance cannot get traction. And when it does, companies buckle under the cost of claims.
Companies have responded with combination policies and riders that might be the best match since chocolate met peanut butter.
As Baranoff of LIMRA put it, “It’s very comforting to people to know, ‘Look, if I get sick, I’ve got the money. If I don’t get sick and I die, it goes to my heirs.’ ”
One product answers two objections of “wasting” premium by outliving a life policy or making sizable payments into an LTCi contract that is never used.
Shaw of Deloitte predicts that insurance can develop into one product bought early in adulthood and added to over the years in different life stages. In that case, it would be even more important to maintain a meaningful relationship with clients straight from the initial policy through retirement, rather than constantly fishing for new prospects.
All roads in insurance lead to retirement these days. Insurance used to be all about protecting heirs and legacy. Now it’s about self-protection because people have found out the hard way about the dependability of employers and the government.
Insurance is a key sector giving consumers control over their own retirement. That’s the message many industry advocates have been taking to legislators, including the National Association of Insurance and Financial Advisors (NAIFA).
“Quite frankly, we make great partners with the federal government,” said John Nichols, NAIFA president. “I mean, imagine if we only had Social Security. Are you kidding me?”
Nichols cited the $1.5 billion daily that the industry pays out in benefits, which has been compared to the $1.9 billion that Social Security pays each day.
As Congress considers tax and entitlement reform, insurance advocates have been rallying around the message that industry earns its tax-exempt and tax-deferred status. This is especially true as Americans bear more of their own retirement burden.
“Never before has there been such a movement toward personal responsibility,” Nichols said. “Our industry can play a critical role in helping people understand how to achieve financial security for themselves and their families.”
Implicit in this is the debate between the fiduciary standard and suitability. If insurance agents are pushed to a fee-based, fiduciary standard model, analysts predict that many of the older agents will opt for retirement. Under that system, many are concerned that even less insurance will be sold because financial advisors tend to sell other products before insurance. Also, NAIFA has long pointed out that many communities don’t even have financial planners available, even if they could afford them, but there is almost always an insurance agent in town.
Hawkins of Conning said he has seen how the struggle on credentialing and oversight can work out.
“I’ll be curious to see how the competing fiduciary standards become resolved and how that may change the overall nature of the business,” Hawkins said. “Because in the U.K., you had a situation with their retail distribution review that significantly impacted the ability of product providers or manufacturers to put commissions on products.”
Given that drift, many analysts said it makes sense for advisors to get a securities license now rather than get pushed into it later. Also, that fits with the evolving broader-service retirement income model.
In fact, many analysts and observers are saying that one of the keys to success is specializing in a niche, but unlike in the past, that niche is a market rather than a product. For example, rather than indexed annuities being the niche, the niche would be clients between the ages of 55 and 65. Advisors in that case would provide products and services that help with that life stage rather than just being a shop for a particular product.
Life stage marketing is one of the areas that benefits from big data.
If that phrase sounds like it should have its own sound effect like the “Law and Order” ker-chunk scene opener, well, it is in fact pretty dramatic. Big data can mean monumental changes in the business.
Underwriting is an obvious area for improvement, said Bob Baranoff, senior vice president of LIMRA.
“Some companies are experimenting with these algorithms, and I’m hearing that they are predicting pretty much in line with the traditional full underwriting methods,” Baranoff said. “Whereas traditional underwriting could go six weeks, they can get it down to a week, in some cases two, three days. But they’re charging more than the fully underwritten version. They’re building in some premiums to cover that additional risk of default.”
Companies can determine quite a bit about people from credit card purchases, for example. “If you belong to a gym or buy a lot of sporting goods, they can make certain inferences. If you’re charging hang gliding or something like that, you’re going to be rated higher. They’re going to be wrong in certain proportions, but that’s true of any underwriting.”
Expedited underwriting is a major change, but harnessing data can add to transparency in the process, too.
“If you called Domino’s for a pizza, you can track it being made and where it is along the process up to delivery,” Baranoff said. “Well, there’s an insurance company that’s now doing the same thing once you apply for a policy. Agents can track just the way they can with a Domino’s pizza where the application is in the process.”
But it’s behind the scenes where things are getting really interesting. The day is rapidly approaching when analytics will not only supplant current underwriting but also create a new model altogether. An IBM white paper, “The future of insurance: How big data and cognitive computing are transforming the industry,” described products custom-fit for each client, rather than a selection of different coverages to suit needs. It’s what happens when computers start thinking, as in cognitive computing.
“Cognitive computing will allow underwriters to underwrite like their forebears – by evaluating the unique risks of each customer as opposed to aligning risk to a defined product,” says the paper. “And this work can happen in real time based on knowledge of the customer, past experiences and future predictions – at great scale.”
That means as quickly as a credit check, a consumer could have an offer that speaks to his family, career, life expectancy, likelihood to need disability insurance and whatever else you can think of.
Here’s the important point of all this. Analysts are identifying trends such as carriers selling through big-box stores and other ways they are going direct to consumer, but meanwhile insurance and technology companies are building a spaceship that could blow past all that. The saving grace for insurance agents has been that the complex cases require a human being to understand all the dynamics affecting a person. IBM and others expect cognitive computing to step into that role.
Let’s put this in a more accessible context: The Super Bowl.
In the IBM paper, the company showed how Nielsen ratings and focus groups might go the way of the Fuller Brush man. (If you don’t know who the Fuller Brush man was, that might be the point.)
During the 2012 Super Bowl telecast, IBM gathered more than a billion tweets, blog posts and social media messages pertaining to movie trailers shown during commercial breaks. Out of all this, cognitive computers produced about 20 opinions that basically said the movie would be a stinker in the box
office, and they proved to be right.
“Imagine the significant cost and time savings if a movie studio could test the performance of a trailer before entering full production,” according to the paper. “The resulting competitive advantage could change the way films are made, radically altering the risk inherent to the industry – the definition of a paradigm shift.”
The size of big data can be staggering, but that is just rocket fuel to this process. The more data, the faster and more accurate it gets.
Seems like a bright, shiny future – without agents and advisors, right?
IT’S STILL ALL ABOUT YOU
Let’s get off that wild Futureland ride and get back on the ground and get a sense of where we are. Agents and advisors are still the key channel for selling insurance and annuities. Consumers still prefer to buy insurance from a person, as Baranoff pointed out.
“Even Gen Y’s first preference is to buy life insurance face to face,” he said. “That is still about half of them.”
But he was quick to say that percentage is far lower than it used to be, which was nearly 90 percent a decade or so ago.
So what are agents and advisors to do? Analysts say one thing is to broaden service to clients in order to be more useful, whether that is obtaining a securities license or a property and casualty license. Pick a demographic niche and learn what those needs are.
But mainly, advisors can’t coast if they want to remain relevant. Hawkins of Conning takes an examination of who professionals want to serve and how those people can get their information on their own.
“It requires the agent to put some effort into thinking about who the people in the market are and what they need and want,” Hawkins said. “What kind of advice can they provide as an advisor that the person couldn’t get by going to the insurer’s website and typing in, ‘I’ve got X thousands of dollars, I’m 70 years old, and what’s my quote?’ ”
And that answer is often going to lead to a more robust practice, Hawkins said.
“Your competitors are heading upmarket,” he said. “If you go up there you can make some significant commissions. But realize that’s going to require you to expand your skill set and expand your product base. When you’re talking life insurance, you’ll want to be able to hold a conversation about issues such as estate and tax planning.”
The trick for agents and advisors is to do all that and remember the core value of life insurance and the reason they love the business. Baranoff of LIMRA said the truer the industry and its agents can remain to their central premise, the more vital they will be for Americans.
“We’re not in the instant gratification business,” Baranoff said. “It’s not like you charge something and a couple days later the UPS guy brings you a new toy to play with. It’s a fundamentally different. We’re in the business of selling a long-term promise.”