Carriers’ ability to rapidly roll out new products, product changes, and pricing in response to market conditions is vital for growing revenue and market share. Economic uncertainty, compounded by a volatile and turbulent investing environment, will stress consumers and product manufacturers.
Insurers are waking up to the importance of customer experience from the perspective of policyholders and producers. This insight prominently manifests in new business and contract issuance, with continuing straight-through processing (STP) efforts.
The Role of Private Equity and Interest Rates
Private equity firms have been acquiring annuity writers, combining carriers’ large investment accounts with potentially higher investment returns due to private equity firms’ expertise and willingness to invest in high-risk, high-return asset classes.
Regulators have been asking questions about these acquisitions, concerned by the potential for annuity writers owned by private equity firms to be on both sides of a transaction and the question as to whether private equity firms are investing for the long haul or planning a profitable sale of the carrier in several years.
Annuity companies became accustomed to a prolonged low interest rate environment, which made variable annuities (VAs) more attractive to consumers. Inflation is now a concern, which means the Federal Reserve may continue raising interest rates. Annuity companies must account for interest rates and stock market activity when considering product mix and features. Otherwise, they risk misjudging demand from prospects and reducing their profitability due to spread compression.
Carriers and vendors are promoting annuity sales through advisors; they are offering financial advisors simplified, low-cost products without commissions through marketing organizations in some cases, which is making annuities more attractive to registered investment advisors (RIAs) than they have been previously. Insurers that offer direct-to-consumer annuities and those considering a direct-to-consumer strategy must enable online applications, including compliance and suitability checking.
Carriers have begun to offer annuities online through third-party platforms that show side-by-side comparisons of annuities, marketing support, and product education. The share of business transacted through these platforms is unclear,—but Envestnet’s Envestnet Insurance Exchange, as an example, already has 13 annuity partners.
Impact of the Pandemic
Milliman conducted a study on mortality experience for annuities through 2020 that found an 11% increase in VA contract-owner mortality, varying based on contract size, distribution channel, guarantee type, and tax-qualified status. A.M. Best suggests that through 2021, life/annuity/benefits carriers saw mortality volatility due to the pandemic, but that the impact has primarily been on income statements rather than balance sheets.
Annuities require more guidance than simpler life insurance products, but there is still room to leverage third-party data and digitize processes to improve efficiency and increase STP. Carriers have been particularly challenged with licensing and appointments during the pandemic.
Fraud and Security
Another impact of the pandemic is on fraud and security. A recent survey showed that 50% of carriers believe account takeover (ATO) is an industry issue. Carriers are using various options, including staff education, participation in LIMRA FraudShare, and voice printing. In 2022, 34 annuity carriers will be participating in LIMRA FraudShare.
Malicious external entities drive some ATO attacks, but the most difficult cases to prevent might be when the ATO is driven by a relative or close friend. Aite-Novarica Group sees tools such as document-based authentication as the next layer that firms will have to consider unless this trend reverses.
The Department of Labor’s best-interest rule will reemerge, but the timing is uncertain. As of late May 2022, 25 states have adopted annuity suitability sales standards based on the National Association of Insurance Commissioners model legislation, which is intended to be compatible with the SEC’s Regulation Best Interest. Best interest is the dominant paradigm at present, but RIAs are emerging as distributors of annuities, and they are required to comply with a fiduciary standard.
The SECURE Act 2.0 passed the House, though it still needs to be reconciled with any Senate version. Provisions of note for annuities companies include gradual increases in the age limit for required minimum distributions. Doing so may encourage older retirees to look at annuities as an option, increasing the amount of retirement savings they can use to purchase annuities, enabling multiple employer 403(b) plans, and offering new opportunities for adding exchange-traded funds (ETFs) to VAs.
If you’d like to discuss our key findings in the annuities space, please read our new report Business and Technology Trends 2022: Annuities or contact John Keddy ([email protected]), Deb Zawisza ([email protected]), or me ([email protected]) to continue the conversation.