By Raymond J. Ohlson
InsuranceNewsNet
Oct. 1, 2010 -- Let’s take a look at the challenges and opportunities we all face today in the annuities business. Looking back, we’ve endured everything from 9/11 to Bernie Madoff to the burn down in financial markets, regulatory threats, SEC 151A and more. We wonder what will happen with NASD 05-50; will the BDs continue to push that concept and garner part of the funds, or will they behave as though they don’t want to be involved in the supervision of this type of a product?
The low interest rate environment has made the fixed annuity business much less profitable for issuers. Implementation of the new NAIC suitability regulations increases costs. As a result, many insurance companies are dramatically de-emphasizing fixed annuities. There will be less innovation and fewer new product introductions, until rate conditions change at the earliest, and perhaps permanently.
Consolidation will also reduce the number of insurance companies that are major players in the fixed annuity market. Because fewer companies will be competing, products are likely to become less competitive in terms of rates, commissions, and innovative features.
Depending on how “fiduciary” is defined, implementation of a universal fiduciary standard for all financial advisors could seriously dampen commission-based fixed annuity sales and could even, at some time in the future, eliminate them altogether. The threat is potentially much greater than SEC Rule 151A.
It’s an old story, but the number of producers is declining, and that also will be negative for fixed annuity sales.
However, one thing has happened with the burn down, the financial markets, and thousands losing millions of dollars: we are forced to go back to basics. The American consumer is looking more at income rather than just that pile of money. The insurance companies are returning to the basics, and they may abandon some of their non-core products. The marketing organizations and agencies are beginning to focus more on people. They are truly building those relationships with more of a partnership philosophy.
Many professionals from around America have given me their take on the problems (challenges) and opportunities we face. You may or may not recognize their names, but their input is vital to all of us. Some are insurance company representatives, some of my friendly competitors, agents, my own focus groups, and some consumers. We’re asking them all, “Where do you see the challenges in your life? Where do you see the opportunities, and what do you want done; how can we help you?”
This generation of Americans has been less than successful in making good financial preparations for retirement. Study after study asserts that we’re saving too little and we’re saving too late. Yet now, the savings rate is up over 6 percent. Instead of consuming, Americans are saving again. We find the market is somewhat stagnate as of this date, yet analysts are talking about a 2 percent to 3 percent GDP growth rate.
It’s clear that what we need to do is go back and help our clients make good decisions. We need to have adult conversations, laying everything out, honestly. We need to talk to them about the difference between their needs and their wants. Many pundits define the stock market decline as “the lost decade.” People who are at or getting close to 65 can’t afford another long period to get their financial act together. That’s why I always recommend Safe Money Places as a solution and a great opportunity for everyone.
Ernst & Young recently reported on their five most important attention areas:
1. Optimize capital in response to ongoing pressures;
2. Build more robust risk-management, deal with stronger governance, and transparency;
3. Focus on core businesses and re-address product and distribution strategies;
4. Operate successfully in a continually changing regulatory environment, and
5. Improve the effectiveness of company infrastructure.
Tied in with No.1 – optimizing capital – risk-management begs an important question, “When rates are as low as they are today, how long can a company stay in the markets they’re in?” That question leads logically to attention area number three -- focusing on core business. Another couple of questions: “Will many of the carriers today exit areas – parts of the business that they are in today – and only stick with the ones that are making them the most money?” and “What kind of pressure will that put on the industry?”
Here’s another one – distribution channels: if the average age of the insurance-based advisor is closer to 60 than 55, and if the average age of the members of the financial planning association is 55 or 56, we are going to be losing approximately 5% per year, possibly 25 percent of all distributors in five years, and 50 percent in 10 years. We must add to that startling projection the reality that there are few “new babies” coming into the business. Thank goodness for companies like Northwestern, New York Life and MassMutual! But even so, the net result is that we are still losing. Take a look at the dates of birth of many of your agents, insurance companies, IMOs, and agencies, and you’ll be as concerned as I am. Frankly, we have an industry that is slowing down, retiring and literally dying off.
So are insurance companies going to be forced to use alternative or additional distribution systems? Will they sell online? Will they go directly to the consumer? Will the IMO do that as well? Will the agent participate? What about the regulatory environment? With the deficits that we have today, will the government attack the cash value buildup in our products, and will broker/dealers, even though they lost the 151A war, still continue to impose the NASD 05-50 rules or decide if they no longer wish to supervise. Let’s don’t forget some of the biggest agent challenges out there today: finding prequalified prospects under favorable circumstances on a regular basis. What about dealing with their customers, their clients out there who are seeing all the bad news and who watch shows like Dateline NBC? Will we be able to build that credibility and integrity? And people are just nervous.
So, where do we go from here? Say tuned. We will be dissecting each of these topics in coming months and borrowing the perceptions of others.
Raymond J. Ohlson, CLU, is president and CEO of the Ohlson Group.
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