New insurance alliances spawn annuity innovations

Smaller life insurers — battered by the recession but ready to get back into the annuity business — have begun to outsource the manufacturing of fixed indexed annuities to marketing groups. The arrangements bring cost savings, built-in distribution and compliance assistance.

While the idea of selling insurance products through field-marketing organizations is nothing new, turning over manufacturing to them is — and perhaps marks a sign of the times.

“The idea of field-marketing organizations’ developing proprietary products is something that seems to be gaining more visibility and interest,” said Noel Abkemeier, a consulting actuary with Milliman Inc. “The structures we’re discussing today are ideas that marketing organizations have for bringing more efficiency and discipline to independent-agent distribution.”

For insurers, some of which had retrenched after taking a beating during the recession, the arrangements offer relief from the high cost of bringing a product to market. They can also help the carriers meet the requirements of the National Association of Insurance Commissioners’ annuity suitability model rule and give insurers the distribution muscle of field-marketing organizations. And by focusing on fixed indexed annuities rather than variable annuities, they reduce expensive hedging costs.

The latest pairings include The Phoenix Cos. Inc. with The AltiSure Group LLC, and Security Benefit Life Insurance Co. with Advisors Excel.

Security Benefit and Advisors Excel kicked off the spring with the release of the Secure Income Annuity, a product that provides a consumer bonus of up to 10% and features a withdrawal benefit that increases the benefit base annually by 8.2% if the client doesn’t touch the money for 10 years.

Teaming with Advisors Excel as a distributor and with Innovation Design Group on product creation helped Security Benefit make its debut into the retail market as a fixed-indexed-annuity seller. The carrier took it on the chin during the 2008 downturn, suffering downgrades from major ratings agencies. Its fortunes improved, however, after its acquisition by Guggenheim Partners LLC last year.

The purchase, along with the ratings improvements that followed, helped put Security Benefit on a solid financial footing, said Doug Wolff, president of the retail retirement group. It chose fixed indexed annuities as its entrance point because the product requires less hedging than variable annuities.

“We were looking to grow on the fixed-indexed-annuity side, as clients are really looking for downside protection with some upside potential and retirement income guarantees,” Mr. Wolff said. “Innovation Design Group and Advisors Excel took a new entrant into the space, knew that we have a lot of capital and saw that we’re serious about growing.”

FROM THE ASHES

Phoenix, which also had been through tough times, refocused its business on indexed annuities after backing away from variable annuities amid post-crisis downgrades and a loss of distribution partners. The carrier linked up with AltiSure last fall, gaining access to independent-marketing organizations.

The firms launched the Secure LifeStyle fixed-indexed-annuity series in October, and sales have exceeded $100 million since, said Niju Vaswani, president and founder of AltiSure.

“These relationships with carriers are working well because firms like mine are able to give some good premium commitments to the insurance companies and deliver on those results because of our innovations,” he said. “For the insurer, it makes sense. It’s a low-cost effort for them; they don’t build the distribution and we don’t get paid until we deliver the results.”

Firms such as AltiSure are expected to develop marketing materials and to generate a certain amount of premiums from the independent-marketing organizations that will sell the product.

“It may not be as easy for companies who were in a weak period to build distribution piece by piece,” Mr. Abkemeier said. “You may get volume with more certainty than if you had to build your distribution.”

David Callanan, a founder of Advisors Excel, said his firm is in talks with an A-rated insurer looking to create a larger footprint in the fixed-indexed-annuity arena.

“I see more of this coming, because you have new carriers that want to get into that space,” he said. “Traditional carriers have 60,000 or 70,000 agents. New carriers that come in only want controlled distribution, to license a few thousand people and to get a lot of premium from that group.”

COMMISSION TRADE-OFF

The collaboration has other benefits for insurers and clients in that the exclusive arrangements provide agents with unique products — on which the carriers pay lower commissions.

Agents collect 8% or 9% on a regular product, but commissions fall to 6% or 7% on an exclusive product, said Pete D’Arruda, president of Capital Financial Advisory Group LLC, who has sold a proprietary product created by Aviva Life & Annuity Co. and The Annexus Group.

“The reason this is happening is because in a low-interest-rate environment, there’s less spread for insurers to cover overrides,” said Jack Marrion, president of Advantage Compendium Ltd.

In most cases, agents will jockey for higher payouts from their independent-marketing organization, which then has to go to the insurer to ask for additional marketing assistance or more money, he said.

“Special selling groups are very clear on the commissions you get; if your members break the rules, they don’t get to offer the exclusive product,” Mr. Marrion said.

Finally, while partnering with a field-marketing organization won’t absolve an insurer of its compliance responsibilities under the NAIC’s annuity suitability model rule, carriers are at least assured that it is in the best interests of a marketing organization and its agents to submit all necessary paperwork in proper order.

“Suitability at its root is the responsibility of the insurer, but if you have a high-quality entity downstream, it’s much easier to delegate,” Mr. Abkemeier said. “It’s convenient if they can rely on the field-marketing organization to do day-to-day work on suitability.”

E-mail Darla Mercado at [email protected].