In order to keep the individual annuity market alive amid economic turmoil, insurance companies will need to readjust their product risk, distribution and cost structures for the product, according to a report from Conning Research & Consulting.
Although the 2001-2003
recession caused by the technology bust helped stir demand for annuity guarantees to protect clients’ principal, insurers are now paying the price. Carriers’ financial positions have been weakened and they face difficulty in paying for future growth, according to the research paper, “Rethinking Individual Annuities.”
In order to overcome their weakened financial position, carriers will need to concentrate more on asset management as clients’ preferences for certain products shift and low interest rates pressure their pricing models. Insurers need to find a balance between effective asset management and the need to control costs.
The insurance industry also needs to become less dependent on its shrinking independent distribution channels, according to the report. Carriers face risk if the independent channel has a hard time selling variable annuities, and additional problems arise because distributors aren’t increasing their numbers enough to replace financial advisers and brokers who retire.
But some insurers are investing in their distribution. For instance, in December
MetLife Inc. of New York said that it would increase the number of career agents for individual life and annuity products to between 8,800 and 8,900 at the end of this year, from 8,398 at the end of 2007.
The carrier has more than 8,000 career agents and sells individual life and annuities through more than 100,000 independent agents and brokers.
To remain competitive, some carriers are now putting dollars toward their wholesale forces, a move that flies in the face of the wholesaler layoffs that took place at major insurers as those companies tried to lower costs.
Product demands have also changed. Fixed and immediate annuities are in vogue now, and that challenges the business model of insurers, which is based on earning revenue from fees on separate account assets — which is where VA dollars are kept.
Carriers have pulled back on the reins on variable annuities by raising fees for product features, tightening investment restrictions or eliminating guaranteed benefits altogether. Conning’s analysis of the fee increases for guaranteed living withdrawal benefits for several of the 25 largest annuity carriers revealed that the average price hike was .30%
Conning Research is a unit of Conning & Co. in Hartford, Conn., a subsidiary of Swiss Reinsurance Co. of Zurich, Switzerland.
