From media attention to new and changing regulations -- study paints industry picture
Annuities are one of the oldest financial planning tools in history. According to personal-finance writer Joe Finora, the word "annuity" stems from the term "annua," which is Latin for "annual stipends." They were originally created during the Roman Empire for citizens who paid a one-time fee in exchange for lifetime annual payments. While many features have been added since then, the basic idea is the same -- a lifetime income guarantee is given later in exchange for a payment today.
So how have producers adapted to fit within today's annuity environment? When surveying more than 1,000 agents across the nation who have sold at least one annuity within the last 12 months, we found several trends, including sustained optimism on the part of agents; more product development and the creation of value-added features by insurers; and a growing awareness -- both good and bad -- about the role annuities play in the financial futures of Americans. Read on to learn what we found in this survey, on which we partnered with the industry groups of NAFA (National Association for Fixed Annuities) and NAVA (Association for Insured Retirement Solutions).
The basics: A general market overview
A theme that arises again and again in annuity discussions is the well-publicized baby boomer conundrum: While members of this demographic have accumulated many illiquid assets, historically many haven't been presented with an adequate solution that will help convert their holdings into a consistent stream of income.
Annuities provide just that, which explains the optimism of annuity agents -- the vast majority (94 percent) believe there is some potential for additional income from annuities. (Chart 1)
Fixed index annuities in particular have done very well, with 42 percent of agents saying these offerings accounted for the majority of their annuity sales in the past year. Thirty-four percent said the same about variable annuities, and 21 percent selected traditional fixed annuities. (Chart 2)
In the upcoming year, producers an--tici-pate a similar breakdown, with 44 percent favoring FIAs, 34 percent VAs, and 18 percent traditional fixed annuities. In both past and future scenarios, immediate fixed annuities fell into very last place, with 2 percent selling them most over the past year and 4 percent expecting the same in the next year. (Chart 3)
A common characterization of the ideal annuity client -- the baby boomer who is either nearing or entering retirement -- matches neatly with producers' stated target audience. Forty-four percent of agents sell the most annuities to those in their 60s, with 32 percent selling mostly to consumers in their 50s. Only 14 percent of producers sell mostly to those in their 70s, while a mere 7 percent indicated that cli-ents in their 40s make up most of their annuity sales. (Chart 4)
Kathleen Driscoll-McKee, executive director of NAVA, said the very nature of annuities appeals to clients who have accumulated assets but aren't certain about how to convert these assets into an income stream that can provide them with financial security in retirement. And such security is of paramount concern as the average lifespan of a typical American is growing longer, leading to more years in retirement and more expenses.
"As baby boomers mature, they're going to realize that they need some kind of retirement plan that produces income," said Driscoll-McKee. "The leading-edge boomers may very well have pensions, but, as we get further into this demographic, those younger boomers are not going to have pensions.
For this reason, annuities represent a great way for clients to make their own pension plan."
The well-documented growth of the baby boomer demographic may help explain agents' optimism about the market. As more consumers climb into the typical age bracket for an annuity client, more demand for a source of retirement income will likely appear, leaving producers with a huge opportunity on the horizon.
Common challenges
The ability to find qualified prospects outweighs any other challenge that agents see in the field today: Thirty-seven percent named it as their No. 1 challenge, with "clients don't want to tie up money" at 15 percent, "clients are skeptical due to recent negative media attention" also chosen by 15 percent, and "my own lack of product knowledge and training" at 8 percent. Additional obstacles include product performance; clients' preference for CDs, money market accounts, stocks, or mutual funds; and clients' lack of understanding due to product complexity. (Chart 5)
The number of agents running into prospecting problems, however, has dropped since 2007, when 64 percent last year ranked it No. 1.
And, as with other markets, referrals are by far the most effective way agents have found to market annuities to prospects. Sixty-three percent of agents chose this method over any other, with seminars falling in at 13 percent, sales material provided by marketers or insurers at 8 percent, and 6 percent favoring direct mail. Telemarketing; TV, radio, magazine, and newspaper advertising; email; and client Web sites fell to the bottom, with the final three options garnering no favor whatsoever with agents.
As for the producers' lack of product knowledge, Ron Rawlings, owner and principal of Dallas Financial Wholesalers, pointed out that this concern moved from its spot as the sixth biggest challenge in 2007 to the No. 4 obstacle the annuity market presents to agents.
"We're not talking about the end-user client; we're talking about an agent concerned with their product knowledge," said Rawlings. "Independent agents are out there alone, and who do they rely on the most? Predominantly IMOs. This shows we've not done our job in terms of making sure an agent understands a product that we expect them to go out and sell to clients."
Negative media attention
Though negative media attention tied for second place among agents' most pressing challenges, it is worth noting that this issue is becoming a greater obstacle. The most notable example of such news is the lawsuits against Allianz, one of which was brought in 2007 by Minnesota Attorney General Lori Swanson. The company settled in October, and the deal could return millions of dollars to about 7,000 senior citizens who have purchased annuities since 2001 and who apply for refunds.
In February 2008, Allianz then settled for $10 million in a separate lawsuit, making a deal with the California Department of Insurance concerning the sale of annuities to seniors and agreeing to strengthen the way the company reviews annuity applications and to better explain its products to customers. Allianz, however, admitted no wrongdoing.
Though this is the most recent and high-profile case of annuity carriers being targeted by regulators and receiving press along the way, it's not the first time the industry has been portrayed in a negative light.
"We always get that (the challenge presented by negative news)," said Lori Bochner, president and CEO of DNA Brokerage. However, she continued, "In some respects, any press is good press."
In the past, said Bochner, there has been coverage that points to the relatively small number of agents who pre-sent clients with a contract to sign yet essentially leave the client in the dark as to what they're getting into. Those images, however, are now few and far between, she said. In fact, industry groups, advocates, agents, and insurers continue to work on improving how the annuity market is portrayed by working together to combat trouble-some issues, such as poorly designed products, improper sales tactics, and mismatched suitability.
In fact, the majority of agents this year said that their clients' awareness of negative media attention surrounding annuities has stayed the same (63 percent) -- but 30 percent said this awareness has increased. (Chart 6)
Kim O'Brien, executive director of NAFA, said a lot of hard work must be done to make clients aware of the positive aspects of annuities -- and that effort rests not only with carriers and wholesalers, but with the producer, as well.
"Negative views will be counteracted by an increased understanding of the benefits of annuities, the guarantees, and the insurance protection. Agents who sell these products ... should do a needs analysis and create a financial plan to determine the amount of assets that should be protected."
The added value of annuity riders
The past two years have seen the introduction of a growing number of annuity riders in the market. In 2006, said Bochner, insurers began offering annuity add-ons such as guaranteed lifetime withdrawal benefits (GLWBs) and guaranteed minimum death benefits (GMDBs) -- and agents have been taking notice.
The most popular of today's riders are GLWBs, with 37 percent of agents forecasting that this is the rider they'll sell most in the coming year. Seven percent selected survivor benefit riders, which pay an additional income of the annuity's gain to reduce the beneficiary's tax burden. Thirteen percent predict they'll sell more products with surrender charge waivers, and an additional 10 percent selected GMDBs. (Chart 7)
The most telling figure, however, is not agents' outlook on their upcoming rider sales, but rather the fact that many of the agents -- 34 percent -- said they're not sure what they'll sell the most. Sheryl Moore, president and CEO of Advantage Group Associates Inc. and AnnuitySpecs.com, said this indicates a failure on the part of insurance carriers in promoting these features and explaining them to producers and consumers. And, she said, as carriers keep refining and releasing new riders, they tend to ne-glect the development of the product they are intended to improve: the annuities themselves.
"We've seen such a decline in individual annuity product development in the past five to nine months, with carriers caring less about products and more about riders," she said.
With such a lack of development, said Moore, comes the added need for agent education and training. The constant refinement of relatively new features can lead to more complex products, which can cause confusion not only for clients but also for agents, and may create yet another sales obstacle. The most important thing for agents to remember, however, is that it is essential that agents be proactive rather than simply waiting for carriers and wholesalers to spread the word.
"This should send a message to agents: If you plan on selling a product with riders, while they are value-added, you need to make sure you do your due diligence when learning about (those features)," Moore said.
After all, said Bochner, these add-ons are not going away anytime soon.
"These riders are only two or three years old, and I think throughout 2007, we've seen more and more people talking about them," she said. "2008 will be a big year, and we'll see those riders becoming more important."
The regulatory environment
Any situation involving a third party's handling of consumers' finances must fall under regulation. Banks are scrutinized, as are other areas of the insurance industry. Most agents would agree that such measures have begun to affect their sales and the way they approach the annuity market, but whether that has or will impact clients is another matter.
When asked about FINRA's oversight of index annuities, in which these types of annuities could be classified as potential securities products, 28 percent of agents indicated such a measure would be better for consumers, while 29 percent said the move would be worse for clients and
33 percent indicated it wouldn't have any effect at all. (Chart 8)
Bochner said FINRA's oversight could help the industry clean up some messes, but it also has the potential to result in the decline of index annuities, which may, in the long run, hurt consumers.
"You hear people say FIAs are absolutely terrible, and I just don't understand that," she said. "If everybody got forced into the securities side, there may be so much lack of knowledge and willingness to look at the value that consumers just wouldn't hear about them. That would be a very, very sad thing."
As with any successful business venture, care must be taken to stay within the boundaries of regulation, education, and awareness while creating value for clients and revenue for agents.
Driscoll- McKee sees that happening right now, with various developments creating better-educated agents and consumers -- which helps everyone involved.
"Agents are making good, educated, considerate recommendations," she said. "I view it as a matching process that provides consumers with a wonderful product, but producers need to match it appropriately."
Bochner leaves agents with this final note: "The biggest moral of the story is get smart, know what you're doing, and know what you're selling," she said. "There's lots of new stuff out there, so find every resource you can and educate yourself. The serious, integrity-driven good guys and gals are going to be the ones who make it through."
Christina Pellett is managing editor of the Agent's Sales Journal. She can be reached at 800-933-9449 or ASJEditor@AgentMediaCorp.com.
More Coverage
Habits of High-Producing Annuity Agents
Return to story
Return to story
Return to story
Return to story
Return to story
Return to story
Return to story
Return to story
