In 2010, buffeted by the economy and wary of risk, people are seeking the insurance equivalent of comfort food. They are looking for life-annuity products that offer security and stability for themselves and their families. That cautious outlook will also extend to the insurers they entrust with their business.
The economic meltdown has left consumers distrustful of large financial institutions and insurance companies. Consumers want to be sure those companies deliver on their promises. For their part, insurers will have to rebuild their customers' confidence and assure them that their businesses are financially stable.
Baby boomers a huge market
Economic uncertainty is only one part of the story, however. There is also a potential upside to 2010 and beyond. Right now, with the aging of the baby boomers, insurers have an opportunity to expand their markets, even in a challenging economy.
They can also tap into first-time life insurance buyers whose fears about the economy and the well-being of their families have acted as a catalyst for them to enter the market.
Carriers will have to be nimble to be successful. They will need to roll out new products and quickly match ones offered by their competitors. While some carriers have cut back significantly on new product development, others have refocused and developed products targeted to specific demographic segments.
Insurers can also benefit from the renewed interest in estate planning brought about by expected changes in the estate tax and the possibility of higher income taxes on the affluent. Life-annuity products have emerged as an important element in long-term planning for individuals, families and businesses.
Other developments that will help to drive business include the ability to reach more people through the Internet, and technology that makes producers more efficient and productive.
Industry challenges still prevalent
To be sure, 2010 looks to be another challenging year. But while expectations may be modest, having the right product mix and marketing to the right people can be a successful strategy. Providing more mid-priced and lower-cost options will help drive sales, for example. Further, if the economy picks up and more people find work, those factors will also be significant market drivers.
Seeking guaranteed returns, asset protection
So what are people looking for and which products will lead the market in 2010? In short, they are looking for products that help protect their assets, provide lifetime income, can be tapped for cash as needed, offer a return on premiums and accumulate cash value.
Of course, no single product offers all of those things, so people are choosing among the options, seeking as much protection as they can afford.
Baby boomers are retiring now and for the next few decades. In many cases, they are facing the future with trepidation. They have seen their nest eggs shrink, their retirement plans derailed and their long-term financial plans disrupted. They are concerned about maintaining their lifestyle, the fast-rising costs of health care and long-term care, and the possibility of outliving their assets.
In the 2009 Phoenix Wealth Survey, more than half of high-net-worth boomers said their most important financial goal is to ensure a comfortable lifestyle in retirement. Longevity planning was also a top concern. Above all, they are seeking products that offer certainty and guarantees. Given the events of the past several years they are recognizing that a guaranteed lifetime income is essential.
In response, carriers are focusing on conservative products that frequently offer guarantees, such as fixed income annuities, indexed life insurance and universal policies with guaranteed minimum benefits, among others. Products that address several needs at once, such as those combining life insurance or an annuity with long-term care coverage, are growing in number and gaining traction.
Some of these products will also be receiving more favorable tax treatments as a result of the Pension Protection Act of 2006. For example, as of Jan. 1, 2010, qualified long-term care benefits paid out of non-qualified annuities will generally be paid tax-free.
Laggards and leaders
Indexed annuities are among the product leaders. The addition of living-benefit features, such as guaranteed minimum withdrawal benefits, has added to their appeal. According to LIMRA, indexed annuity sales rose by 9% in 2009 over 2008 totals.
Variable annuities have lagged, however, and are expected to continue falling behind guaranteed products. LIMRA recently reported that variable annuity sales finished 2009 down 18% from the prior year, although VA sales had been down 26% through the first six months of 2009.
Moreover, a trend to increase fees, reduce benefits and withdraw riders is already well under way. Our research indicated that in 2009 all of the top 20 variable annuity carriers had made changes to their living-benefit riders.
Term life insurance has held steady for the most part and is likely to continue to be a strong seller. Many adults (with the exception of younger people without families) see it as must-have protection and have been drawn in by its relative affordability. There are also significantly more first-time buyers and that number is also expected to grow. People are seeking value and competitive pricing but their main priority will continue to be protecting their loved ones.
Flexible policies hold appeal
People are also seeking flexibility. Policies that cover two or more lives under one policy are appropriate for couples and families, as well as small businesses, which give them wider appeal.
Group sales to businesses are also expected to hold their own, including life insurance and some bundled products.
Technology adds speed and efficiency
Several industry trends are also affecting the market in 2010. While somewhat behind other industries, insurance is beginning to use technology to aggregate data and automate processes, from applications to underwriting. This has great potential to help lower costs, mitigate risk, speed sales and provide faster customer service. In fact, with technology, it's possible to underwrite a policy very quickly, in some cases while the customer is on the phone or online.
The industry is also turning more to the Internet to reach potential customers, who often begin their search for insurance products online. Further, the Internet offers greater flexibility in segmenting and targeting specific groups.
In addition, brokers are becoming more organized, creating industry organizations and banding together to share knowledge, centralize processes and work directly with carriers to offer advice on the needs of their client. In fact, brokers and carriers are increasingly collaborating on defining, developing and growing niche markets.
Inspiring confidence key to success
While many carriers are still mired in the losses of the last few years, others have begun to rebuild. Aided by a steady (if not overwhelming) market for products that offer security in an insecure world, it will be possible to emerge from 2010 in better shape than in prior years.
Of course, a major key to success in 2010 and beyond will be improvement in the overall economy. Insurers will also need to maintain a solid reputation for stability and solid, long-term financial health. Most importantly, insurers must offer innovative, consumer-driven products that enable people to plan with confidence for the future.
Lou DiGiacomo manages Saybrus Partners' wholesaling team dedicated to servicing independent producers and brokerage general agencies. Saybrus Partners, Inc. is a wholly owned subsidiary of The Phoenix Companies, Inc.
