Your Insurance Industry GPS is Recalculating Where is True North?
While driving from Philadelphia to Charleston, South Carolina recently, I hit horrible traffic between Washington, D.C. and Richmond, VA. My car is equipped with a new global positioning system (GPS) that is directly connected to traffic reporting services that provide me with alternative routes in case of traffic tie-ups. During this drive, my system kept recalculating my route based on the latest traffic reports. Traffic was so bad that different developments were occurring simultaneously, keeping my GPS stuck in recalculation mode. I thought about this as I drove and realized that’s where we are within our industry. We are trying to find true north to drive our businesses, despite facing a significant number of directional changes.
The following article outlines the environment facing the U.S. life insurance industry and the challenges and opportunities independent agents and distributors face.
Positive Population Demographics
On a very positive note, the continued demographic of 10,000 people per day turning age 65 will drive our industry for the next two decades. The tidal wave of retirees we have talked about for decades is finally at hand. Unfortunately, we’re also in a situation where the life insurance agent population has been declining 20 percent every five years and right now LIMRA indicates the average agent age is 56-years-old. What we’re seeing is a steadily decreasing agent base that hasn’t seen any new agent recruiting systems emerging with new blood for the business industry. At the same time, the industry is seeing aging baby boomers struggling with the financial realities of aging while their children, the eco-boom generation, are reaching the life stage where they need financial products and services after their prolonged adolescence. These population cohorts very much need our advice and counsel. They want someone to talk to. Unfortunately, it looks as though the supply of financial professionals is shrinking at a time where more people want and need financial advice.
The Uncertain Economic Environment
Let’s take a look at the real state of our economy. In the near term, the GDP growth in the U.S. is expected to be in the 1 ½ to 2 percent ranges. The current U.S. unemployment rate remains very high with many people stuck in lower paying part-time jobs and recent college graduates having a difficult time finding meaningful work. The Federal Reserve has maintained a policy of historically low interest rates, with this likely continuing for the near term. These low rates are one of the key reasons the equity markets have reached all-time highs with significant market volatility on a daily basis. So, when you look at the real economy, you’ve got underemployment, continued low interest rates and market volatility for the foreseeable future.
On the political front, we’ve got a number of key realities. First, our fiscal policy needs a drastic overhaul. We’ve seen the Federal government borrowing 30 cents on every dollar being spent, even with recent budget improvements. Tax reform is definitely a budget issue that’s being addressed. There are a number of congressmen working on this particular issue, and as part of these efforts the tax advantages of insurance products are being questioned. We take for granted the tax-free nature of death benefits, tax deferred accumulation of annuities, and tax deferred accumulation of life insurance products. If these benefits were to change, it would have a significant impact on the competitiveness of the products that are being offered by our industry. Along with these issues comes the recently validated Affordable Care Act. In 2013, we’ve seen tax increases on investment income and new Social Security taxes developed to fund this legislation. We are now seeing – effective October 1, 2013 – the new health insurance exchanges come to life, which will begin to offer coverage for individuals to purchase effective January 1, 2014. My belief is that the direction of the nation’s political outlook is really unclear and there are potentially significant impacts for the economy and the consumer.
Identified Consumer Needs
Consumer financial needs are becoming increasingly clear. One of the key studies I have looked at is the 2011 LIMRA Insurance Barometer Study. The study highlights key consumer financial concerns as being retirement planning/income and paying for medical expenses. The LIMRA study shows the financial concerns they’re least concerned about is premature death, which has partially been translated into the fact that life insurance ownership is at 50-year lows. In our industry, we all know from a financial foundation standpoint, life insurance needs to be a part of the financial plans of the consumers we’re serving. Overall, we see that today’s key consumer needs are generating adequate retirement income, protecting that income and funding healthcare. These needs are right in our industry sweet spot.
Industry Sales Trends
So, how have the traffic patterns discussed so far translated into industry sales trends? In 2013, life insurance sales premiums went up about seven percent year over year, with the largest increase shown in indexed universal life sales. One of the areas I have noticed that’s below the radar is that even with premiums up seven percent, across the board units or the actual number of policies sold is down about five percent, so the good news comes with a downside. Hybrid life insurance product sales are up about 10 percent. Hybrid products are mainly those with a chronic illness or long-term care rider attached. Annuity sales in the first quarter of 2013 were down about six percent year over year. Fixed indexed annuity sales dropped four percent to their lowest level in two years. Immediate annuity sales fell six percent in the first quarter. One of the bright spots is deferred income annuity sales that were up 147 percent year over year and are now averaging about $400 million a quarter. On the long-term care side, even though aging boomers really need this product, sales have continued to decline. The decline has to do with many carriers exiting the individual market, repricing new and in-force products and individuals looking for the least costly alternatives to pay for their long-term care needs. Overall, from a sales trend standpoint, indexed life insurance and fixed indexed annuity products continue to be our sales leaders.
Increasing Use of Technology
There’s an industry bright spot in the use and application of technology. The cost of technology continues to drop. However, despite making increased technology investments, the insurance industry still hasn’t caught up. For the most part, in a digital world, the industry still delivers its products by rotary phone. We’re starting to see new tools come into our business that are helping with marketing and sales. We’re seeing podcasts; increased use of video and digital point of sales tools; along with Smartphone and tablet applications. One thing that I’m starting to see appear is the introduction and use of affordable data mining technologies. From an individual producer standpoint, cost effective solutions are starting to be brought into market that enable producers to put their customers in a robust database, so that focused marketing strategies can be deployed. Social media’s a part of this, but realistically, it’s the basic blocking, tackling and customer relationship management facilitated by technology that’s catching on. When I look at available technology, it is now much more affordable. The expected traffic patterns are very favorable.
Areas of Growth and Opportunity
While we have seen negative trends in a number of areas, there are new areas of growth and opportunity emerging. The most promising area is that retiree product sales should substantially grow over the next 24 months. This product segment relates to Medicare-related planning, Medicare supplement coverage, final expense and income planning, particularly the use of deferred income annuities. Social Security planning assistance is emerging as an essential service for producers to offer. Advisors are starting to invest time and money to gain the knowledge necessary to provide Social Security knowledge to their clients. These conversations then open up into an overall conversation on retirement planning, final expense, and how consumers are going to supplement their Medicare health coverage. At the same time, we’ve seen single premium life products, with chronic care riders, making a comeback primarily as a long-term care alternative, along with sales of hybrid or combination life products. So for me, there are a number of new growth areas emerging. However, these new areas require new skill sets to properly serve these markets.
Actions You Should Consider:
I’ve covered a lot of highway with you in this article, but I would be remiss if I didn’t leave you with actions you should take to navigate the traffic ahead.
You need to get better informed on industry, regulatory and the tax changes underway. There’s going to be a rapidly changing environment over the next 24 months and time must be spent understanding the changes.
Diversify your product offerings by making sure you sell all of the key product suites: indexed products, annuities and life, as well as the retiree products. A diversified product suite will add diversity to income streams. As part of this effort, agents should look to elect trailer commission arrangements rather than depending on new, upfront commissions. If a producer is selling indexed annuities with long-term income benefits, those products will likely be in place for the long-term, such that the producer should be compensated on a long-term basis.
On the innovation front, organizations need to continue to invest in technology to improve marketing, sales and service capabilities. In a difficult sales environment, actions must be taken to continue recruiting, marketing and educating.
Another necessary action is that distributors look at their businesses and try to stop cash leakage wherever possible. Many of the managers of our top distributors are excellent sales professionals, but in many instances, they’re not as good at the operations side of business. Leaders need to carefully manage cash by rationalizing operating costs. One suggestion is to look at sharing services or pooling resources with others.
If I had to leave you with one great suggestion, it’s to better focus on service and sales to your existing customers. From my current experience in working with insurance professionals from around the country, I don’t think they’re working their existing customer bases as much as they possibly could. One basic example seen is producers aren’t performing annual reviews with customers the way they should. A good best practice is to do an annual review with each of your customers – wholesale or retail. What I’ve seen in my work is that organizations performing annual reviews discover that 25% to 30% of those annual reviews yield an additional financial need and a suitable product sale. Work your existing customers. You’ll be amazed at what kind of business you’ll discover.
Visit the iPad edition of NAFA Annuity Outlook magazine for added industry insights from Harry Stout on: regulatory actions, insurance carrier realities, the 24-month industry outlook and his conclusions about the road ahead.