Bank Anuity Sales...Trouble In Paradise

Stock market and interest rate concerns will alter the pricing and distribution of both fixed and variable annuities through banks.

(PRWEB) October 20, 2002

Bank Annuity Sales In 2003... Trouble in Paradise

“...and the good news is that your money will double in 24 years!”

Written by Bob Wick, Cramer, Wick and Associates

October 18, 2002

In July of this year we offered our opinion on the state of fixed annuities in an article titled “Preparing For When The Fixed Annuity Wave Hits The Beach.”

The premise was that the surge in Fixed Annuity sales we’ve seen in 2002 would have to stabilize because markets and rates would have to stabilize...someday. Our worse case scenario was that rates would continue to fall along with the supporting bond portfolio yields. I mean, something has to give here!

It Won’t Be Business As Usual in 2003

Unfortunately, the latter has held true as interest rates and bond yields continue to plummet. In spite of this, fixed annuity sales through banks have experienced unprecedented growth in 2002. It’s reported that the average bank retail investment program has derived 57-58% of revenues from fixed annuities this year. So what’s the point we’re trying to make?

Simple. Rate has been the driving factor in the sales success of this product line. Sure, some will argue that it’s the other benefits that really appeal to the customer, rate is just one of several factors. But the truth be known, it’s the rate advantage that fixed annuities have enjoyed over c.d.’s that has caused the sales records that we’ve seen in 2002.

But, that advantage is diminishing. Many insurance companies, held hostage by the contractual minimum interest rate guarantees, 3% on average, are looking to refile a 1.5% minimum. Imagine the bureaucratic nightmares created by 50 separate state insurance departments all ruling on multiple insurance company filings and refilings of minimum guaranteed rates?

The looming issue is being driven by the portfolio yields that the insurance companies are experiencing. These portfolios, primarily intermediate duration bonds, are generating gross yields approaching 5%, perhaps less. The typical insurance company distributing fixed annuities through banks, needs a 225-275 basis point spread between the gross portfolio yield and the “new” money crediting rate. This is the spread required so they can realize their target return on capital requirements in the 12-15% range. So, what are the options that both banks and insurance companies will be facing as they approach 2003 and their new budgets? How will they grow net operating revenues 15-20% in this ever-tightening rate environment?

Insurance Company Options:

A)    Drop new money rates to 3% while reducing commissions. ISSUE: How does the bank offset the reduction in the GDC? Second, at 3%, what’s the value proposition for the customer?

B)    Become intentionally uncompetitive until portfolio yields return to over 5%. ISSUE: The bank will have less providers and product to offer, potentially driving a disproportionate amount of business into any one company.

C)    Business as usual realizing that a lower return on capital will be the price. ISSUE: Will there be a temptation to invest in lower quality bonds in order to drive yield?

D)    Relax pricing constraints by such methods as extending surrender charge duration’s, drooping contractual guarantee of principle and eliminating first year rate bonus. SSUE: Again, we’re back to the value proposition for the customer.

E)    Promote the fixed accounts in variable annuities. ISSUE: How does the bank representative match the traditional risk profile of the fixed annuity customer to a “variable” annuity?

Financial Institution Issues:

Overheard at a recent bank investment program staff meeting:

President, Broker Dealer: “At today’s staff, we need to discuss 2003 operating budgets and the expectation we will grow net revenues by a minimum of 15%.”

National Sales Manager: “ Simple, boss. I’ve budgeted a 20% increase in sales because my people are the best!”

Annuity Product Manager: “ I meant to tell you, Mr. Sales Manager, XYZ insurance company called yesterday and they have to drop the annuity rate to 3% and reduce commissions by a third.”

National Sales Manager: “No problem, we will simply just have to sell more of the other products, like variable annuities. Yeah, I know, 70% of our fixed business comes from the licensed platform and only 3% of our variable. Guess will just have to train them. Isn’t that what wholesalers are for, anyway?”    

Annuity Product Manager: “Oh yeah, ABC insurance company called this morning, trouble with the variable product. They didn’t price all those death benefit options right, the ones that pay 100% of the highest account balance achieved. So they have to add 800 million to policy reserves and AM Bests is lowering their rating to B+. Wanted to know if that would be a problem and can we all play golf next Friday.”

Far fetched...probably. But isn’t now the time to address some of these issues and how they MIGHT impact your program in 2003? What are the potential options you could consider?

Financial Institution Issues: (continued)

A)    With regard to Fixed Annuities, simply be cautious.. After all, what options does the conservative saver have...rates are what they are. The key point here is that the power of the “rate drug” is weakening and it’s a time to return to basics, especially for the licensed platform. Now is the time to retrain them on all the inherent guarantees found in fixed annuities. Probate issues, guaranteed incomes etc. should be the buzzwords in 2003. Train them in the 4th quarter and have sales momentum on 1-1-03.

B)    Single Premium Life: Has it’s time arrived? LIMRA studies show that approximately only 1% of fixed annuities are actually annuitized and 11% accessed for partial withdrawals. If the issue truly is one of capital preservation and wealth transfer, perhaps now is the time to confront the issues that have limited its sales in banks.

C)    Variable Annuities: Who said they had to be sexy anyway? A simplified product with simplified features is all that’s required within a typical bank program. Simplicity of product, process and compensation plans will work in the majority. Today’s product design allows for A, B, C and L share chassis’ all with the ability to move between equity and fixed accounts. For the conservative saver, the “split annuity” concept will have appeal. Provide principle guarantees with the fixed and potential market upside participation with the variable.

    Does the typical variable annuity customer really come to the branch inquiring about the death benefit options, the asset allocation models, interest and dollar cost averaging mechanics? But in this time of product innovation, variable annuities with death benefit options, no lapse guarantees, fixed accounts and various interest / dollar cost averaging type features, if kept simple, will have their place. ISSUE: training, training and training. You’ve had a good year riding the fixed annuity wave, but prepare now for the sea of change about to come. Unbundle the product features, train your reps. and model the product features to the specific needs and objectives of the customer.

Call to Action

Who will be the winners in 2003? It will be the people and organizations that anticipate and prepare for when the fixed annuity wave crashes. It will be the organizations that take action today while their peers are standing around congratulating each other on 2002 sales. Tomorrow’s winners are implementing programs right now that increase their Brokers’ and LBEs’ ability to sell variable and other alternative investment products.