In my December 10 article, I began a discussion on the issue of annuity persistency, a significant problem in our industry that shows some signs of getting worse.
The biggest part of the problem stems from full surrenders occurring that are well in excess of what was anticipated in the initial pricing. Most of these surrenders are in the form of tax-free "1035″ exchanges, meaning the annuity owner moves his or her annuity from one insurer to another, with no adverse tax consequences.
I pointed out that maximizing persistency (conserving policies) starts at the product design phase. Most importantly, it also includes a thorough review and investigation of the chosen annuity distributors. Any insurer should carefully analyze past persistency patterns of their distributors, in order to stop persistency problems before the first product is sold.
Once appropriate distribution is selected, it is incumbent upon the insurer to make sure the product design is well suited for the distributors and the buyers. Anything that can be done to spread producer compensation over many years, should be done. Anything that can be done to keep the buyer engaged and not feeling that the product "matures" after 5, 7 or 10 years, should be done.
Lets assume all of that is accomplished. The policy is designed and sold by a trusted, tested distributor. Now what?
There are a number of steps that need to be taken. First, the obvious. Its important for the insurer to stay in contact and be responsive to the needs of the producer and annuity owner. Yet, as obvious as this sounds, many companies seem to disregard the significance of the issue. Ive seen countless examples of annuity lapses triggered by poor service. Good service will include well-trained, well-mannered, knowledgeable people to address questions and needs as they arise.
At this point, Im talking about the needs of both the producer and buyer. But I also believe its good policy for the insurer to maintain contact with the annuity owners. Many agents will bristle at this suggestion. If done properly, however, I think the agents will benefit as well. Being done properly means frequent, meaningful contact, in concert with the producer.
In addition to meaningful contact and good service, its also very important to make sure the product is performing as the owner expects. This may not always be possible. For instance, market performance may be causing a variable annuitys return to be much lower than what was expected. Additionally, an equity-index product may be suffering low returns for a similar reason.
