Innovation In Annuities--What It Takes To Win

By Linda Koco

September 03, 2005 at 08:00 PM

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Is innovation alive or dead in the annuity business? The answer is, "yes–well, sort of," according to insurance professionals contacted for this story.

The question is pertinent because some industry watchers have been saying that annuity innovation evaporated as of the early 2000s recession and never returned. Yet many carriers routinely tout their latest rollouts as new, first, innovative and groundbreaking. Some rollouts even carry the patented or patent-pending tags.

So, which is it? Alive or dead? Following are some assessments, plus glimpses at how innovation is happening.

"Some annuities are coming out disguised as innovations when they are merely tweaks that only complicate the product," observes Michael Bartolotta, a brokerage general agent and founder of M3 Financial Inc., Glastonbury, Conn. This explains some of the confusion that exists over whether annuity innovation is or is not on the wing, he says.

Jerry Golden, president of the Income Management Strategies Division at Massachusetts Mutual, Springfield, Mass., puts industrywide annuity innovation at about 4, on a scale of one to 10.

Laurence Greenberg, president and CEO of Jefferson National Life, a Dallas subsidiary of Inviva, New York, puts it at about 5.

A lot of companies are interested in developing hybrid products, such as putting LTC riders on life and annuity policies, says Stephen D. Kendrick, head of insurance business development at North America, for Majesko Mastek, Edison, N.J. But most are slow to do so, he says, explaining that their systems are often the "limiters." They'll need to make changes to the systems first, he says.

So it goes.

Golden believes the level of innovation right now varies by product line. For instance, fixed and variable immediate annuities are in the 5-6 range, whereas deferred FAs are at about 2, he says.

What about traditional deferred VAs? "The feature wars continue, but there's no real innovation." Golden ranks innovation here at 3.

Bartolotta sees something similar. For instance, in the traditional FA world, there is not a ton of true innovation going on, he says. "Some carriers say they are innovating with single premium immediate annuities, but that's a rate-driven product (and sale). What's to innovate when it's rate-driven?"

With VAs, though, "some" innovation has occurred on the retirement income side, he says, citing introduction of guaranteed income and withdrawal features as examples. Some of this has even carried over to FAs, a few of which now also have guaranteed withdrawal features, he says.

While Bartolotta concedes those can be good things–they're "something different to talk about" and certain new features do meet emerging needs–he always checks to be sure that what is being promoted innovative is, in fact, innovative. If they're not–if they're just a tweak that complicates an existing product, for instance–he doesn't want to spend a lot of time with them.

That rings bells with Greenberg. There are a lot of "good ideas" for meeting consumer needs circulating in the annuity industry right now, he says. "However, a lot aren't there yet. Most are just re-hashing existing products and riders, especially in retirement income. The companies may be trying to develop innovative products, but too often this is "inward focused," he says.

What factors should industry pros consider when innovating or when looking for truly innovative products and companies? Some ideas follow.

Is it complicated? Even when a product is in fact innovative, Bartolotta says, that's not a guarantee it will sell. "I've seen a lot of cool features come out that never catch on." Often, the problem is the innovation is just too complicated, he says.

Do the new products align the company with new channels and markets? "The challenge is to align annuity products with the needs of the intermediaries and the clients," says Golden.

The companies shouldn't just focus on innovating for the same segment of the market that the industry already serves, he continues. "We need to expand to new distributors and markets … and align the products, pricing and features with different channels and market segments."

This way, the industry won't just be replacing products in the same channels. It will be growing.

Innovation like this requires a "market back, not product out" mindset, Golden adds. That is, "work backwards, to what the market needs today and will need tomorrow."

Does the innovation meet needs of people who don't currently own annuities? To a large extent, annuities are still advisor sold, and a lot of the emphasis continues to be on selling product, says Eric Sondergeld, director of retirement-private, client-channel marketing at BlackRock, Inc., Princeton, N.J.

There has been some innovation in annuities, Sondergeld alleges. This has largely focused on achieving greater simplicity and reducing costs, and both are good ways to help bring the mass market to annuities, he says.

But what needs more work, he says, is "developing products for people who don't yet own annuities. That means products that address their needs and goals."

Does the innovation take a customer-centric approach? Developers at Sun Life Financial, Wellesley, Mass., believe it takes a customer-centric approach to be innovative," says Mary Fay, senior vice president and general manager-annuities.

That is, the company should be studying customer problems and concerns, and then come up with related solutions, she says. That requires doing consumer research and responding to the findings, she indicates.

She described the "innovative challenge" as one of understanding the consumer and then translating this into a solution that represents a competitive advantage. That's "strategic innovation," she says.

She cites, as an example, research her company did into baby boomer wants and needs. This revealed that maintaining lifestyle and ability to live life on one's own terms is very important, Fay says.

"Boomers don't intend to live on 80% of previous income. Some expect they will have a bump up in spending, for travel and other things, once they retire, followed by a slope down and then another bump up, say to fund health care." In other words, research shows that boomers want to be able to stop, start and store their retirement funds, she says.

The insurer used those findings in developing its patent-pending Income ON Demand VA option, she says. The option is an "income storage benefit" that allows VA owners to defer part or all of their permitted annual withdrawals and to "store" those withdrawals for future use, she says.

Does the company study–and address–obstacles that consumers encounter? New York Life surveyed consumers to learn what obstacles were in the way of their buying single premium immediate annuities, says Michael Gallo, senior vice president-retirement income for the insurer.

"In thinking about the retirement market, we felt (industry SPIA) sales should have been growing geometrically," he recalls. But they weren't, so the company decided to see what was going on. Its research found 3 main obstacles to buying SPIAs: Lack of liquidity, worry about SPIA payouts not keeping up with inflation, and lack of legacy benefits.

The company then designed a new SPIA that has several patent-pending elements that addresses those issues, he says.

The product, LifeStages Lifetime Income Annuity, includes: The ability to accelerate payments for short-term liquidity, a one-time withdrawal feature, an optional auto increase in payout level, a money-back guarantee, and a guaranteed legacy option (pays 25% or 50% of premium as a death benefit, no matter how long payments have been made).

Is it a solution or just a product? True innovation comes from designing solutions, not just products, says Jefferson's Greenberg. This is a hot button topic with many other executives too. To arrive at solution, it requires use of platform-based models, Greenberg continues, noting this makes it possible for the carrier to offer different solutions for different consumers.

Is the developer selective about what gets innovative treatment? Not every idea merits such treatment, alleges Fay. For instance, she noted that Sun Life Financial sometimes decides to be a fast follower on an annuity trend to stay competitive.

But when trends and data points suggest innovation is a viable option, the company will innovate, she says.

The decision process includes checking industry products to see whether the need is already being met and moving when opportunity is perceived. The planning encompasses not just sales, but also service of the product throughout its lifecycle, she adds. It also entails getting advisor feedback and tweaking the "messaging" so that it can be easily understood.

The innovation must have a clear value proposition and full disclosure, Fay says.

Did the developer leverage the small company advantage? Greenberg raises this point because he believes larger companies often have a hard time innovating because they must also tend to existing distribution channels and books of business. By contrast, he says, smaller, entrepreneurial companies with strong technology assets can be "very comfortable" in that role.

He cites his own company's experience as an example. When it entered the VA market, it had no block of existing annuity business. But it had efficiency–via web-based technology and a staff of only 70 employees. The leaders decided to innovate on the accumulation side of VAs, aiming at distribution through fee-based advisors "who typically don't like VAs but who do value tax deferral and asset management," says Greenberg. The result was Monument Advisor, a stripped-down low load VA (only a $20 monthly insurance fee), 170 "ultra-low cost" funds, no commission and no surrender charge.

Now, the company is looking at applying the same model to income solutions.

A lot of carriers can't afford the time or money to do technology-related innovations on their own, concurs Ron Schurtz, co-founder of Annexus Group, a Scottsdale, Ariz. product development affiliate of AmerUs, now an Aviva company.

For instance, he says, if the goal is to simplify, some carriers will just take away client-friendly features rather than invest in technology that would achieve the same end with the client-friendly features intact. But if carriers use specialty companies for the innovation, they don't have to weaken the product, he asserts.

That is an important distinction, says Don Dady, the other Annexus co-founder. Ever since 2001, he continues, most large annuity carriers have focused on maintaining, not inventing. Further, most large company executives see their role as management and their companies as manufacturers. So for them, innovation is not uppermost.

But such companies are at a turning point, Dady adds, because they want to grow distribution and markets. That means they need to figure out how to do that and their other roles too. For some, choosing a specialty company to do the innovation will be the solution, he predicts.

Does it have direction? Some executives believe size is not a governing factor; rather, it's direction and focus that counts.

"A lot of companies crank out product after product," and that makes it hard for them to detect and pursue new business opportunities, maintains Gallo of New York Life. "Also, if companies are budget-driven, it's tough for them to spend money on (developing) things that won't pay off right away."

By contrast, he says his company decided first to look at what the market wants. When it saw a new business opportunity, the company went for it.

"It's a balancing act," he says. "You can't be entrenched in old ways. You need to have new ways of looking at problems."

Does the innovation have top-down involvement? This is critical, say many executives. As Gallo puts it, "leadership is needed to break the (old) cycle of product development." At his company, Vice Chairman Ted Mathus had the vision regarding a new type of SPIA and he put the wheels in motion, says Gallo.

Do the developers have applicable prior experience? Greenberg believes the prior experience in e-banking, which Jefferson executives had, provided a significant boost to innovation.

From e-banking, he says, "we learned you don't have to be face to face with the consumer, to create consumer value. … You can do that on the phone and the internet.

"We learned you can go against common thinking; you don't have to fear it. We learned that if the solution creates strong consumer value, you can be successful. And we learned that it's all about execution (in servicing, processing, etc.) Without execution, it dies on the vine."

Does the innovation draw on technology? Suitable technology is essential, says Kendrick, of Majesko Mastek. In many cases, technology that's needed for innovation already exists, he observes. However, "it won't work if the company doesn't utilize it effectively."

Executives at Annexus agree. The company had decided to develop a fixed index annuity that offers more liquidity than traditional FIAs, maximizes performance, is simpler than other FIAs and is easier to understand. "But we found we needed technology innovations to do all that," says co-founder Shurtz. "You just can't put enhancements like that onto current products."

The result was BalancePlus Annuity, an FIA with 3 patents pending on the underlying technology. Like other FIAs, it guarantees the principal and offers upside potential. However, it differs in its interest crediting strategy and also in the fact that it omits caps, participation rates, administrative fees, term averaging and forced annuitization. Owners can track contract values on a daily basis too.

"This is more consistent with what consumers expect, and they can see their policy values and get statements online," says the other co-owner Dady. The technology was the key, he says.

Is turfdom getting in the way? At some companies, "the LTC and annuity departments still operate in silos, when they should be talking to each other," notes Kendrick.

In addition, the front office (sales) often has enormous uncertainty about what the consumer wants, even with all the consumer research that has gone on, he continues. And there are problems with connecting the front office with the back office (systems) in a way that enables companies to put together parameters of a new plan and then communicate it.

Some companies are beginning to think about this architecturally, Kendrick allows. "But some need to modernize their legacy systems first."

Most important: "The system needs to be able to do to what the customer in the front office wants," he says.

Are creative people on the innovation team? Appoint an "officer in charge of revolution" to challenge everyone, suggests Golden. This will help stimulate out of box thinking and create a culture that facilitates change, he says.

Select creative people "who thrive on challenge, not people who want to stay in their comfort zone," suggests Gallo.

One example involves actuaries, says Jody Kravitz, corporate vice president and actuary at New York Life. "Our focus groups said they need to be able to get their money back (from an SPIA). That was a big challenge for the actuaries, but they worked on it and designed a withdrawal feature" to do just that.

New skill sets may be needed too, Golden says, as well as new sets of products that aim at meeting needs.

Do the marketers tell all? Some go around selling a sexy new feature without explaining it properly, says Bartolotta. For instance, they may fail to mention that a new feature dilutes other elements of a product, he says. "Then, the regulators pick up on it, and they adopt new regulations that get in the way of selling a really good product." This way, everyone is painted with the same brush. His conclusion: "The innovators have to make a commitment to telling the whole story."

Do the product materials and promotions communicate the value? As Gallo sees it, "innovation is only as good as your ability to show the value." That means, spend time and effort on the marketing materials, systems and illustrations that go with the innovation, to show its benefit, he says. Also provide agents with training and help shift the mindset.

Are there signs that service will be there when needed? "With an innovative product, the field always has concern about whether service for it will be there a year from now or more," says Bartolotta. "We don't want to be in a situation where we call the home office and no one knows anything about it."

Is the company committed for the long haul? "Innovation is constant work," stresses Gallo. "It's not a one-shot deal." His advice: "Spend time to do it right." For instance, his company decided to "start innovating and don't stop." That includes not only the product development and materials, but also agent training and support. "Be sure it's all coordinated too."

Real innovations don't come along every day, continues Bartolotta. "The last big one that made me say 'wow' was 10 years ago."

But he is keeping an open mind. If something new comes along and the cutting edge brokers pick up on it, the innovation will get traction, he explains. Maybe there won't be immediate gratification, but it will come, he says.

Ben Sartin, an advisor with Financial Process Group in San Antonio, Tex., says he too hasn't seen anything really new, structurally, for a few years. "All the annuity companies seem to be focused on staying up to speed with the major players' innovations of a few years back."

But, he adds, "I'll be ready for something genuinely new and really beneficial for my retiring and retired clients when it happens."

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