All Product Eyes Will Fix On The Economy In 2009

By Linda Koco

January 05, 2009 at 07:00 PM

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Life and annuity professionals have eyes firmly fixed on insurance products that consumers will need and can afford during the prolonged period of financial turmoil that 2009 is likely to see. Here are some of their forecasts.

Even though it will likely be a rough year for the economy, brokerage general agents and their producer partners will keep working with insurance companies to develop the most competitive, cost-effective products they can, says Gary S. Dworkin, chairman of National Association of Independent Life Brokerage Agencies, Fairfax, Va.

Some life carriers will not want to do much product development because money will be so tight, concedes Dworkin, who is president of Dworkin Associates, Inc., Rochester, N.H. But he says NAILBA members will remain committed to finding–and selling–the best products all the same.

"Insurers that don't keep developing the best value proposition in products simply will not have them sold," predicts Dworkin, explaining that the independence of BGAs and the large volume of business they control will influence this outcome.

Some annuity companies will be scaling back development efforts, agrees Tom Buckingham, senior vice president-life and annuity product development for Phoenix Companies, Hartford, Conn. "But they won't scale back to zero," he adds. "Instead, they'll use their dollars more wisely."

The annuity market is so big that the companies can't stand idly by, he says. "They have to take action."

The strong companies will keep manufacturing quality products, recession or not, sums up Dworkin.

What will be the hot button issues for products in 2009? "Guarantees and equity exposure," says Buckingham, noting that his company's market research and annual trending data show that "people will need both to achieve the lifestyle they want."

Also, people are increasingly concerned about outliving their assets–the longevity risk, he says.

And, due to the coming change in Administration, change and clarity in tax treatment will become important–for example, concerning estate taxes, and income taxes for the high net worth, Buckingham says.

In general, observes Dworkin, if the economy is under great strain, people typically look across the dinner table and see the people they care about and want to protect. "So they will find and buy the best life insurance tools that will provide protection on the most economical basis."

If the economy improves later in the year, he says, "the dynamics will change–to a preference for cash value vehicles with newer features."

But overall, he says, "every company will try to find a way to sell the agent and client what they want to buy."

What life and annuity trends will dominate the year? Here's a snapshot, first looking at annuities and then life insurance.

Annuities. The product picture here is iffy in some areas, such as the status of fixed indexed annuities, but the overall direction is toward guarantees. Examples:

Proposed Rule 151A from the Securities and Exchange Commission. Bill Atherton, managing director of Atherton Group, Pittsfield, N.H., believed the SEC would adopt this rule, as it did on Dec. 17. However, he feels changes could occur at the SEC, due to the new Administration, that might impact this.

With the rule going through, "expect to hear a lot of noise and opposition" from the annuity industry, Atherton adds. But also expect indexed annuity providers to develop back-up plans, he says, and expect to see "fire sales" of fixed indexed annuities led by annuity marketers who are trying to sell those policies "while they still can."

Traditional fixed annuities. Look for explosive growth here, says Atherton. The products won't have high crediting rates, he allows, adding that the rates may in fact be lower than they were at the end of 2008. However, he says, "the guarantees on these products will be in demand."

Income annuities. "Expect continuing and possibly exponential growth in single premium immediate annuities," says Atherton. Why? "The demographics are there, and the recognition is growing that guaranteed lifetime income is essential."

Michael Gallo, senior vice president-retirement income, New York Life, New York, has the same expectation. In fact, he is predicting his company will experience "continued double-digit growth" in income annuity sales in 2009. As 2008 ended, he notes, these sales were growing by 45%.

Guarantees from a strong company are particularly appealing in today's economic climate where people see what can happen to non-guaranteed investments, Gallo contends, noting that people can easily run out of money if they try to finance their longevity themselves.

Today's low interest rate environment is a factor, too, he says. The notion of living off interest from products like bank certificates of deposit and money market accounts is, he believes, "driving investors to consider income annuities as a means of boosting payouts and maintaining lifestyles, especially in view of the unique risk pooling benefits these can provide."

The industry has to develop simple retirement income solutions, simple processes and simple marketing, stresses Chris Grady, president of Genworth Retirement Services, Richmond, Va.

People who will be retiring in 2009 will be facing 2 black holes, he continues. "One is how long are you going to live? The other is what are your health care costs going to be while you live longer?"

The challenge will be to create solutions that will ease the customer's pain or worry in these areas, Grady continues. This won't happen at a point in time, he notes, but will be an evolution comparable to that experienced by the fast food industry, starting with McDonalds in the 1950s.

Soon, Grady predicts, "the marketplace will be screaming for solutions. People will be saying: 'I want lifetime income.' And, the industry will recognize not just the opportunity but also the needs."

Variable annuities. VAs will have a rough sales year, predicts Atherton, due to uncertainties about equities.

But the hurdles will be mitigated somewhat by the addition to VAs of living benefit features, he says, citing guaranteed minimum withdrawal benefits and guaranteed minimum income benefits as examples. "Many people won't buy VAs without those features," he explains.

However, Atherton cautions that the cost for the guarantees will be going up: "Some might cost as much as 100 basis points compared to today's 60 bps." In addition, "many guaranteed withdrawal options won't be as high as today's 5% or 7% options."

Buckingham agrees, noting that carriers will trim back in response to the rising cost of issuing the benefits. In fact, at the end of 2008, some carriers had already pulled back on certain living benefits, he says.

Still, Buckingham predicts that most carriers will continue to offer the features. Further, he says, changes in the market will create new opportunities and trade-offs. "It may be that simpler or better ways to handle these features will emerge."

Atherton thinks there will also probably be a resurgence in sales of VAs with an earlier type of living benefit–the guaranteed minimum accumulation benefit. This feature can be more expensive than GMWB features, he allows, "but will reemerge because of the need for a floor on cash value."

Fixed indexed annuities. Look for more growth and evolution here, says Buckingham. Market forces will spur this growth, he predicts, noting that volatility will facilitate new policy structures, regardless of whether the products are deemed securities or not.

Life insurance. The buying and selling of life insurance will continue in 2009, predicts Dan Mulheran, president of ING Life Distribution, Minneapolis. However, he adds, the nature of this activity will change.

For instance, some cases will be slower to place, because the clients may be hesitant, he predicts. Also, some will want to reduce premium expenses by cutting the face amount in half, or they'll choose term insurance instead of permanent.

But sales will go on, he reiterates, because "people tend to think more about protection when things are unstable."

Dworkin agrees. "Average premiums may be down, but I think we'll see an increase in the numbers of policies sold."

The year will see re-pricing of life policies for the 2001 Commissioners Standard Ordinary tables, says Rod P. Hansen, the new president of the Society of Financial Services Professionals, Newtown Square, Pa. "This will only have negligible impact on consumers," he adds.

But because of economic uncertainty, products will be heavily scrutinized for quality and how the carriers meet their long-term promises, continues Hansen, who is regional vice president of Pacific Life, Boca Raton, Fla. Therefore, in dealing with clients, he says, distributors will want to compare, review and have more knowledge of the risk products they're offering than ever. The operating question will be: "What's best for the customer?"

This will happen with any insurance product where the customer exchanges health, LTC, disability and life premium for risk-bearing by the company, he says.

Here are some predictions about various life products in 2009:

Universal life. "The ULs with no-lapse guarantees will provide consumers with base protection at the lowest average premium at some ages," says Dworkin. "These products respond to what many clients will want in 2009–protection for a lifetime at the lowest average premium."

The no-lapse ULs typically result in no cash value, he allows. Still, "it is a permanent product," he says, "and it will be there consistently for the insured's lifetime."

But some distributors are now asking for lifetime no-lapse guaranteed ULs that also offer a cash value rider, notes Mulheran. The reason: clients are saying they don't understand why their UL policies will no longer exist at age 100, he says. "The clients say, 'I put in all this money and I get no cash value?'"

Distributors are also seeking enhancements that will grow the internal rate of return on UL death benefits, says Mulheran. This reflects the growing interest in treating UL as an asset for the estate, he says. "It's critical to affluent buyers," he says, explaining that they see it as a guaranteed asset, meaning that they can be more aggressive with their other assets. Some features, like the return-of-premium rider, could enhance that value, compared to a UL with no ROP rider, he notes.

Variable universal life. Certain distributors say they can sell VUL with death benefit guarantees in 2009, says Mulheran. The year will be a good time to buy VUL because the market is down, he indicates. Also, a lot of new VULs have no-lapse guarantees, he says, so that will be very attractive to buyers in 2009.

VULs are due for a sales comeback, agrees Atherton. However, he thinks the comeback won't happen in 2009. "The equity markets will still be under a cloud of suspicion from both planners and investors," he explains. "And the products will probably need some modernization before they do come back."

Survivorship life. Demand for these policies will increase, in line with emerging clarity in estate tax issues, predicts Buckingham. This will happen even if the estate tax does not change, he says, and it will start even before the estate tax issue gets resolved. The policies will use both UL and VUL chasses, but the policies won't be cash value oriented, as such products would be too expensive, he says.

The VUL is the riskier of the two products for this need, he adds, but Buckingham says high net worth people can afford to take that risk.

Living benefit features. VUL carriers will continue to adapt these VA features for their own products, says Buckingham. They might, for instance, offer a guaranteed minimum accumulation benefit on a VUL that returns the premium after 10 or 15 years, or offer a guaranteed minimum withdrawal benefit on a VUL. "Life insurance is a longer-term purchase than an annuity purchase so we will see more evolution in this area," he predicts.

Indexed life insurance. This will be another area of growth and evolution, says Buckingham. People who formerly were VUL buyers will be drawn to more conservative products in 2009, including indexed life, he explains, noting the indexed product represents less risk to the buyer. Insurers that have a development budget will look into becoming new players or offer new designs in this market, he predicts.

The cost of the options used to hedge indexed products is causing some retrenchment in benefits in both indexed life and indexed annuities, he allows. "But I think this will bounce back sooner in indexed life than in fixed indexed annuities."

Term life insurance. Return-of-premium term policies, especially the 30-year plans, will do well in mid-market sales in banks, the worksite and property-casualty agencies, predicts Atherton. Dworkin predicts there may be more sales of 10-year policies too, possibly on a term-like UL chassis.

All in all, 2009 will be a challenging year, sums up Hansen. "There will be chest-pounding and snowballing over reserve issues, for instance, and appetites for risk will change. We owe it to the customer (to deal with this)–we can never lose the trust from the public," he says.

As the year unfolds, "we will lose carriers to mergers. Products will merge and blend. We will see blocks of business sold, such as in group insurance. The insurance companies will stick close to what they're good at, and so will advisors."

Is this doomsday? "I hope not," Hansen says. "But it won't be a heyday either."

Insurance professionals will need to be sure they do a quality job, he says. "Make sure you know what you are selling, who you are selling it to, and periodically check to be sure it's all still correct. Remember, this is about the consumer. Do what's right for the client, stay in touch."

Finally, he says, approach change as something good. "Products will always change, for the business to stay healthy."

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