For those familiar with current demographic and economic trends, it would appear the stars have aligned for an uptick in annuities growth. With the Pew Research Center projecting 10,000 baby boomers turning 65 every day for the next 15 years, juxtaposed with a decline in defined benefit pension plan availability to support them in their golden years, the pool of prime prospects for longevity-focused solutions should theoretically be deepening.
Annuities, with its core feature of long-term, guaranteed income, should be uniquely positioned to help more people alleviate retirement funding concerns. Yet despite these seemingly optimal growth conditions, individual annuity sales have been fluctuating over the past decade — 11 percent lower last year compared to their peak in 2008, according to the LIMRA Secure Retirement Institute.
Part of the problem is that persistently low interest rates have been a barrier to annuity providers trying to generate enough of an investment return to profitably cover their guaranteed income commitments. As a result, some carriers have intentionally scaled back their annuity writing, de-risked their portfolios, reassessed underwriting and pricing models, and adjusted product mix, terms, conditions, and fees to better position themselves for sustainable growth.
With interest rates expected to start rising later this year or early in 2016, this retrenchment trend among many annuity providers will likely be reversed before long. However, a recent Deloitte Center for Financial Services survey titled "Voice of the annuities consumer: New approaches to growing the annuities market" identified several more fundamental, systemic challenges for insurers to address if they expect to consistently increase market penetration, widen their prospect base, and propel sales on a steeper upward trajectory over the long term.
Which new approaches should annuities writers consider?
The key takeaway from Deloitte's survey data can be summed up with the phrase, "What got you here won't get you there" — at least when it comes to connecting more effectively with a wider range of annuities prospects.
To grow the overall "annuity pie," carriers will need to consider a number of options to change the game both in terms of gaining market share within standard target groups as well as enhancing visibility and attractiveness among non-traditional prospects.
Based on Deloitte's analysis of the survey data, industry practices, regulatory changes, and market developments, there are at least four opportunities for annuity writers to bridge the gap with a broader pool of prospects in traditional and underserved markets:
1.Increase focus on repeat buyers and capitalize on cross-selling opportunities
2. Repurpose the product to broaden the utility and appeal of annuities
3. Appeal directly to consumers with proactive education, marketing, and sales initiatives
4. Leverage the workplace channel to significantly increase group sales as well as facilitate more individual purchases within retirement accounts
1. Increase focus on repeat buyers and capitalize on cross-selling
One opportunity may present itself in the form of recurring annuity purchases, as 42 percent of the annuity buyers Deloitte surveyed already owned at least one other annuity prior to their most recent acquisition. Even more encouraging is that 73 percent of these repeat buyers bought an annuity in addition to, not as a replacement for, their prior purchase (click image to enlarge).
Familiarity with the annuity writer and seller may create additional cross-selling opportunities as well. Nearly half of annuity buyers surveyed had already owned at least one other financial product from their annuity company, while about two-thirds said they also had purchased other financial products from the intermediary who sold them their most recent annuity.
This means that buyers of life insurance or other types of coverage, as well as various investment products, might be more amenable to adding an annuity to their portfolio from the same provider and/or intermediary.
2. Repurpose the product to broaden the appeal of annuities
To build bridges to traditionally overlooked segments, it may be pragmatic for insurers to consider augmenting their traditional retirement focused-product line with innovative elements to appeal to a wider — particularly younger — audience. Deloitte's survey indicates that life events other than retirement could motivate a younger person to buy an annuity. For example, 35 percent of annuity buyers in the youngest age group said they had purchased one because they "came into a sum of money," while 23 percent cited the birth of a child as a reason for buying an annuity.
To capitalize on the high potential for repeat sales, prospects need to first be sold their initial annuity, preferably early in their financial life cycle.
However, insurer success at penetrating untapped market segments will likely require a comprehensive understanding of the product characteristics that can ultimately discourage an annuity purchase for some — product complexity and investment objectives.
3. Appeal directly to consumers with more proactive education, marketing, and sales initiatives
4. Leverage the emerging workplace channel
Where do annuities writers go from here?
