Marketplace & Regulation

Distribution Channels


At one time, life insurance products (including annuities) were sold primarily through the insurer's "captive" sales force.  Today, that is no longer the case.  Over the past couple decades, changes in the marketing and distribution of individual life and annuity products have had a strong impact on industry growth and profitability.  The changes in distribution have also spurred design of new product offerings.  New distribution channels include banks, broker-dealers, wirehouses and the Internet, as well as  fee–for–service financial planning.  This expansion is partly the result of non-insurance companies diversifying their product mix; others resulted from mergers and consolidations with the financial services sector. These expanded channels increase the opportunity for insurers to access new customers, but they have also resulted in increased costs due to more intense regulatory scrutiny and new compliance requirements. 


It's interesting to note, that while the industry has been very successful in broadening annuity distribution channels, it has had only limited success in doing the same for life insurance products.  There are several factors contributing to this phenomenon.   Market research by the Life Insurance Marketing Research Association (LIMRA) indicates that consumers tend to segment their financial activities into two broad groups insurance and financial planning. Because consumers typically view annuities as investment products, they are often more willing to consider traditional investment product distribution channels, such as banks, stockbrokers, financial planners and other financial advisers, as acceptable sources for purchasing annuities. But when it comes to life insurance, consumers continue to gravitate toward traditional insurance professionals to buy life insurance.  Today, stockbrokers and banks write approximately 40% of total individual annuity new business, while less than 10% of new individual life premium is written through these channels.   (The trend for equity indexed annuities is different. More than 90% of indexed annuities are sold through personal producing general agents (PPGAs), unaffiliated insurance agents and insurance brokers. Banks, broker-dealers, and captive agents accounted for 4 %, 3%, and 1% of EIA sales, respectively.)


The shift to third party distribution was seen as a way to meet customers' calls for more independent sales representatives, as well as a way for companies to shift away the fixed costs of a captive sales force.  There have been some unintended consequences, however.  Insurance products, including annuities, have come to be viewed as interchangeable "commodities", and this has led to greater price competition.  Companies also found themselves competing for limited "shelf space" as independent agents were given a wider variety of branded products to offer their clients.   Both of these trends have placed greater pressure on company profitability.  In addition, unaffiliated agents, with access to the products of several different carriers, can quickly discern and exploit any pricing or design mistakes to the detriment of insurers. The fact that these producers no longer have a strong affiliation with a single carrier means that they are more likely to shop around and recommend replacement of existing contracts when new products come to market.  This can upset the "persistency" assumptions insurers make when pricing their products (persistency is the average length of time a contract stays in force).  Insurers amortize their "contract acquisition costs" over a long period any increase in policy surrenders has a negative impact on company profits.


In addition to the increased number of distribution channels, insurers have had to grapple with the logistics of bringing their product to this wider market.  Firms no longer can simply develop a product and rely on its sales and training departments to roll out that product to captive agents.  Insurance and annuity companies rely on various methods to reach its more-diverse sales force: in-house marketing personnel, wholesalers, brokers, and independent third-party marketing organizations.   The distribution chain has become longer, and subject to forces outside the control of the underwriting carriers.  This, in turn, has put old regulatory assumptions under pressure: Who is responsible supervising the agents?  Who is responsible for determining whether a recommended product is suitable for a particular client? 


Increased price competition and a wider range of alternative products would seem to benefit the annuity-buying public.  But the downside is that the new sales force may not be as knowledgeable about the products they are selling, or they may be more concerned with the short-term gain afforded by generous commissions and less worried about long-term client satisfaction.   



Secondary Market


Liquidating marketable securities such as stocks, bonds, or mutual funds is relatively easy and incurs few transaction costs. That has not been the case with annuity contracts.  Deferred annuities allow for partial withdrawals or surrender, but in the early years of the contract there may be steep surrender fees to cash out. And once the contract is annuitized, those limited options are usually not available (a few contracts do offer “commutation” provisions to allow for surrender after annuitization).  In some cases, beneficiaries inherit annuities that met the initial contractholder's needs, but do not fit the beneficiary's financial plan.  Other contractholders may face an urgent need for cash due to financial emergencies, while others may simply find that their financial plan has changed for a number of reasons:  investment strategies, estate planning or wealth transfer needs. Some annuity holders may simply have buyer's remorse and wish to undo a mistaken purchase. 


A nascent secondary market for annuities is emerging, giving investors the opportunity to sell what was once unsalable and possibly cash in their policies for more than they could receive from the annuity company upon surrender. Ads on television tout sales of annuities proclaiming "It's your money, use it now" or by asking "Do you need money now?"  The answer seems to be "yes".  According to a survey of existing annuity contractholders by the American Council of Life Insurers (ACLI), 27% of respondents are concerned that they may be unable to sell their annuity if they want the money for something else.


A number of companies that previously filled a niche in turning a structured settlement (usually a judgment in a court case paid over time) into a lump-sum payout have expanded their services to include standard annuity contracts.  This would seem to be a straightforward process: calculate the present value of a future income stream, deduct a little for profit, and cut a check. But according to the National Association of Insurance and Financial Advisors  "it's a complicated, unregulated new field, and there are so many variables which make the calculations extremely complex and not transparent to the consumer."  This market is unregulated. Currently, company representatives need not be licensed, and the purchasing companies do not fall under state insurance regulations or other government oversight. 


The best advice for clients is caveat emptor (or more correctly, caveat vendor "let the seller beware").  For those who may be interested in converting an annuity into a lump sum, the first step should be to contact the issuing annuity company.  The administrative policies at the company may be more flexible regarding surrender than is apparent from the policy language.  If a client is intent on pursuing the sale of his or her annuity, obtaining independent advice from an insurance specialist or actuary should be the first course of action and then obtain a number of bids. 


In an annuity sale, the price will be based on the total dollar amount to be distributed, the time period over which the payout will be made, and the current level of interest rates. Other considerations include the insurance company's financial strength rating and particular terms and conditions such as whether the policy has a death benefit.  Each potential buyer will have its own methods of calculating a price, so there may be a wide disparity in possible payoff values so shop around.


Even with this new market, not every policy can be turned into cash. Those tucked away in tax-qualified retirement accounts are ineligible because the Internal Revenue Service won't allow ownership to be transferred. Deferred annuities that are still in the accumulation phase can be sold in this marketplace. Annuities in their payout period can also be sold but only those with a guaranteed payout period (such as period certain contracts) or other minimum guaranteed values.  Straight life immediate annuities cannot be sold, as the future payments from these annuities are based on an unpredictable life expectancy.  (The purchasers in this market do not deal with enough contracts to rely on the Law of Large Numbers).


Annuity companies and regulators tend to take a dim view of secondary market transactions for annuities.  (Part of this, no doubt, stems from shady transactions in the viatical/life settlement market, which is provides a similar secondary market for life insurance policies.)  But the availability of a method to cash out annuity payments for a lump sum might overcome many contractholders' hesitancy to purchase or annuitize a contract in the first place.  So, in the long run, this secondary market may actually come to serve the industry's purposes.   With over a trillion dollars currently locked away in annuity contracts, a secondary market could add needed liquidity and flexibility to the contract allowing clients to find more suitable investments and allow agents to provide "value-added" services to their clients.


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