An industry founded on the principle
ofrisk-avoidance, the US life insurance market might seem an odd
choice for the venue for the next technological revolution.
Yet its data-rich, process-heavy pedigree
presents an ideal opportunity for the armies of consultants that
have proscribed waves of change through the years in core
processing systems towards more nimble and less siloed architecture
to have the last laugh.
The demographics of life insurance in the US
skew increasingly older, but a huge shift is inevitable, and
insurers may well be in exactly the right place, at exactly the
right time, as an industry once focused on manufacturing and
selling product rides the technology to a more consultative
It is all part of a long march towards product
diversification and deeper client relationships
that agents in the field began nurturing
decades ago; as recently as the early 1980s, life premiums
dominated the industry as the largest source of revenue and the
myopic focus of the carriers serving the producers in the
That began to shift with the expansion of the
industry into the savings market through the growth engine of the
annuity. In less than a decade, annuities overtook life insurance
premiums and broadened the industry’s view of the customer
No longer would insurers merely pipeline
product – they were financial consultants in an insurance setting,
or aspired to be, at least.
The broader financial planning conversation
was vital to the expansion of the US life insurers’ product set.
Client needs grew the disability and long-term care insurance
market, for example, and began to influence the unbundling of life
insurance products into universal life, variable and variable
universal life chassis.
The same inertia ruled the rise of annuities,
which long were sold as income annuities, often as a supplementary
contract associated with the settlement of a death claim, only to
emerge and diversify when insurance companies began promoting
individual deferred annuities as a tax–advantaged savings vehicle,
complementary to individual retirement arrangements (IRA) and other
retirement plans. Today, of course, annuities may be fixed or
variable, immediate or deferred.
Interest rate focus
The interest rate environment in the US
dominateslife sales these days, as skittish customer have fled the
equities markets in droves for the dull safety of whole life and
universal life with a heavy dose of guarantees, says Steve
Weisbart, vice-president and chief economist of the Life Insurance
“In these days, when getting investment income
are the stuff of dreams, the opportunity to participate in the
equities market through universal life is not as powerful, so whole
life with its boring old 3% return now looks pretty attractive,”
“The attractiveness of guarantees is helping,
but on the annuities side, I would have thought that two stock
market meltdowns would really have been felt a lot more on that
side of the business.”
The great differentiator of annuities these
days is the guarantees written on top of the products. In fact, it
is safe to say that if it were not for the guarantees, there would
be no real difference between variable annuities and mutual funds,
except for the difference in tax treatment.
Thus guarantees are a fundamental area of
product innovation, with a new design of the moment causing
excitement in the marketplace seemingly every week. Do not let the
noise fool you, though: guarantees all are a variation on the
mechanism designed by the insurer to offer some type of
mortality-contingent investment return guarantee.
In the current economic climate, such
guarantees become crucial. Guarantees now are used to differentiate
universal life, variable universal life and other types of
insurance products as well. For life insurance products, there are
guarantees with respect to mortality changes as well as investment
They are durable, flexible, and incredibly
effective: in the third quarter of 2011, for example, guaranteed
living benefits riders were elected 88% of the time when offered,
according to industry organisation, LIMRA.
Guaranteed minimum income benefit riders,
guaranteed minimum accumulation benefit and guaranteed minimum
withdrawal benefit are all vying with guaranteed life benefits for
product space on the shelf.
LIMRA estimates that in the third quarter of
2011, guaranteed life benefits were elected in contracts
representing $25.2bn, out of $28.7bn new deferred variable annuity
premium where guaranteed life benefits was available.
Financial planning to the
Vera Dolan, president of VFD Consulting,
says that the life insurance market in the US has moved gradually
from a sales-first pipeline toward a greater role in the financial
“In the go-go years before the 2008 meltdown,
the life industry had moved toward aggressive, complex products
aimed at maximising returns,” Dolan says. “We won’t return to that
mindset. Instead I see whole life making a tremendous comeback.
This is the best whole life market in 30 years.”
LIMRA’s research bears Dolan out. The
insurance research firm reports that total individual life
insurance grew four percent in new annualised premium in 2011,
resulting in the second consecutive year of growth, propelled
entirely by booming whole life sales.
For the year, whole life premium income
increased by 9% compared with 2010. Overall in 2011, companies
issued 2% more individual life policies than they did in 2010. This
is only the fourth time individual life policy sales have increased
in the past 30 years.
Variable universal life also experienced a bit
of resurgence in 2011. Variable universal life was the second
biggest driver of total individual life insurance premium growth in
2011, increasing by 22% compared with 2010 and spurred on by a 36%
jump in the fourth quarter of 2011.
Term life insurance was the only product line
to experience declines in both premium and policy number count in
Term premium fell 6% in 2011 and the policy
number count was down 4%. In the fourth quarter of 2011, term
premium and policy number count dropped by 4%.
Despite the declines over the past few years,
LIMRA research reveals that term life insurance continues to
represent 65% of coverage and nearly 40% of all new individual life
policies issued in the US are term policies.
“Term had quite a little run, but it has
always been terribly cyclical and price-sensitive,” Dolan says. “It
is really a product of its own.”
Changed risk landscape
So the US life insurance industry has moved
from being mainly a provider of mortality protection to being a
significant provider of complex savings products with investment
guarantees. This changes the landscape of risk management.
Systematic market-return risk is now replacing
diversifiable mortality risk as the most important product risk
faced by many insurance companies, especially due to the fact that
much of the mortality risk in recent years has been passed on to
That transformation toward complex savings
vehicles is accompanied by the most fundamental industry trend –
the declining demand for life insurance among middle income
Americans, resulting in an industry shift in pursuit of the
affluent market for specialised needs in life insurance as well as
This narrows the customer base of the
industry, exposes it to regulatory and legislative changes, and
compresses its distribution force.
A constrained industry
Terence B Martin, director, Insurance Research
& Consulting, Conning, says that the dominant issue facing the
life industry in the US is the interest rate environment, which
shows no signs of easing up anytime soon.
“It is hard to overstate just how constrained
the life industry finds itself because of the cratering of interest
rates,” Martin says.
“Life policies are long plays, and investment
income is where the money comes from to make these policies work,
so pricing of life is really being stressed.”
Martin says that the yield curve is now so low
that life insurers are bumping into the guaranteed minimum rates,
so they are locked into paying interest rates they cannot earn.
The industry is persevering thanks to the
product differentiation that began in the wake of the 2008
recession, he says. If it had not, things would be even more
“Whole life has really helped, and the other
product that took a huge jump was fixed annuities, which then
jumped way back down as variable annuities came roaring back,” he
says. “Indexed annuities have become a stronger mainstream offering
than ever before.
“Initially there were some suitability issues,
and consumer acceptance issues, but it seems that those have
subsided and the agents sell it better as they grow more
comfortable with the concept.”
Martin continues that combo products –
especially those combining life coverage with an long term care
rider – are ideally positioned for the aging US market.
“It is baffling to me that long term care has
not done even better as a standalone product, but insurers face the
inevitable question of ‘what happens if I pay for long term care
for 10 years then die?’ so combo products really help insurers get
over that hurdle.”
Bob Kerzner, president and CEO of LIMRA,
stresses that the fact that the industry has “held its own” in such
a low-interestrate environment is noteworthy.
“The question is, is this the new reality?”
Kerzner says. “Is this the operating environment going forward, and
if it is, what are the long-term implications? We have never even
acknowledged the possibility of managing life insurance in such a
low interest rate environment.”
Insurers have been ratcheting back guarantees
to reflect the new realities of the marketplace, and thus far,
Kerzner says LIMRA’s research shows little sign that sales are
slowing as a result.
The huge numbers of Americans entering their
retirement years could not be coming at a better time, he stresses.
“Life sales overall increased by 4% in 2011, so we have now seen
two years in a row of steady growth,” he says.
“And when you really look at it, whole life is
the big story,” Kerzner continues. “Whole life was up 9% in 2011
over 2010, marking the sixth consecutive year of growth for whole
Across all products, policy count rose last
year by 2 percent, and that seems like no big deal, but that’s only
the fourth time in 30 years that it has increased.”
Kerzner emphasises that despite the solid
numbers overall, the rocky economy has really taken its toll on
smaller producers and financial advisers, who lack the economy of
scale to weather a flat yield curve.
“Our research found that a third of producers
said they were experiencing declining sales, so some are truly
suffering, particularly at the smaller end of the market,” Kerzner
“Producers said they are changing to offer a
more diversified product mix, or working in tandem with others in
strategic alliances, in ways we have never seen before.
A lot of the fundamentals of the business are
changing somewhat as the industry begins to normalise after the
Substantial changes in the overall structure
of competition in the insurance industry, including the scope of
operations and the size and number of companies will depend to a
large extent on changes in how the industry’s products are
distributed, Kerzner observes.
If the traditional agency system declines
considerably, the structure of competition in the life industry
will probably undergo a transformation.
A silver lining
Despite the interest rate environment, the
unsteady economic picture and heightened capital concerns, there is
much to like about the long-term prospects for the US life
insurance industry, not the least of which the trend toward
personal responsibility for financial security.
An overextended federal government is sending
an unmistakable signal to Americans that they must meet their own
Coupled with the equally powerful trend toward
a lower level of employer responsibility
for the security of the workforce, the next
generation of Americans already expects changes in the federal
Social Security system to occur before they retire.
Their expectation is that benefits will be
less generous. As this notion takes hold broadly, demand for
insurance and savings products will strengthen.
“Any way you look at it, we have 75m people,
who when they are all finished retiring, 20-plus years from now,
will, for the first time, be at least partly, and for many mostly
dependent on their own financial management skills,” the Life
Insurance Institute’s Weisbart says.
“The more we can get people into fixed income
products that they don’t have to manage, the better off they are,
and the better off the life industry is,” Weisbart concludes.