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									                                            Life Insurance and Annuities:
                                                Is It Possible to Satisfy Your
                                             Distributors and Still Make Money?




                                              SOA Spring 2004 San Antonio Meeting
                                              Matthew Coleman – Creative Marketing Intl. Corp




                               Creative Marketing
                               •   Began as a MGA in mid 1980’s
                               •   $1.1 billion in annuity premium (’04 target);
                               •   170 employees;
                               •   Full service intermediary for Independents;
                                    –   Materials
                                    –   Training
                                    –   Licensing
                                    –   New business tracking
                                    –   Product info/updates
                                    –   Promotions/Incentive Trips
                                    –   Advertising assistance
                                    –   Actuarial Consulting (6 actuaries)
                               • Limited number of affiliated companies (about 6).




SOA 2004 San Antonio Spring Meeting - 59 OF, Life Insurance and Annuities: Is it Possible to Satisfy Your Distributors and Still Make Money?
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                               How Did We Get Here


                               • Declining profit;
                                                   proceeding from:
                               • Ratings pressure, capital requirements;
                                                   exacerbated by
                               • Low interest rates;
                                                   but dominantly created by:
                               • Competition for a national market share;
                                                   which has brought about:
                               • Commoditization of insurance products;
                                                   driven by:
                               • Atrophy of career distribution.




                                  Actuaries are uniquely qualified to
                                        answer this question!




SOA 2004 San Antonio Spring Meeting - 59 OF, Life Insurance and Annuities: Is it Possible to Satisfy Your Distributors and Still Make Money?
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                               Actuarial Competencies


                               • Seeing the parameters in insurance products.

                               • Identifying the relationships between parameters and
                                 profit (modeling).

                               • Demonstrating these relationships under various
                                 scenarios (scenario testing).




                               Actuaries’ Weaknesses


                               • Understanding the key drivers of the insurance sales
                                 process.

                               • Valuing and nurturing collaboration with sales
                                 professionals.

                               • Interpreting actuarial results into actionable information.




SOA 2004 San Antonio Spring Meeting - 59 OF, Life Insurance and Annuities: Is it Possible to Satisfy Your Distributors and Still Make Money?
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                               Internal Product Development Process

                               • Marketing fails to understand relationship between profit
                                 and product features & assumptions.

                               • Marketing produces an idea that does not meet company
                                 profit requirements.

                               • Actuarial refines idea, restoring profit but stifling product
                                 appeal.

                               • Combat ensues and a mediocre product is launched.




                               Alternative Product Development Process
                               • Marketing commits to grasping the profit requirements;
                                 Actuarial commits to explaining limitations to marketing’s
                                 satisfaction.

                               • Actuarial commits to grasping the selling environment.

                               • Actuarial elicits and grasps a detailed view of
                                 management’s profit requirements.

                               • Marketing and actuarial collaborate deeply about product
                                 design.




SOA 2004 San Antonio Spring Meeting - 59 OF, Life Insurance and Annuities: Is it Possible to Satisfy Your Distributors and Still Make Money?
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                               PD at CMIC

                               • PD fees are entirely trail based – so CMIC is devoted to
                                 product market success.

                               • Product models must pass muster with client company
                                 actuaries.

                               • CMIC actuaries are immersed in the sales & marketing
                                 culture.

                               • CMIC recommendations emphasize product
                                 differentiation and shelf space.




                               Product Differentiation Successes
                               •   Designing to carrier finances
                                    – IRR implies capital limitation
                                    – PM implies distribution limitation
                               •   Designing to carrier legal risk aversion
                                    – Product simplification
                                    – Issue age limits
                                    – Better guarantees
                                    – Renewal rates
                               •   Designing to carrier interest risk aversion
                                    – Shorter surrender charge term
                                    – MVA & lapse-support
                               •   Designing to higher production needs
                                    – Upside potential (Indexing)
                                    – Product development
                                    – Premium bonus
                                    – Higher commissions
                               •   Designing to willingness for innovation
                                    – New indexing methods
                                    – New product features
                               •   Designing for policy owner value orientation
                                    – Higher Guarantees
                                    – Lower Commissions
                               •   Designing for agent value orientation
                                    – Higher commissions & longer surrender charge term
                                    – Premium bonus
                                    – Service requirements




SOA 2004 San Antonio Spring Meeting - 59 OF, Life Insurance and Annuities: Is it Possible to Satisfy Your Distributors and Still Make Money?
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                               In Conclusion

                               • Is it possible…
                                    – Forging a successful product requires deep collaboration with both
                                      marketing and actuarial – and an overall commitment to PD.
                               • To satisfy…
                                    – Satisfaction varies between distributions and even agents. Must
                                      understand what they really need. Actuaries, get help with this!
                               • Your distributors…
                                    – Understand what drives these people: whether they are comp driven or
                                      consumer value driven – or if they really just need training.
                               • And still make money?
                                    – Identify dominant profit measure (ROI vs PM). Where specifically is
                                      management willing to take risk?
                               • YES!
                                    – Translate knowledge of distribution, market forces, company strengths
                                      and management risk preference into an appealing product that your
                                      company is uniquely positioned to offer.




SOA 2004 San Antonio Spring Meeting - 59 OF, Life Insurance and Annuities: Is it Possible to Satisfy Your Distributors and Still Make Money?
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                                                 Society of Actuaries Spring Meeting
                                                             San Antonio
                                                            June 15, 2004

                                                             Session 59 OF
                                                     Life Insurance and Annuities:
                                  Is it Possible to Satisfy Your Distributors and Still Make Money?




                                                               Anne M. Katcher
                                                                AXA Financial




                                  Is it possible to satisfy your distributors and still make
                                                            money?




                                                                        Yes?
                                                                        No?
                                                                        Maybe?


                                                                        What is the role of the product
                                                                        development actuary?




SOA 2004 San Antonio Spring Meeting - 59 OF, Life Insurance and Annuities: Is it Possible to Satisfy Your Distributors and Still Make Money?
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                                     Product Development Actuary has a balancing role
                                    between the sales and financial needs of a company.




                                                                        Profit partners:
                                                                             Distributors
                                                                             Investment providers
                                                                             Customers


                                                                        Risk Management focus


                                                                        Strong monitoring discipline




                                  First year compensation is only one piece of the puzzle
                                           in the company/distributor partnership


                                                                   What else can you offer in the value
                                                                   proposition?
                                                                       Asset based trails/charge-backs
                                                                       Agent Reinsurance/deferred
                                                                       compensation arrangements
                                                                       Stock options
                                                                   Ease of doing business – time is
                                                                   money!
                                                                      Sales and marketing support
                                                                      Underwriting support
                                                                      Problem resolution
                                                                      Customer service




SOA 2004 San Antonio Spring Meeting - 59 OF, Life Insurance and Annuities: Is it Possible to Satisfy Your Distributors and Still Make Money?
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                                  Asset Based Trails can shorten the breakeven year,
                                              and improve persistency

                                            Example: “B Share” Variable Deferred Annuity

                                      Type of                               Profit          Breakeven
                                  Compensation             IRR             Margin               Year


                                   Yr 1 – 6.5%            15.0%             3.9%                  4
                                      No trail


                                    Yr 1 – 4%             14.8%             3.3%                  1
                                   Trail - .25%/
                                 .75%(after SC)




                                  When producers are partners in mortality and persistency through
                                    an Agent Reinsurance Company or a deferred compensation
                                        arrangement, experience is often better than pricing.

                                                                         Agent Reinsurance Company
                                                                         (ARC) assumes 30% of mortality
                                                                         and persistency risk (subject to
                                                                         retention limits).
                                                                         Insurer pays ARC reinsurance
                                                                         premium for risk transferred.
                                                                         ARC receives (or is charged) an
                                                                         asset based rate based on
                                                                         actual persistency experience
                                                                         vs. a baseline assumption.




SOA 2004 San Antonio Spring Meeting - 59 OF, Life Insurance and Annuities: Is it Possible to Satisfy Your Distributors and Still Make Money?
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                                  Stock option awards for higher levels and production growth align
                                      sales with profit. Stock option program can have several
                                                              elements:

                                                                         Production award – must
                                                                         achieve minimum level of
                                                                         revenue; value of reward is
                                                                         based on some percent of
                                                                         revenues.
                                                                         Growth award – given to
                                                                         producers who reach minimum
                                                                         level of revenue and achieve a
                                                                         significant growth over the prior
                                                                         year, e.g. 20%.
                                                                         New high level award – one time
                                                                         stock option award for reaching
                                                                         new level of production.




                                   Investment Providers can offer investment quality and
                                    brand support, as well as lower fees as assets grow


                                                                   What else can they offer in the value
                                                                   proposition?
                                                                       Wholesaler Training/Support
                                                                        Event Sponsorship
                                                                        Co-branded Marketing Materials
                                                                        Industry Research & Speakers
                                                                       Fee Breakpoints
                                                                       Innovative Funding Options
                                                                       Broader Distribution




SOA 2004 San Antonio Spring Meeting - 59 OF, Life Insurance and Annuities: Is it Possible to Satisfy Your Distributors and Still Make Money?
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                                 Product designs can be structured to reward high value
                                                      customers.


                                                                   Lower asset fees and/or higher
                                                                   interest rates for larger accounts
                                                                   Lower fees/higher interest rates at
                                                                   later durations
                                                                   Availability for low or no spread loans
                                                                   at later durations
                                                                   Additional enhancements for unused
                                                                   benefits




                                    Many Single Premium Fixed Deferred Annuities have
                                    tiered interest rates for higher contributions or lower
                                                 minimum lifetime guarantees
                                     Companies A-D – Premiums of $100K and higher
                                     receive anywhere from .10%-.5% higher interest
                                     rates
                                     Company E – First year interest rate is 5.25% for
                                     1.5% lifetime minimum guaranteed interest rate of
                                     1.5% versus 5.0% for 2% lifetime minimum
                                     guarantee version
                                     Company F- First year interest rate rate is 5.5% for
                                     lifetime minimum interest rate of 1.5% versus 4.7%
                                     for 3% lifetime minimum guarantee version




SOA 2004 San Antonio Spring Meeting - 59 OF, Life Insurance and Annuities: Is it Possible to Satisfy Your Distributors and Still Make Money?
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                                 Variable Life Products generally have M&E charges that
                                      vary by duration and/or level of account value

                                Company A - 0.80% on first $250,000; 0.70% of value over
                                $250,000 and up to $2,000,000; 0.60% of value over
                                $2,000,000 for first 15 policy years. Beginning in policy year
                                16, the charge is 0.30% on the first $250,000 of account value
                                and 0.20% on amounts over $250,000.
                                Company B - 0.60% on first $25,000 of cash value; 0.30% on
                                next $225,000 of cash value; 0.10% on cash values higher
                                than $250,000 (years 1-15); 0.60% of first $25,000 of cash
                                value; 0.60% of first $25,000 of cash value; 0.10% on cash
                                values higher than $25,000 (years 16+).
                                Company C - 1.20% (years 1-15); 0.00% (years 16+)
                                Companies also have loan spreads that may exceed 1% during the
                                first 10-20 years and then reduce to 0-25 bp thereafter.




                                  Variable Annuity riders are starting to provide enhanced features and/or
                                  reduced cost if the benefit is not used. Some examples of this trend can
                                   be seen in offerings of Guaranteed Minimum Withdrawal Benefit riders:


                                     Company A – Rider charge is generally waived if no
                                     withdrawals are taken during the first 7 years.
                                     Company B - Withdrawal benefit base is increased by
                                     5% in each year in which the withdrawal benefit is
                                     deferred up to a maximum of 125% over 5 years.
                                     Company C – Maximum withdrawal benefit increases
                                     from 5% to 10% per year if no withdrawals are made
                                     in the first 3 years.




SOA 2004 San Antonio Spring Meeting - 59 OF, Life Insurance and Annuities: Is it Possible to Satisfy Your Distributors and Still Make Money?
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                                       Risk Management Focus is Essential in
                                            Today’s Volatile Marketplace
                                                                    What are all of the product
                                                                    guarantees and risk features?
                                                                        How much do they cost and are
                                                                        you charging for it?
                                                                    Are they a source of profit volatility,
                                                                    and can they be limited?
                                                                        What safety nets can you put
                                                                        into place?
                                                                    When do you breakeven?
                                                                    Have you consulted with the
                                                                    valuation and investment areas for
                                                                    guidance re possible unintended
                                                                    impacts?




                                        Robust Database is Critical to Monitor
                                                   Performance


                                                                   Early warning of variances from
                                                                   pricing assumptions
                                                                   Regular discussion with sales area
                                                                   re how product is being used
                                                                   Quick action to adjust for any
                                                                   unexpected variances
                                                                       Price change
                                                                       Remove certain features
                                                                       Update profit view and work with
                                                                       finance area to adjust reserves,
                                                                       DAC, etc.




SOA 2004 San Antonio Spring Meeting - 59 OF, Life Insurance and Annuities: Is it Possible to Satisfy Your Distributors and Still Make Money?
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                                                                 Summary


                                                                         Ongoing Communication
                                                                         amongst all players is critical
                                                                         Best balance means everyone
                                                                         “wins” with an attractive return




SOA 2004 San Antonio Spring Meeting - 59 OF, Life Insurance and Annuities: Is it Possible to Satisfy Your Distributors and Still Make Money?
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                                         Life Insurance and Annuities:
                                             Is it possible to Satisfy
                                       Distribution and Still Make Money


                                                         Company Management Perspective




                                Arnold D. Henkel, J.D., CLU, LLIF
                                AmeritasAcacia Holding Company




                                        I. Relevant Competitive Factors

                                       Increasing costs to administer complex products

                                       Increasing costs of distribution
                                         –   Marketing organizations with increasing pricing clout
                                         –   Absence of new adequate numbers of distribution being hired
                                             and retained


                                       Increasing focus on more affluent markets, and subsequent
                                       decreasing numbers of policies written and in force

                                       Reducing ROIs across the industry in Individual Insurance
                                       product pricing




SOA 2004 San Antonio Spring Meeting - 59 OF, Life Insurance & Annuities: Is it Possible to Satisfy Your Distributors and Stil Make Money?
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                                        I. Relevant Competitive Factors

                                       Increasing penetration of large Broker/Dealers into
                                       commodity end of the business

                                       Increasing impact of new features, the profitability of which
                                       is uncertain

                                       Roiled financial markets, with poor equity performance and
                                       exceedingly narrow interest rate margins

                                       Increasing costs of product development of complex
                                       products, with shorter shelf life




                                        I. Relevant Competitive Factors

                                       Increasing market share for a few large companies in some
                                       product lines, creating true scale advantages, especially in
                                       some annuity lines

                                       Increasing reliance on outsourcing of non-core
                                       competencies - more “deals” than ever

                                       Continuing consolidation, primarily at the alter of achieving
                                       “scale”

                                       Reinsurance capacity limitations for some benefits,
                                       especially benefits requiring LOCs, and the increasing LOC
                                       costs




SOA 2004 San Antonio Spring Meeting - 59 OF, Life Insurance & Annuities: Is it Possible to Satisfy Your Distributors and Stil Make Money?
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                                    II. Company Response



                                       Clarify decisions around manufacturing focus versus
                                       distribution focus, and trade offs

                                       Streamlined Product Development process, with increased
                                       focus

                                       Pick limited spots at which to compete, and sells lots of that

                                       Aggressively take out costs at all internal levels

                                       Focus as much as possible on variable cost distribution




                                    III. Streamlined Product Development Process,
                                    with Increased Focus

                                   Sense and Deliver Product Development Model

                                   Elements:
                                      Development of “Core Strategy”
                                        –   Variable Product Strategy and Fixed Product Strategy fully
                                            established
                                        –   Internal resources and outside consulting

                                      Three targeted product launch dates each year, tied to
                                      systems upgrades and releases – allows for effective look ahead
                                      planning and cost controls

                                      Sensing process established and practiced on regular basis
                                      – PITT Meetings – allows for relatively fast “speed to
                                      market” response




SOA 2004 San Antonio Spring Meeting - 59 OF, Life Insurance & Annuities: Is it Possible to Satisfy Your Distributors and Stil Make Money?
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                                    III. Streamlined Focus and Process in Product
                                    Development

                                   Sense and Deliver Product Development Model


                                      Rapid assessment and preliminary approval process

                                      Business case and product design and pricing process well
                                      established

                                      Established launch teams for both internal and external
                                      launch activities




                                    IV. Pick limited spots at which to compete, and
                                    sell lots of that


                                       Limited product offerings – primarily focused on core VUL
                                       and UL products - annuities as a supportive secondary
                                       strategy in limited market segments

                                       Focus pricing on key cells in which we want to compete

                                       Match pricing cells to marketing strategy, driving to needs of
                                       Chosen markets/chosen customers

                                       Stay away from recognized “commodity offerings” as much
                                       as possible




SOA 2004 San Antonio Spring Meeting - 59 OF, Life Insurance & Annuities: Is it Possible to Satisfy Your Distributors and Stil Make Money?
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                                    IV. Pick limited spots at which to compete, and
                                    sell lots of that
                                     Focus on higher margin products – to the extent any such
                                     exist

                                     Focus Distribution, sales and marketing efforts towards those
                                     markets where we can compete and make money

                                     Identify and attack niches where products are not commodized
                                     and where we can attract Distribution

                                     Consider taking additional risks, where manageable

                                     Creating a focused product “risk management” function




                                    V. Aggressively take out costs
                                       Used Industry Benchmarking and Pricing Deviations for
                                       costs at all levels of the organization

                                       Take out costs to achieve benchmark results in all areas of
                                       Division
                                         –   Multi-year commitment of senior management to take out and
                                             manage costs
                                         –   Mid term objective to live within or close to pricing assumptions


                                       Focus as much as possible on variable cost distribution that
                                       allows for performance based results

                                       Manage to the “right cost/right result” balance




SOA 2004 San Antonio Spring Meeting - 59 OF, Life Insurance & Annuities: Is it Possible to Satisfy Your Distributors and Stil Make Money?
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                          VI. Focus as much as possible on variable cost distribution



                                       Multiple Distribution system strategy
                                         –   Different products fit different distribution systems
                                         –   However, to the extent possible, use variations of the same product
                                             for different distribution systems. Key factor is different uses of the
                                             Total Distribution Allowance.
                                         –   Utilizing Career, PPGA, Independent Broker/Dealer, some IMOs,
                                             Direct to Consumer and Worksite


                                       All models are either variable cost, or moving aggressively
                                       towards variable cost




SOA 2004 San Antonio Spring Meeting - 59 OF, Life Insurance & Annuities: Is it Possible to Satisfy Your Distributors and Stil Make Money?
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