2007 Annuity Market Study
January 9, 2010 by Christina Pellett
Agent Media/NAFA study shows annuity producers optimistic about marketplace despite lingering challenges
The first annuity was offered in 1759 by a Pennsylvania company to Presbyterian ministers and their families.
Since then, annuities have been used as a way to help people deal with the uncertainty of how long they will live. By pooling together their money for a specified number of years, an individual can eventually annuitize these savings, providing a lifetime income stream that can be applied toward their financial and personal needs. And given the oft-cited fact that more than 70 million baby boomers are nearing retirement or in the process of retiring, there’s good reason for both current and aspiring annuity producers to be excited.
“We are the only [industry] in the world that can provide a guaranteed monthly income to people for as long as they live,” said Bill Harris, president of San Diego-based technology and publishing company W.V.H. Inc.
“That fact coupled with the new life expectancy tables and a return to needs-based selling could be the reasons why we’re looking at the biggest sales bonanza this financial services industry has ever seen.”
But how do producers feel about this market? In January, Agent Media, publisher of the Agent’s Sales Journal, teamed up with the National Association for Fixed Annuities (NAFA) to survey annuity agents on their experiences in and outlook for the annuity marketplace. The results reveal agents’ greatest challenges and their individual needs. They also reflect a great optimism on the part of agents, especially for the fixed annuity industry.
“It’s enlightening that the [05-50] notice to members has been going on for so long and the market is so old but agents are still saying the same thing,” said Sheryl Moore, president and CEO of AnnuitySpecs.com, an index product resource. “They’re hanging in there, they’re not discouraged, they’re still wanting to sell product, and that’s encouraging.”
And not only are they selling the product, says Lori Bochner, president and CMO of the national marketing organization DNA Brokerage, they are selling it for the right reasons. While nearly half of respondents say their clients have given safety and security as the No. 1 reason for purchasing annuities, 18 percent say that guaranteed income options and 16 percent say that tax benefits have tipped the scale.
“Safety and security, income options, and tax benefits are the biggest reasons to sell annuities. The reasons people are selling them are the best reasons,” says Bochner.
In addition to answering questions about their general experience in the marketplace, agents were also invited to take an annuity report card survey where they ranked individual carriers they’re contracted with in a variety of categories across the board. Those results start on page 19.
Fixed vs. variable
While agents feel optimistic about the annuity market in general, respondents give a slight edge to the future of the fixed annuity business over that of variable annuities. While 51 percent said they feel there is a substantial potential for additional income from variable annuities (of those who are licensed to offer such products), 68 percent said the same about fixed annuities.
Fixed annuities — and, more specifically, index annuities — are certainly turning heads. When asked which of three types of annuities accounted for the majority of agents’ sales in the past year — fixed, variable, and index — 58 percent said index annuities took the largest piece of the pie (over 20 percent fixed and 22 percent variable). And when asked about what to anticipate in the next year’s sales activity, responses stayed about the same — 58 percent again expect index annuities to account for the majority of their sales, compared with only 19 percent saying the same for fixed annuities and 23 percent for variables.
“If most people are looking at the market and what they’re going to do in the next year and they’re still selecting products with principal protection and downside guarantees despite the fact that they may be optimistic about the market, I find that really interesting,” said Moore. “They’re saying, ‘I’m just not willing to risk that for my clients.’ ”
Understanding the product
Given that there are so many choices, determining the right annuity depends on many factors. Client age, risk tolerance, income, and more can all dictate which annuity fits with which client. But before you can recommend any product, you must understand it.
Our respondents know this. While 31 percent of respondents said their biggest stumbling block is their client’s lack of understanding about annuities, 19 percent said it is their own understanding that gets in the way.
But while understanding the product can be difficult, said Melody Juge, managing director of the retirement income firm Life Income Management LLC, solving this problem is anything but. Agents simply need to take their time to review each annuity contract and highlight the areas they don’t understand. Then, take your questions to the marketing organization or carrier. Don’t stop until you’re satisfied. When you get a new contract, do it again.
“When you do it once, you do it thoroughly and to the point of completion and you actually understand one contract,” said Juge. “Then when you have to do it a second time it’s easy, and if you have to do it a third time, it becomes easier.”
Respondents agree it’s essential that insurers be prepared to answer their questions — 69 percent demand high-quality sales support and 60 percent say back-office support is an absolute must-have.
One agent said, “Insurers need to be certain they educate the agents to the disadvantages as well as the advantages of their products. All possible scenarios must be revealed.”
And another responded, “It is imperative to have access to all of the answers to my clients’ questions.”
Part of understanding a product comes from recognizing when it’s not suitable. Kim O’Brien, executive director of NAFA, said that while 37 percent of respondents said clients not wanting to tie up their money was the second-biggest challenge facing agents, this objection should signal that perhaps an annuity is not the right choice. It’s important to ask all clients how long they’re willing to put up their money.
If the answer is anything less than three years, you may have a problem. With a surrender period of less than five years, in fact, it will be difficult to find a suitable annuity product, said O’Brien.
If it bleeds, it leads
Another challenge felt by many agents (36 percent) is contending with the negative media attention surrounding annuities. Companies are being censured left and right for alleged deceptive sales practices, and annuity suitability is a hot topic. So how can you deal when your client says they’ve heard bad things about annuities — or the specific annuity you’re offering?
“Be informed, listen to both sides of the story, and then after listening to both sides of the story, make your own informed decision. But investigate, research, and listen,” said Harris.
Juge agrees, and adds that one of the keys to dealing with bad press is education. You should be prepared to write rebuttal letters for your clients and defend your product’s position in the marketplace.
Some products lend themselves to more bad press than others, such as index annuities. But Bochner says these products are clearly on the forefront of the industry despite this bad exposure.
“I think the main reasons people are talking negatively about them is they don’t understand what they’re used for. I think if people are trying to plug in an index annuity into a variable annuity world, it’s not a match,” said Bochner. More specifically, she said, many people today sometimes compare index annuity performance to variable-type products or even the S&P 500 when it should instead be compared with CDs and the like.
“If I were to compare my investment to the actual benchmark, to the stock market, I would want to compare the performance of my variable annuity, not my index, because my index isn’t supposed to compete with the S&P 500,” Bochner said.
Finding the clients
To those who have spent any time in the insurance industry, it’s no surprise that prospecting is the No. 1 challenge of annuity producers responding to this survey. Sixty-four percent chose “finding qualified prospects” as their biggest obstacle, making annuities much like any other insurance product in that regard.
“Finding prospects remains and always will be the agent’s biggest challenge, and that is one of the marketing organization’s biggest jobs is to help them learn how to find prospects,” said Bochner. “I don’t think it’s giving them prospects; it’s teaching them how to find qualified prospects.”
This tenet may be proven by the strikingly low number of respondents who indicated that leads are the most important service their wholesaler/marketing group currently provides for them (6 percent).
“Many, many, many, more than 6 percent (of marketing organizations) provide leads,” Bochner says.
“Of those that do, agents are not perceiving it as an important service because they’re dissatisfied with the leads — those leads programs are not a magic bullet.”
While it will always be a challenge, says Bochner, if you get the proper sales and product training and are good at it, you will master the technique. And one of the best ways to do this, said both Bochner and respondents, is through referrals. Fifty-three percent of respondents say referrals are the most effective method for marketing annuities to prospects. But while they can be effective, there are good and bad ways to pursue them, said Bochner.
“A lot of it is simple conversation, and it’s the way you deal with your existing clients,” she said. “If you deal with them right up front saying, ‘I want to make sure I’m doing everything I can for you and I hope you’ll tell other people about me,’ that’s all you need to say. Make that a part of your everyday conversation, and people will start coming your way.”
While survey respondents seem to recognize the great opportunity laid bare by the annuities industry, they also realize that training and education are important keys to their success. Proper training, in fact, can help solve many of the challenges that agents run into on a regular basis, including finding qualified prospects, contending with negative media attention, and a general lack of understanding by their clients and themselves.
“They have to take responsibility and see how important they are,” said Juge. “They have to see they’re holding an enormous responsibility in their hands — in many cases, someone’s lifetime savings. That saving comes over time with tremendous sacrifice from people. (Agents) have to have personal integrity, strong personal ethics, personal conviction, see their value, and have their own standards of operation.”
Christina Pellett is managing editor of the Agent’s Sales Journal. For more information about this and other studies, please email ASJeditor@AgentMediaCorp.com or call 800-933-9449 ext. 226.