The 2009 Industry Outlook: Experts’ Predictions on Market Performance in the New Year
January 9, 2010 by Sheryl J. Moore and others
- By Staff Writer
Kim O’Brien » Executive director, National Association for Fixed Annuities
In times of economic uncertainty and economic downturn, Americans typically turn to protection and security. They seek to insure their money and protect their savings. During these times, fixed insured annuity sales (including declared rate and indexed) traditionally go up and risk-based securities products (variable annuities, mutual funds, etc) typically decline in sales.
This is demonstrated again when you see sales from the first half of 2008 compared with the first half of 2007. Third quarter results, while not yet officially out (as of press time), are trending in a similar pattern, but with even more sales for fixed annuities as a result of the Sept. 21, 2008 market implosion.
We saw this trend in the late 1980s and again in the earlier part of this decade.
This is another reason, of many, that NAFA opposes the SEC’s proposed Rule 151A because historically, broker-dealers (who, under the proposed rule, would be the only channel “anointed” to sell insured fixed annuities) have not recommended fixed annuities to their customers despite having fixed annuities as product offerings. There is no reason to believe that will change when they are the only channel to sell these products. NAFA believes that consumers seeking to find the insured guarantees of principal and earned interest protection will not go to a broker-dealer to buy them, just as consumers would not go to a broker-dealer for their homeowners’ or life insurance.
Laurence P. Greenberg » President and CEO, Jefferson National
When it comes to financial advisors, their clients, and annuities, we see five key issues that will make the news in 2009. First and foremost, accumulation continues to be critical, especially in light of the market downturn. In October 2008, the Congressional Budget Office estimated that total private retirement plan values — including 401(k) and IRA accounts — dropped by $2 trillion, or 20 percent, in the 15 months ending Sept. 30.
Second, tax deferral is more important than ever, as taxes are likely to increase once recovery is in place and the bills for government intervention begin to get paid. Third, we will see a growing use of alternate investment strategies and non-correlated assets as a means of achieving greater diversification within annuities. Fourth, we anticipate a growth of managed accounts as a way for intermediaries to deliver fee-based advice in a structured program. And last, but certainly not least, we will see an even greater surge in the growth of fee-based advisory services to manage it all. This year, according to recent studies, registered investment advisors (RIAs) began bringing in more assets than wirehouses. The Registered Investment Advisor Survey, published in October by Citi Investment Research, states that RIAs who use Schwab, Fidelity, and TD Ameritrade as custodians collectively brought in $215 billion of new client assets compared with just $168 billion from the combined retail brokerage forces of Merrill Lynch, Smith Barney, Morgan Stanley and UBS from Jan. 1, 2007 to June 30, 2008.
Bob Taylor » President, Council for Disability Awareness
Obviously, 2009 is going to be a tough year for all businesses. So much is dependent upon the economy, but I do think that a couple of things are really changing. I don’t think I ever recall a time when we put such a high value on a person’s ability to earn a living as we do today. If you think about it, people don’t have savings like they used to; people don’t have access to assets like they used to (such as equity in their home, retirement savings, stock portfolios, etc.). People are much, much more aware of their income today, and that’s starting to change people’s attitudes about looking at the things that can negatively impact their ability to earn a living. That’s a good sign for disability income insurance. I think people are recognizing more and more today that disability not only impacts their ability to manage day-to-day expenses, but also their long-term financial security and their ability to continue to handle medical expenses in times of crisis.
If you look around, there seems to be a growing interest and discussion in the media of the impact disability can have on your financial security. I’m cautiously optimistic about the industry going forward because the notion of income protection is becoming more and more important to individual workers and families.
I also see a growing interest in healthy lifestyles and the correlation between a beginning dialogue of living a healthy lifestyle and how that impacts a person’s ability to maintain their earning capacity in the future. We see that a lot in the health care arena, but it needs to be extended into also managing absenteeism and your ability to continue to work. More and more people are beginning to recognize that their most valuable asset is their ability to earn a living – not the equity in their home, not even their 401(k). It’s the ability to generate income, and I think that bodes well for the disability industry.
Robelynn H. Abadie » President, Association for Health Insurance Advisors (AHIA)
The health care reform challenge is to bring uninsured Americans into the system and reduce the high cost of health care for everyone. Of course, these two challenges are related, and one cannot be solved without tackling the other. AHIA believes that the industry and the state and federal governments, as well as consumers, need to bear the responsibility of addressing health care costs. Solving the underlying problem – preventing chronic disease — needs to be the starting point of reform efforts. According to the Centers for Disease Control and Prevention (CDC), chronic disease accounts for about 75 percent of the nation’s aggregate health care spending – or about $5,300 per person. AHIA’s goal for 2009 is to work collaboratively with all parties involved to ensure the high quality and accessibility of health care that we expect as American consumers while protecting the agent/advisors’ role in that process. It is certainly proven that the system is better served as a result of our role in guiding consumers through the intricacies of health insurance coverage.
Janet Trautwein » CEO, National Association of Health Underwriters
When the 111th Congress convenes in January 2009, the first health care item on their agenda will likely be the reauthorization of the State Children’s Health Insurance Program (SCHIP). With the SCHIP reauthorization, NAHU’s primary goal has been to make it easier for states to operate premium assistance programs. Many families with children who qualify for SCHIP are working families with employer-based health insurance options.
NAHU would like to see it made easier for states to be able to use SCHIP dollars to subsidize employer-based coverage where available so that more families can obtain private health insurance coverage through the same source.
NAHU is also very carefully watching the various federal proposals for broad-scale health reform. A comprehensive reform effort may move forward rather quickly with Sen. Barack Obama as our next president and the Democrats in Congress having increased their majority. Such a reform bill could be attached to the SCHIP reauthorization effort or move as a standalone measure.
One bill that could move quickly under such a scenario is Sen. Ron Wyden’s (D-OR) Healthy Americans Act. This measure includes both an individual and an employer mandate. All Americans would have to purchase coverage through regional purchasing pools, and government-run “health help agencies” would handle all enrollment and purchasing and claims assistance. There are several reasons why Wyden’s bill could move quickly. First, it has bipartisan support and co-sponsors, since some conservative Republicans like its replacement of public programs with “private” coverage and its focus on individual policies rather than coverage provided by the employer. Also, because of its elimination of Medicaid and SCHIP and its required employer contributions, the bill has received a “zero” score from the Congressional Budget Office, meaning that it is not estimated to cost the federal government any additional money.
Gary Dworkin » 2009 chairman of the board, National Association of Independent Life Brokerage Agencies (NAILBA)
With a new White House administration with new priorities, I anticipate the coming year will be different from any we’ve seen in recent history.
Our industry is going to face certain challenges within the legislative and regulatory arena that could have a significant impact on the way that we conduct business. With the focus on regulation of the financial services industry, an optional federal charter (OFC) for insurance may very well become a reality in 2009. An OFC would allow all individuals access to the same products across the country, as well as provide equal protection for small businesses and sole proprietors.
We expect 2009 and 2010 to be very active years on the tax reform front. The new administration will be looking for ways to finance the recent federal financial bailout packages. Our industry is one of the only ones left with a tax-advantaged product, making us a prime target. It is possible that inside buildup may come under attack or that the administration may try to limit the amount of tax-free death benefits that an individual can have on their life.
As an industry, we must return to the values on which this industry was built. We offer base protection for families and businesses through products that are affordable and can be relied upon. We must encourage the manufacture and deliverability of the best alternative products, as well as fight to protect the security that our products offer.
Marvin H. Feldman » President and CEO, LIFE Foundation
The recent economic turmoil has many Americans on edge. They have been shaken by the failure of leading financial institutions. They have watched their investments and retirement accounts shrink, and the value of their homes fall.
I think that with these extraordinary circumstances comes the perfect time for consumers to take a closer look at what our industry has to offer: security. In 2009, I expect more people will turn to life insurance. History shows that those looking for safe havens turn to life insurance during economic downturns for guarantees they can’t get from the stock market and other investments. But some people, given the uncertainty, may resist taking any action. That’s when the role of the insurance professional becomes so important. They must convince Americans to make appropriate financial decisions to protect their wealth and safeguard their families’ financial futures.
Larry Simon » President and CEO, Life Settlement Solutions Inc.
In 2009, we expect to see the capital markets stabilize, as well as continuing impacts from the 2008 valuation basic table (VBT) and life expectancy underwriting changes. We also expect more states to pass life settlement regulations, raising interest among senior clients and increasing entry into this market by institutional investors.
Seniors will seek additional sources to fund retirement income due to the severe declines in retirement accounts and estate values that have reduced expected estate tax liabilities. This will increase the number of life settlement transactions and continue to fuel industry growth, as well as industry expansion into smaller-face-value policies, additional products, and crossing international boundaries. These factors will provide greater benefits to a larger portion of consumers and financial professionals, as well as support government needs of increased tax revenues and institutional investors’ needs for quality assets with competitive returns in non-correlated, alternative asset classes.
Financial market upheaval resulted in reduced asset values, increased risk and a retrenchment to quality assets. Institutional investors also revised risk and reward requirements, increasing required rates of return for given asset classes. This, coupled with the changes in life expectancy underwriting, caused several disruptions to capital funding in the marketplace and a general decline in the purchase prices of life settlement assets. As the markets stabilize, increased capital supply in 2009 will offset these downward pressures on settlement pricing as more investment capital re-enters the marketplace.
Many senior clients experienced significant losses in retirement account assets and now need additional sources of revenue to make up for shortfalls, including a decreased focus on keeping current insurance in force to fund goals like estate planning. Financial professionals can therefore expect more interest in life settlements from senior clients and more products to enter the marketplace as seniors look for resources to make up for financial changes.
Regulatory matters will also continue to be an important focus in 2009. The push for stronger regulations is expected to continue, as more states enact life settlement regulations and strengthen guidelines that curtail stranger originated life insurance (STOLI) practices. Most states are expected to continue the trend seen in 2008 and base legislation on the model act set forth by NCOIL that defines and addresses STOLI without curtailing the consumers’ rights to access the life settlement market.
M. Bryan Freeman » President, Habersham Funding LLC
As more consumers learn about life settlements, the secondary market for life insurance continues to grow and thrive, and this has been a boon to savvy insurance and financial advisors and their qualifying clients. Even so, just as it affects other sectors, the challenging economic climate is affecting the life settlement market.
For one, prices to the seller – that is, the price received by the seller of a policy – have moderated to appropriate levels. Simply put, there are more policies for sale than there are buyers in the market, so there is a correction in pricing that would have happened eventually, but was accelerated by the recession.
Another factor in this natural-but-accelerated market correction is a recalibration of life expectancy (LE) projections – a major factor in life settlement transactions – by one of the major life expectancy underwriters, which recently announced that it is raising all LE projections by 20 to 30 percent. Another LE house has announced that it will follow suit, and it is rumored that it will raise all of its life expectancy projections by perhaps as much as 10 percent. Higher LE projections mean lower life settlement payouts.
» For more about recent changes in life expectancy projections and what they mean for your business, visit www.AgentsSalesJournal.com/LifeExpectancy
These changes in life expectancy projection knowledge and philosophy are a result of the industry’s cumulative experience. The modern life settlement industry is still young, with its 20th anniversary in 2009. With the knowledge that experience brings, new understanding means that the methods to value policies has evolved over time.
This knowledge base has rapidly become impressive. In fact, it is rumored that life insurance companies themselves now buy data, along with investment houses – in aggregate form, of course – from major life settlement players.
Finally, the economic downturn is not all bad for the life settlement industry. In fact, it may eventually be quite good. As more (institutional) investors look for value outside of traditional financial markets, they are discovering the appeal of non-correlated life settlement investments; that is, investments not tied directly to the fluctuating stock market. Thus, we’ll see more dollars with which to purchase policies flowing into the market, even though this may be a gradual progression through 2009 and beyond.
Long Term Care Insurance
Joseph Catalano » Senior vice president of long term care insurance distribution,
John Hancock Life Insurance Co.
Since last fall, our industry has experienced some of the most turbulent markets many of us have ever witnessed. While undoubtedly this situation has provided the long term care insurance (LTCI) market with serious challenges, I would argue that it has offered agents and brokers an unprecedented opportunity to demonstrate the value of their product.
As our population ages, the growing need for care will not slow just because the markets are volatile. The cost of care, inching ever forward, is significant, no matter where care is delivered. While LTCI is valuable to policyholders in a strong economy, it is even more valuable when times are tough. At those times, not only does LTCI help provide coverage for the cost of care (as well as offering the ability to receive care in the manner desired and relieve the caregiving burden of family members), it helps to protect a policyholder from having to sell investments, potentially at a loss. Maybe at no other time in recent history will the consumer embrace the protection that a risk-sharing product like LTCI provides.
The client objection of “I will self-insure” can now be more effectively countered.
Having seen the amount of reassurance and help our clients have needed during this recent financial crisis, I believe they more fully understand the importance of the role that protection products such as LTCI play in helping to prepare for a secure financial future.
What they may not have is a lot of money. We, as carriers and distributors, need to continue to develop products and design plans that are affordable. Just by considering simpler plans, shorter benefit periods, higher benefit amounts, and an inflation option based on the consumer price index, this protection is more accessible to a great majority of consumers.
Jesse Slome » Executive director, American Association for Long-Term Care Insurance
Sales of new long term care insurance policies will continue to grow in 2009, though I would expect policies purchased to look significantly different when compared to those purchased two or three years ago. Agents and brokers who market long term care insurance products can expect more receptive buyers in their mid-to-late 50s thanks to focused media attention on when to begin the LTC planning process. Expect consumers to be more aware of policy features that make financial sense. Baby boomers will find the “life-stage” products especially attractive. The anticipated open enrollment for the federal government employee plan (the largest LTCI plan in the nation) and continued roll-out of state partnership plans will provide excellent opportunities for producers to market long term care planning to their own clients and prospects. From an industry standpoint, the entry (or re-entry) of leading insurers and the continued expansion of some smaller, solid insurers is a continuing positive sign for the industry. Two areas in which we expect to see significant sales growth include multi-life long term care insurance and asset-based products. Life and annuity policies that offer long term care benefits have historically been sold predominantly by financial planners and investment advisors. We anticipate sales by traditional insurance producers will increase. Some of this will be fueled by the entry of new providers.
Variable and Index Products
Sheryl Moore » President and CEO, AnnuitySpecs.com
The index annuity market will continue to experience increases over the next year as consumers search for products with principal protection during a tumultuous market. Although the SEC’s decision on its proposed Rule 151A will be anxiously anticipated, sales will not hinge on the outcome. Several carriers with nominal sales will exit the market, but sales levels will not decline as a direct result of 151A. Product development will continue to focus on guaranteed lifetime withdrawal benefits as opposed to new products. This will enable agents to help their boomer clients move from an accumulation stage to an income stage. New product roll-outs will offer higher bonuses with recapture charges or vesting schedules. This will give consumers the opportunity to share some of the risk of a bonus product while allowing insurance carriers to keep surrender charges lower.
The variable annuity (VA) market, on the other hand, will likely experience a reduction in sales due to market volatility. As an alternative, consumers will search for products with downside guarantees to protect their investments. In turn, VA carriers will respond with increased competitiveness in guaranteed living benefit (GLB) rider development. This will assist agents in offering their clients principal protection during a time of uncertainty in the market. VA living benefits will continue to face increased scrutiny in regards to reserving requirements and product pricing. This may translate to increased costs on some carriers’GLB riders.
Cathy Weatherford » President and CEO, NAVA
2009 will likely continue to present significant financial challenges to consumers. The variable annuity industry is uniquely positioned to help them meet and overcome those challenges.
Consumer confidence in the financial markets was severely tested in 2008. It will have to be rebuilt in the coming year. Variable annuities are long-term investments. They offer features and guarantees to help consumers ride out the fluctuations in the equity market, where the highest returns historically have been. Variable annuities help investors diversify their assets by offering a wide range of investment options, as well as professional management and automatic portfolio rebalancing programs to maintain proper diversification. The importance of diversification as a tool to help minimize risk was amply demonstrated by the market decline in 2008.
In addition, we believe there will be keen interest in the principal protections provided by variable annuity death and living benefits. These benefits give people the confidence to stay invested in the market by offering the upside of potential equity gains with protection against further market declines. Customer election rates of guaranteed living benefits have steadily increased over the past few years and through the second quarter of 2008. We expect this pattern to continue in 2009.
The ability of variable annuities to provide withdrawal and payout options in retirement that are guaranteed to last for life will be of great value to the millions of baby boomers who will be reaching retirement age in 2009. With increasing life expectancies, the decline in the availability of defined benefit pensions, and concerns over Social Security, more Americans will be turning to variable annuities to help them address their fears of outliving their assets or being unable to maintain their desired standard of living in retirement.
Finally, in light of the financial crises experienced in 2008, all segments of the financial services industry should expect to see changes next year in regulatory oversight by both federal and state regulators.