Lehman/A.M. Best Co. 2nd Annual Conference

"When I see that companies have their orphans on a diskette, then I know they're serious about improving their situation." Jeffrey Oster, President, Client Preservation & Marketing

Jeffrey Oster
President, Client Preservation & Marketing

William Healy
Managing Director, Client Preservation & Marketing

Speaker Warns Annuity Lapses Can Hurt Insurers

Insurers writing fixed and variable annuities face a growing problem as most of the money for buying new annuity products comes from old annuity products, according to Jeffrey Oster, president of Client Preservation and Marketing, a New York-based firm.

Oster, who spoke at the second annual Insurance Conference held in New York City on May 21 and 22, cosponsored by Lehman Bros. and A.M. Best Co., said the trend has developed over the past decade. In 1990, about 92% of money flowing into fixed and variable annuities was new to the insurance industry. Ten years later, only 35% of money came from other sources, he said. Oster's company works with insurers to help them conserve their annuity business; about $2 trillion is invested in fixed and variable annuities.

Variable annuity sales growth has been spectacular in recent years, with more than $130 billion in new sales last year. But now many companies are experiencing "shock lapses" of 50% to 90% of their business when the surrender period ends, and some are even experiencing net redemptions, Oster said.

Policyholders sell their old policies not of their own initiative, but because their agents urge them to. These intermediaries are usually employed by banks, wirehouses or brokerage firms that forbid insurers to have direct contact with the policyholder. The agents, spurred by the prospect of new commissions, are "rolling money from one insurance company to another," said Oster.

Insurers rarely have a back-end sales force in place to keep assets on the books, Oster said, and they don't pay brokers to rewrite business that has passed through its surrender period, typically five to seven years. Instead, some engage in what he called "reactive conservation," which he said is "doomed to fail." In this practice, an insurer may assign staff to contact policyholders after they have already decided to terminate the policy and have submitted forms, causing bad feelings with both the broker and the policyholder.

Oster suggested that insurers segment their databases to identify policyholders that have become "orphaned." Nearly half of all policyholders are no longer actively represented by agents, and some may have purchased annuities from channels that have been compromised, such as failed banks. "When I see that companies have their orphans on a diskette, then I know they're serious about improving their situation," he said.

Insurers can also beef up their customer relationship-management capability, forge closer links with additional strategic service providers, and provide account access on the Internet, he said. He also urged insurers to find ways to become more customer-centric and to establish and reinforce their brands so that they have "a common look and feel" wherever they appear, particularly on the Internet.

William Healy, Oster's partner at Client Preservation and Marketing, said 35% to 50% of an insurer's profit on annuity business comes after the surrender period and that actuaries often price the product as though it would be in force for 15 to 20 years. He said that under today's conditions, if he were an investor in an insurer whose main business was in annuities, he would short the stock. He said that most objections to actively trying to conserve annuity policyholders comes from a company's chief marketing officer, and that the primary responsibility to correct the situation lies with the company's chief executive officer.

"That's a serious thing you're saying, that the book value is not real," said Eric Berg, managing director of Lehman Bros. "What questions should we ask?"

Healy's reply was to ask about deferred acquisition costs.

(By Ron Panko, senior associate editor, Best's Review: pankor@ambest.com)