By Cyril Tuohy
With the high-net-worth market now reaching the saturation point, advisors are better off tapping the fourth and third income quintiles – the middle market – if they intend to stay in the business over the long term, a new report on insurance trends has found.
Industry sales in direct premium have remained flat, even if premium per policy and the face value per policy have gone up, the report said.
To be sure, the life-annuity industry still has opportunities in the high-net-worth market, particularly for advisors who specialize. But future opportunities for the bulk of the industry’s financial advisors lies with the third and fourth income quintiles, said Mary Pat Campbell, a consultant with Conning.
For too long, advisors have been chasing the same top-quintile fragment. That fragment is getting smaller as baby boomers move further into retirement. For carriers as well, chasing the high-net-worth segment is “going to be a growth strategy,” Campbell said.
Carriers, she said, “have to broaden their appeal.”
The sooner advisors can distance themselves from the boomer -centricity that has governed the sale of life insurance, the better off they will be in the long run. Baby boomers aren’t going to live forever, and as a group, it won’t be long before it begins to shrink as boomers die.
“This is not a new message,” Campbell said in an interview with InsuranceNewsNet. “People have to go after the middle market and after new markets.”
Campbell, the lead researcher for the annual report titled “Life-Annuity Consumer Market,” said any long-term opportunity for advisors to grow life insurance sales will come from the middle market.
“To grow the life insurance market of the future, insurers need to penetrate this market,” Campbell said.
Fourth quintile households have annual income of between $62,000 and $102,000. Third quintile households have annual income of between $39,000 and $62,000.
These two market segments are underinsured, the report found, and life insurance isn’t a spending priority for them.
“This is borne out not only by consumer attitude surveys, but also when looking at how much households actually spend on life insurance compared to other financial protection products,” Campbell wrote.
The fourth quintile, which is less financially constrained than the third quintile, provides advisors with more opportunity. Households in this quintile are relatively easy to penetrate, the Conning report also said.
Financial advisors gravitate toward high net worth families because these households have more to invest, demand broader insurance protection needs and ancillary long-term planning, and generate more revenue for the advisor.
Another reason advisors are better off chasing middle market buyers is because of the opportunities offered by what industry experts call the “protection gap.”
The protection gap, or the amount of capital that would be needed to replace a portion of the primary breadwinner’s income for the period prior to normal retirement in the event of early death, remains “persistently high,” Campbell said.
Measuring the gap, a bearing of how much people are uninsured or underinsured, offers insight into the economic opportunity available to life insurance carriers as well.
From year-end 2005 to year-end 2013, in-force amounts of life insurance increased 36 percent while the total protection gap increased 42 percent. The result is a protection gap for 2014 of about 50 percent of the in-force individual life insurance business in the U.S.
“This protection gap indicates the extent that the market is underpenetrated from the point of view of insurers: if they could close the gap for U.S. consumers, in-force face value would increase by 50 percent,” the report said. “From the insurer point of view, there is a great deal of opportunity that is not being fully realized.”
To appreciate the magnitude of the opportunity for carriers afforded by the gap, consider this statistic: For 2014, the gap across all demographic segments in the U.S. is estimated to be as high as $15.8 trillion, Conning estimates.
Campbell said that in the individual life insurance market, carriers have altered their approach and are beginning to offer simpler life insurance products.
“Variable life has cratered since the crisis,” she said. “Whole life has really been picking up, and whole life has a very simple design.”
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at firstname.lastname@example.org.
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