By Linda Koco
Insurance agents doing business in towns across the country may assume that international insurance developments don’t have much impact on everyday work. But forces are afoot that suggest they could be way off the mark.
In fact, “as bad as agents think things may be now (with cuts in various annuity areas), it could get worse,” says Stan Haithcock, an annuity specialist based in Ponte Vedra Beach, Fla., who routinely goes by his business name, Stan The Annuity Man.
Advisors aren’t talking much about globalization, Haithcock allows. But they should be, because the increasingly international profile of the insurance business is likely to impact the U.S. annuity market. For instance, the Solvency II Directive in the European Union will likely “trickle over here,” he says.
Haithcock made the comments in an interview just a day after a meeting in Washington where two representatives of McKinsey & Co., the consulting firm, presented eye-popping data about changes in the international insurance scene.
The McKinsey presentation was part of a meeting on international issues held at the Federal Advisory Committee on Insurance (FACI), which also ran simultaneously via webcast. The committee is charged with providing input to Treasury’s Federal Insurance Office, which was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act. FACI members include major insurance industry participants and academics, consumer advocates and state regulators.
Between 2006 and 2011, the global life and annuity market and the global property and casualty market each showed 2 percent overall growth in premiums, the McKinsey data show.
But during that time, the global insurance markets became increasingly driven by Asia-Pacific and Latin America, said Mike Pritula, a director from McKinsey’s New York office.
In fact, between 2008 and 2011, life and annuity premiums actually shrank in North America, Western Europe and Japan, said Frederic “Fritz” Nauck, a director in McKinsey’s Charlotte, N.C., office. Meanwhile, Emerging Asia (excluding Japan) and Latin America together drove 85 percent of the international life insurance industry’s growth, Nauck said.
That marks a “stark reversal” from the 2000 to 2007 period, when North America and Western Europe drove three-fourths of life insurance premium growth, Nauck pointed out.
Not incidentally, the big shifts in life insurance premiums parallel changes that occurred on the property/casualty side of the industry during the same period, the McKinsey consultants said, with North America and Western Europe shrinking and Asia and Latin American growing.
Looking ahead, McKinsey is projecting this trend will likely continue to 2020. Nauck showed a slide projecting Asia (excluding Japan) and Latin America nearly doubling their market share in that period--from roughly 20 percent in 2010 to nearly 40 percent 2020.
What about the United States? The U.S. position in the global insurance markets will continue to shrink, Nauck predicted. In addition, he said, the global insurance market is evolving in such a way that “the large international carriers are becoming more important, increasing their share of the overall global market.” The trend is likely to continue, he added.
Impact on U.S. annuities
The growth of the international carriers will affect the U.S. annuity business, reiterates Haithcock, pointing out that that several of those carriers also operate in the U.S.
A key impact will likely come from implementation of Solvency II Directive, he predicts. Scheduled for implementation in 2013, the directive aims to harmonize European insurance regulation and it is expected to affect capital levels that insurance companies will be required to hold.
“As a result, the European insurance companies will need more money on hand to back up their guarantees,” Haithcock says.That will likely “be reflected here (in the U.S.), even though it is not a law (here),” he continues.
If that happens, advisors could see annuities paying lower commissions, having reduced benefits, offering fewer or more limited riders, and using reduced actuarial payouts on the back end, Haithcock says.
The continuing low interest rates on 10-year Treasury bonds and the hedges that carriers buy to support annuity guarantees will play a role, too, he predicts. The global companies doing business here are affected by those factors as are domestic companies, he indicates.
The record low for 10-year Treasuries was 1.43 percent on July 25, 2011, according tothe Department of Treasury. As of August 7, the rate was up a bit, to nearly 1.66 percent, but that’s still way below the long term average in the range of 6.6 percent.
The decline in Treasury rates in recent years has already played a key role in reductions in annuity commissions, guaranteed rates on riders, and actuarial payouts on the back-end that advisors have already seen. Should that rate drop even lower, things could get even worse, Haithcock predicts.
No one knows for sure what will happen, he allows. For instance, things could get better in the short term, if interest the Treasury rates were to rise. That would help by increasing the annuity guarantees.
“But if that happens, equities will go down, so returns on accumulation values in annuities would likely be affected,” Haithcock says. He points to not only variable annuities but also fixed indexed annuities that key their interest crediting to growth in an equity index such as the S&P 500.
“In addition, as soon as people see that they can get more money from interest than equities,” he says, “they would flock to interest-paying products. In the annuity market, that means straight-rate products like multi-year guaranteed annuities. We saw that happen five years ago, when rates were acceptable and when markets were volatile.”
What to do
Annuity advisors need to be thinking about those possibilities as they counsel clients today, he says. Here are a few of his suggestions:
• Sell the best contractual guarantee, not hypotheticals. Hypothetical annuity presentations at the “bad chicken seminars” will go away, because consumers will get smart, predicts Haithcock. “They will ask, what does that mean?” He believes the customer demand will be for products where everything is guaranteed.
• Show the realities. People who are at retirement need to find a way to create an income stream right now, he says. “They can’t wait.” So provide them with solutions that have guarantees that they can rely upon, regardless of what happens in the future. “You can’t straddle that line by putting a dream into their heads that might not happen.”
• Point out that annuities are contracts. Use them to put in a foundation for retirement income and lifestyle, one that is guaranteed even if interest rates and equities markets keep shifting.
• Inform the customer. Let retirement-minded customers know that there are transfer-of-risk strategies they can use that make sense, Haithcock suggests. As examples, he points to the “stacking” or laddering of immediate annuities to build an income stream, perhaps in combination with longevity annuities.
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