The annuity landscape. Five areas to watch in 2016

Transcription

1 The annuity landscape: five areas to watch in 2016

2 The annuity landscape Five areas to watch in The annuity landscape: five areas to watch in 2016

3 Our editor and our authors Christopher Raham Editor and Principal Ernst & Young LLP Daniel Bender Executive Director Ernst & Young LLP Doug French Principal Ernst & Young LLP Ranjit Jaswal Principal Ernst & Young LLP Kevin Kang Senior Ernst & Young LLP Gerry Murtagh Assistant Director Ernst & Young LLP Brad Rokosh Manager Ernst & Young LLP Alpesh Sanghani Manager Ernst & Young LLP Justin Singer Senior Manager Ernst & Young LLP Ben Yahr Senior Manager Ernst & Young LLP The annuity landscape: five areas to watch in

4 Five areas to watch in 2016 The annuity la 12 Five steps to boosting top-line revenue with deferred income annuities by Alpesh Sanghani Page 8 Top five concerns for insurance executives: results from the 2015 Life and Annuity Executive Survey by Doug French Page 12 3 The annuity landscape: five areas to watch in 2016

5 ndscape 34What s next for Redefining the future of long-term care: four opportunities for insurers by Brad Rokosh and Kevin Kang Page 16 annuities: top five trends shaping the market by Gerry Murtagh Page 20 5U.S. Department of Labor s proposed fiduciary rule: three outstanding questions by Ben Yahr, Justin Singer, Daniel Bender and Ranjit Jaswal Page 24 The annuity landscape: five areas to watch in

6 Letter from the editor Christopher Raham Editor and Principal Welcome to the fourth edition of our Annuity Market Landscape review series. I m pleased to present the newest edition of articles written by my colleagues at EY, who focus on helping our clients understand the changing landscape of the insurance and annuity marketplace on a daily basis, and follow a mission to build a better working world for customers and market stakeholders. Similar to previous years, the one thing that continues to be true is the state of continuous change our industry is experiencing. As the global economy struggles to gain momentum, life and annuity executives are forced to look for new ways to boost revenue and interact with their customers. As our population ages, it not only means more opportunities to help customers with their retirement challenges, but it also ushers in an entirely new breed of consumers, one that brings with them very different expectations when it comes to the types of interactions they desire to engage in, and a new way of buying products from our industry. At the same time, the proposed DOL fiduciary rule will drive radical changes in distribution. So while change can be frightening, it can also provide us with an opportunity to innovate. Companies that are willing to experiment with their products and distribution channels can pave the way to new revenues. I hope that you find the perspectives as interesting and as engaging as I did when working with my colleagues to assemble them. I know that they would be pleased to discuss perspectives and share viewpoints with our readers. And if you have input for our next series, please don t hesitate to let us know if there are questions you might like us to tackle! The better the question. The better the answer. The better the world works. 5 The annuity landscape: five areas to watch in 2016

7 The annuity landscape: five areas to watch in

8 7 The annuity landscape: five areas to watch in 2016

9 8 1 F ive step s to b oosting top - l ine revenue w ith def erred incom e annuities b y Al p esh S ang h ani, E rnst & Y oung L L P I ncreased l ong evity. Th e im m inent retirem ent of th e b ab y b oom er g eneration. Th e rise of defined contribution plans and fall of defined benefit and traditional pension plans. Low yiel ds on traditional incom e- p roducing op tions, such as b onds. P otential vol atil ity in financial markets. The prospect of changes in Social Security benefits. The confluence of these forces is com p l icating retirem ent p l anning f or m il l ions of Am ericans. And it is p resenting b oth ch al l eng es and op p ortunities f or th e individual annuity m ark et. C ertainl y, m ark et and dem og rap h ic trends underscore th e stark real ity th at m ore p eop l e need to g enerate m ore g uaranteed incom e across l ong er- term retirem ent h oriz ons. Th at incl udes th e socal l ed m iddl e- m ark et seg m ent of retirees w h o h ave rel ativel y l im ited investab l e assets b ut stil l need to g enerate sustainab l e incom e f or 2 0 years or m ore. F or th e l if e insurance and annuity industry g eneral l y and ag ents and b rok ers in p articul ar, th is is very m uch a g ood new s/ b ad new s scenario. O n one h and, th ere is a cl ear and exp anding need f or p roducts th at del iver g uaranteed incom e. Th ere are al so new m ark et seg m ents to eng ag e as an ag ing p op ul ation f aces retirem ent. Th is is g ood new s g iven th e urg ent need f or top - l ine g row th. O n th e oth er h and, th e m aturity of th e variab l e annuity m ark et m eans m any com p anies and advisors are seek ing a new g row th eng ine. W h il e variab l e annuities m ay stil l b e attractive to consum ers seek ing to g enerate retirem ent incom e, f actors such as p roduct com p l exity and excess f eatures are contrib uting to a sh if t tow ard new and sim p l er p roducts. D e f e r r e d i n c o m e o p p o r t u n i e m e r g e a s a p o t e n t i a l g r o w e n g i n e O ne p roduct th at of f ers such g row th p otential is th e def erred incom e annuity ( D I A). D I As w ork sim il arl y to im m ediateincom e annuities ( w h ich h ave b een around f or decades), th oug h p aym ent b eg ins at a l ater date. F undam ental l y, th ey al l ow individual s to transf er l ong evity and investm ent risk to insurers. O f ten reg arded as a p ension al ternative, D I As h el p to p rovide p ol icyh ol ders w ith p eace of m ind and g uaranteed incom e th roug h th eir retirem ent years. The annuity landscape: five areas to watch in 2016

10 W F i v e s t e p s t o b o o s t i n g t o p - l i n e r e v e n u e w i t h d e f e r r e d i n c o m e a n n u i t i e s 1 S ince D I A p roducts w ere introduced a f ew years ag o, p rem ium s h ave g row n f rom $ m il l ion in to ap p roxim atel y $ 2. 7 b il l ion in D esp ite th ese dram atic g ains, D I As rem ain a rel ativel y sm al l sl ice of th e annuity m ark et. C urrentl y, m utual com p anies account f or th e l arg est sh are of th e D I A m ark et, th oug h m ore com p anies are entering th e m ark et. Th is sh oul d resul t in increased com p etition f or insurers and m ore ch oices f or consum ers. To b etter understand th e g row th op p ortunity f or th ose interested in th is seg m ent of th e m ark et, E Y conducted a series of interview s w ith insurers, distrib utors and oth er stak eh ol ders in th e annuity industry. O ur research highlighted five key considerations for insurers and advisors seek ing to increase D I A sal es. eco ni e the e ternal actors that shape the ar et h il e th e g row th outl ook f or D I As is p ositive overal l, it is im p ortant to rem em b er h ow external f actors m ay af f ect th e m ark et. Tak e ch ang es to interest rates, w h ich h ave b een sh ow n to af f ect th e sal es of D I As. Th e l ow interest rates th at h ave b een p reval ent f or so l ong are l ik el y to rise in th e f uture, as th e F ederal R eserve starts to increase th em earl y next year. Th is w il l p rovide g reater incom e p er dol l ar of p rem ium, increasing th eir ap p eal to consum ers w h o com p arison sh op. S im il arl y, vol atil ity in eq uity m ark ets m ak es D I As, w ith th eir stab l e and p redictab l e incom e stream s, l ook m ore attractive to individual s and advisors. R eg ul atory devel op m ents al so sh ap e th e m ark et f or D I As. F or instance, l ast year, th e I nternal R evenue S ervice ( I R S ) f orm al iz ed a new tax treatm ent f or th is f orm of l ong evity insurance. U nder th is rul e, individual s can p l ace 2 5 % of th eir retirem ent assets, up to $ 1 2 5, 0 0 0, into a D I A, w h ich is sh iel ded f rom m inim um distrib ution req uirem ents at ag e 7 0 ½. I ndividual s investing into D I As m ust b eg in to receive distrib utions b y ag e 8 5. O th er rel evant reg ul atory actions incl ude g uidance p rovided b y th e U. S. D ep artm ent of th e Treasury on th e use of D I As w ith in targ et- date f unds th at are p art of retirem ent p l ans. 3 C h ang es in any or al l of th ese g uidel ines m ay h ave p rof ound m ark et im p acts. C ertainl y, l if ting th e cap of $ 1 2 5, w oul d do a g reat deal to f urth er b oost m ark et dem and. I n th e im m ediate term, insurers can l ay th e g roundw ork w ith th oug h tf ul p roduct desig n and distrib ution p l ans. At th e sam e tim e, advisors m ust b e p rep ared to serve new custom ers in new w ays. C ol l ectivel y, th ese step s w il l h el p ensure al l stak eh ol ders cap ital iz e on th e increased dem and w h en th ese external m ark et f orces al ig n f avorab l y. 2 eco ni e the opportunity to o eyond s and help consu ers with roader retire ent plannin D I As m ay seem rel ativel y sim p l e to exp l ain and sel l. H ow ever, th ere are various w ays f or consum ers to use th em. P ol icyh ol ders can f und p rem ium s in th eir 4 0 s or 5 0 s and b eg in to receive incom e once th ey reach retirem ent ag e. Anoth er com m on w ay to use D I As is to draw dow n oth er invested assets up to a certain ag e, and th en b eg in p aym ents f rom th e D I A. Th is ap p roach h el p s address l ong evity risk and p rovides h ig h er incom e due to th e l ong er def erral p eriod. G p f p f p l D I w l p l w l - h p l p l D I h p l I D I m f f l p b b l b p l p I m h p b g p p iven th e increased diversity in roduct eatures, carriers and uses, th ere is a real and im ortant rol e or advisors to ay in A sal es, as consum ers il need to understand where and how they fit in the context of broader retirement ans. Advisors are el suited to el consum ers understand th e asset al ocation im ications surrounding As and ow th ey com em ent oth er typ es of investm ent veh icl es. n th is sense, As ay of er orw ard- ook ing ag ents an op ortunity to uil d new custom er rel ationsh ip s and streng th en existing ones y ook ing at th e roader retirem ent an and erh ap s attracting oth er assets. nsurers ay need to el th eir ag ents understand th e ig er- icture op ortunity to exp and cl ient rel ationsh ip s. S h ort of rew ork ing com m ission structures, insurers can p rovide th eir ag ents w ith training, tool s and educational m aterial s th at m ay m ak e D I As easier to sel l and b etter explain their benefits to consumers. Last, insurers must be p rep ared to com m unicate a w in- w in val ue p rop osition to ag ents reg arding D I As. I n f act, insurers th at p osition D I As as a p roduct b est discussed w ith an advisor ( eith er in p erson or via th e p h one) m ay h el p create al ig nm ent am ong th is im p ortant constituency. Th e b ottom l ine is th at D I A sal es are g row ing rap idl y and, w ith m ore diversity in p roducts and carriers, th e f uture p rosp ects l ook b rig h t. Al ig nm ent b etw een carriers and advisors and a sh ared f ocus on retirem ent p l anning w il l help secure the confidence of this growing market segment, resul ting in g row th f or th e overal l industry. phasi e e i le pre iu products to attract youn er consu ers and ore overall C urrentl y, m any D I As are sol d as sing l e- p rem ium p roducts th at req uire l arg e up - f ront p aym ents. M ost Am erican consum ers do not l ik e to invest in il l iq uid assets, esp ecial l y w h en such l arg e one- tim e p aym ents are invol ved. Th e b ig g est b arrier in th e m inds of consum ers is th e f ear th at th e initial p aym ent w il l b e l ost if th e p ol icyh ol der dies 9 The annuity landscape: five areas to watch in 2016

11 m F i v e s t e p s t o b o o s t i n g t o p - l i n e r e v e n u e w i t h d e f e r r e d 4 5 soon af ter p urch asing a D I A. I n addition, consum ers are concerned ab out unexp ected exp enses in th e f uture and il l iq uidity of D I As. I t is im p ortant to note th at som e com p anies h ave attem p ted to address this issue by designing products with flexible premium options and/or death benefits that return at least the principal to the heirs of policyholders. The death-benefit op tions h ave g ained p op ul arity; h ow ever, th ey l im it th e am ount of incom e p aid to annuitants. Though flexible premium products have yet to gain w idesp read traction, th ey seem p osted f or b roader adop tion in th e f uture. Th e k ey f or insurers is to educate consum ers ( w ith enh anced onl ine sel f - service cap ab il ities) ab out th e benefits of smaller, flexible premium payments, especially rel ative to th e concep t of dol l ar- cost averag ing, and exp l ain h ow p utting in m oney over tim e p rovides exp osure to various interest- rate environm ents. C reative m ark eting and com m unications ( e. g., using statem ents to p resent f uture incom e in term s of p resent val ue) m ay al so h el p custom ers ap p reciate th e val ue of D I As. Tar et defined contri ution plans as a source o usiness I nsurers can seek additional D I A sal es th roug h institutions offering defined contribution and other retirement plans. S everal f actors m ak e th is an esp ecial l y f ertil e m ark et. F or one, D I As h ave b een ap p roved f or use in targ et- date f unds b y th e I R S and th e Treasury D ep artm ent. D I As can al so b e an attractive op tion al ong side oth er f unds w ith in retirem ent p l ans ( esp ecial l y th ose w ith m any p articip ants ap p roach ing retirem ent ag e), as w el l as b eing of f ered as p art of targ etdate f unds. I nstitutional m ark eting and sal es p rog ram s sh oul d b e directed to th ese op p ortunities. esi n products with co petitive di erentiation and ris appetite in ind W h en it com es to desig ning D I A p roducts, th ere are m any ch oices com p anies can m ak e in term s of p roduct f eatures and targ et m ark ets. Th ese ch oices sh oul d b e considered in term s of driving dif f erentiation ( an im p ortant consideration in an increasing l y com p etitive m ark et) and al ig nm ent w ith an insurer s uniq ue risk ap p etites. Th is can certainl y b e a del icate b al ance to strik e, b ut com p anies m ust g et it rig h t if th ey are to ram p up th eir D I A of f ering s and tak e f ul l advantag e of th e g row th op p ortunity ah ead of th em f or th e l ong term. B o t t o m l i n e : w i n - w i n f o r i n s u r e r s a s o c i e t y DIAs represent a unique confluence of opportunities. There is real g row th p otential f or th e insurance industry and a societal im p erative to a retirem ent saf ety net. According l y, it s not a q uestion of w h eth er l if e insurers sh oul d enter th e ark et, b ut rath er w h en and h ow th ey sh oul d. I n th e near term, insurers m ust ask b oth strateg ic and op erational q uestions, incl uding : W h at are th e rig h t p roducts f or custom er targ ets g iven th eir current p ortf ol ios? W h ich inf rastructure is necessary to scal e up to m eet th is m ark et dem and? H D I h p m m f p l p ow can As el eet ark et dem and or sim er roducts? H ow can D I As f oster sm art distrib ution strateg ies ( such as increased eng ag em ent w ith advisors)? Th ese are th e sorts of issues th at th e industry incl uding b oth insurers and advisors m ust col l ectivel y address as it seeks profitable growth by better serving the increasing num b er of m iddl e- m ark et consum ers needing to g enerate m ore retirem ent incom e f or l ong er p eriods of tim e. The annuity landscape: five areas to watch in

12 11 The annuity landscape: five areas to watch in 2016

13 W 2 Top five concerns for insurance executives: resul ts f rom th e L if e and Annuity E xecutive S urvey b y D oug F rench, E rnst & Y oung L L P 1 Annuity E xecutive S urvey sh ow a rang e Th e resul ts f rom E Y s L if e and of ch al l eng es som e l ong - standing and som e em erg ing th at are sh ap ing th e strateg ic ag enda f or th e industry s senior leaders. The key findings from the survey highlight the top five concerns for the retail l if e and annuity sector f rom th e p ersp ective of top executives. Th e survey is b ased on interview s conducted b y E Y s insurance consul tants w ith C E O s and senior executives f rom 2 0 U S l if e insurance and annuity m anuf acturers, distrib utors and reinsurers. Th e ob j ective of th e survey is to understand th e view s and concerns and to outline specific op p ortunities and ch al l eng es across m ul tip l e areas, incl uding consum ers, ag ents/ advisors and oth er stak eh ol ders. At first glance, the key findings may appear daunting or l ook l ik e a com p endium of b ad new s. H ow ever, it is im p ortant to recog niz e h ow ef f ective strateg ies to address th ese ch al l eng es m ay resul t in im p ortant and necessary op p ortunities f or th ose w h o act in a tim el y and decisive f ash ion. n oin acroecono ic slu ishness Th e g l ob al econom y is stil l strug g l ing to g ain m om entum as m any countries continue to deal with the fallout from the financial crisis. G l ob al g row th in w as l ow er th an initial l y exp ected, according to th e W orl d B ank. B eneath th e h eadl ines, neg ative interest rates and deval ued currencies troub l e som e m aj or econom ies. O veral l, g l ob al g row th is exp ected to rise m oderatel y to 2. 8 % in , 1 and averag e ab out 3. 2 % th roug h Al th oug h th e U S and th e U K are sh ow ing some improvement, financial malaise lingers in E urop e and J ap an. C h ina is undertak ing a cautiousl y m anag ed sl ow dow n. I nterest rates rem ain l ow, as do overal l g row th p roj ections. E q uity m ark ets are h ig h l y vol atil e, and f ears ab out th e next b ub b l e run h ig h. Th ere ap p ears to b e l ittl e op tim ism am ong our resp ondents th at an up tick in th e US economy will fully benefit the insurance industry. h il e it s not surp rising th at l if e and annuity executives exp ress real concern across th e f ul l rang e of m acroeconom ic indicators, 1 Global Economic Prospects: The Global Economy in Transition, J une , W orl d B ank G roup The annuity landscape: five areas to watch in

14 W m Top five concerns for insurance executives: results from the 2015 Life and Annuity Executive Survey 2 g m f w h g l h f w l l m h [ J g 4 0 % p 4 0 l 4 0 % p l l W h w l b m,? iven th e industry s uniq ue vul nerab il ity to any of th ese orces, e al so eard concern ab out ob al dem og rap ics. According to one executive, significant demographic ch ang es in th e uture il ik el y contrib ute to th e acroeconom ic eadw inds, stating th at ap an is] oing to exp erience a decl ine in op ul ation over th e next years. Th ink ab out th e tow n you ive in if of th e eop e ef t. at oul d th is do to ocal usinesses, anuf acturing etc. Th e b ottom l ine is th e g l ob al econom y w il l b e an ob stacl e to g row th f or insurers, until th e return of b road- b ased p rosp erity and w eal th creation. osterin innovation in the era o per anent disruption I n an industry th at h as never b een considered h ig h l y innovative or p articul arl y nim b l e, advancem ents in dig ital tech nol og y h ave m ade innovation an im p erative. Th e p ace of innovation m ust accel erate as com p etitive p ressures increase. O ne executive describ ed th e situation th is w ay: As an industry, w e conf use innovation w ith p roduct devel op m ent if w e don t l earn th e dif f erence and don t l earn h ow to b ecom e f ar m ore innovative m uch m ore q uick l y, w e run th e risk of b eing disinterm ediated b y th ose th at can run f aster. S o w h ere sh oul d innovation com e f rom and w h at f orm sh oul d it tak e? L if e and annuity executives cite f our m ain areas: roduct and ar et: th e industry m ust devel op of f ering s that reflect the real-world needs for consumers, from af f ordab l e annuities f or th e m iddl e m ark et to m ore sop h isticated l if e and h eal th p ol icies th at l everag e th e I nternet of Th ing s. ales and service: th e f ocus w il l b e on driving custom eng ag em ent w ith w el l - integ rated and p ersonal iz ed eaning f ul dig ital exp eriences. perations: accel erated or autom ated underw riting, th e use of el ectronic f orm s and straig h t- th roug h p rocessing are j ust a f ew of th e w ays insurers seek m oderniz ed and enh anced op erations. Technolo y: ol d l eg acy system s m ust b e up dated or retired, w h il e b etter m ob il e ap p s, m ore advanced anal ytical cap ab il ities and b etter data integ ration p oint th e w ay f orw ard. As one resp ondent p ut it, I n today s world, everything has to be mobile first. h il e th e tone of survey resp onses w as g rave innovate or die w as one executive s p ersp ective m any resp ondents reported significant progress on several of these fronts. N ow th at a f ew earl y adop ters h ave dem onstrated er 3 success with high-profile programs, more insurers identify th em sel ves as f ast f ol l ow ers th an in p rior years. I nvestm ents in innovative capabilities are likely to be significant, b ut resp ondents b el ieve th ey can b uil d sub stantive and quantifiable business cases based on badly needed p erf orm ance im p rovem ents. H ow ever, insurers can no l ong er j ust f ol l ow th eir current com p etitors. I nstead, th ey m ust b e aw are of th e p otential f or m aj or disrup tion f rom th e entry of new p l ayers, such as G oog l e, Ap p l e, credit card com p anies and oth ers. I n one executive s w ords, Tech nol og y is f undam ental l y up ending and al l ow ing new com p etitors to com e into and interrup t traditional b usiness m odel s [ none of us] are saf e. indin attractin and retainin su ficient talent Tal ent m anag em ent and h um an cap ital issues h ave b ecom e so critical to th e industry s f uture outl ook th at one survey resp ondent exp ressed a b el ief th at th e ch ief h um an resources officer will be the most important person in the C - suite. Th e tal ent sh ortag e af f ects every l ayer of th e org aniz ation, with a lack of sufficient candidates to fill senior executive roles and significant gaps in technical skills. And then there are th e g enerational issues: th e insurance industry is sim p l y not attractive to young p eop l e, executives b el ieve. A f ew com m ents f rom survey p articip ants sum up th e real ity: No one wakes up and decides that they want to go into insurance. Financial services companies are heavily regulated and slow moving and we are competing against cool companies for talent. [We have the] same problem attracting talent as attracting customers. I n oth er w ords, th e industry s im ag e as staid and risk - averse sim p l y does not ap p eal to th e b rig h test and m ost p rom ising young p eop l e, w h o l ik el y view tech nol og y com p anies as th eir em p l oyers of ch oice. I nsurers al so seem l ess ap p eal ing to young people because their offices are typically located in l ess desirab l e cities and of f er l ess col l ab orative w ork environments when compared to technology firms. Executives recognize the deep need to find new talent like data scientists and dig ital exp erience desig ners is not m erel y ab out b urnish ing th e industry s im ag e. R ath er, th ere is a cl ear and p ressing need to rep l ace an ag ing w ork f orce, esp ecial l y in critical areas l ik e underw riting. Tak ing a more strategic view, the talent issue reflects the need to f oster innovation- centric and entrep reneurial cul tures and to devel op next- g eneration cap ab il ities. L ast, th ere is an op p ortunity f or th e industry to tel l a cl earer and m ore p ersuasive story ab out its m ission and im p ortant societal 1 3 The annuity landscape: five areas to watch in 2016

15 Top five concerns for insurance executives: results from the 2015 Life and Annuity Executive Survey 4 5 role in helping individuals and families secure financial p rotection. Th e rising g eneration of w ork ers is seek ing such p urp ose in th eir careers and ch oice of em p l oyer. le in and evolvin distri ution odels E conom ic p ressures, dem og rap h ic sh if ts and tech nol og y- driven disrup tions are f orcing ch ang e in th e real m of distrib ution m odel s as w el l. As one survey resp ondent p ut it b l untl y, B uying h ab its are ch ang ing, and w e re g oing to h ave to ch ang e w ith th em. C h h - p m m ( l m m m m p f l f m I m p m p f urrent distrib ution strateg ies are neith er reach ing ig otential ark et seg ents ik e th e underp enetrated iddl e- incom e ark et) nor eeting th e needs of any current ol icyh ol ders. Th e act is th at ittl e custom er service and ew interactions occur af ter initial sal es are ade. n any cases, rem ium invoices are th e onl y com unications ol icyh ol ders ever receive rom th eir insurance carriers. Th is l ow - eng ag em ent m odel is not conducive to streng th ening rel ationsh ip s w ith th e b roadest p ossib l e set of consum ers. Af ter al l, today s em p ow ered custom ers h ave unp recedented access to inf orm ation ab out p roducts and benefits and, therefore, less need for a broker or advisor to g uide th em th roug h th e education and research p ortion of th e sal es p rocess. S urvey resp ondents b el ieve om ni- ch annel distrib ution m odel s, w ith consum ers ab l e to ch oose am ong sel f - service or in- p erson or oth er p urch asing op tions, are destined to b ecom e th e industry norm. O th ers are considering l if e cycl e sel l ing, or re- eng ag ing custom ers at certain p oints during th eir l ives b ased on th eir stated p ref erences. S uch an ap p roach m ay op en up cross- sel l ing op p ortunities ( e. g., integ rating ( k ) p l ans w ith op tions f or l if e, h eal th, annuity or disab il ity p roducts). H ow ever, th ere al so w il l b e ch al l eng es w ith th is ap p roach to b e discussed in th e next top ic. The evolution o consu er protection needs and re uire ents m w b p p b l. P f D L E w m p f b b m b b p p m m p w p Th ere are any reg ul atory initiatives under ay th at are aim ed at etter educating and rotecting insurance custom ers, and executives are not articul arl y ul ish on th e outl ook rop osed rul es rom th e ep artm ent of ab or regarding fiduciary duties and insurers obligations to know th eir custom ers are am ong executives top concerns. veryone ants com on- sense rotections ag ainst ab use and raudul ent eh avior, ut th ose th reats ust e al anced ag ainst th e ressing need to rovide th e iddl e ark et, in articul ar, ith advice reg arding retirem ent roducts and services. P ersonal p rivacy and data security are oth er p ressing matters. Executives justifiably believe no one is safe from th e very real th reat of data b reach es, h ack ing and oth er f orm s of cyb ercrim e. I t s not a m atter of if it w il l h ap p en, b ut w h en it w il l h ap p en, said one executive. S h f l h w p p w h l p b I b w l b p f m f b C p l l I f f b m p g m m if ting reg ul ations coul d undam ental y ch ang e ow annuities are ritten, roduct inf orm ation is discl osed and advisors are com ensated and eth er cross- sel ing op ortunities can e real iz ed. n th e end, resp ondents el ieve th ere il e a ronounced sh if t aw ay rom com issions and tow ard ee- ased rel ationsh ip s. om iance costs are ik el y to rise. n th e eyes of survey resp ondents, th e ef ects of new reg ul ations rang e rom destroying th e usiness and assive im acts on op erations to etting rid of com issions to ore challenging to give financial advice. T h e b o t t o m l i n e Th e l if e insurance and annuity industry exp eriencing a p eriod of extrem e turb ul ence is not b reak ing new s. B ut th e increasing f ocus of executives on th e necessary step s tow ard innovation and transf orm ation underscores th eir f ocus on f undam ental ch ang e and strateg ic evol ution. O ur resp ondents sum m ed it up th is w ay, W h en w e do rig h t b y th e consum er, w e do w el l as an industry, and com p anies th at th ink, innovate, exp erim ent, f ail and w in w il l b eat th e rel evance ch al l eng e. As an org aniz ation f ocused on b uil ding a b etter w ork ing w orl d, w e at E Y coul dn t ag ree m ore. The annuity landscape: five areas to watch in

16 15 The annuity landscape: five areas to watch in 2016

17 3 How Redefining the future of l ong - term care: f our op p ortunities f or insurers B y B rad R ok osh and K evin K ang, E rnst & Y oung L L P LTC carriers can create growth opportunities through simpler and more innovative products Ex e c u t i v e s u m m a r y D em og rap h ic sh if ts during th e l ast f ew decades h ave ch ang ed th e nature of l ong - term care ( L TC ) insurance m ark et dem ands. An ag ing p op ul ation and th e decl ine of defined benefit plans and traditional sources of retirem ent incom e h ave l ed to g reater recog nition of th e need f or sel f - rel iance. M ore consum ers now f eel an acute need to take action to protect their own financial assets as th ey h ead into th eir retirem ent years. N ew m edical treatm ents and drug s m ean th at retirem ent tim e h oriz ons today often extend for several decades, significantly l ong er th an in th e p ast. Th e resul t of th is extended l ong evity is m ore p eop l e w il l l ive to ag es w h ere th e l ik el ih ood of suf f ering a serious h eal th care event is h ig h, m uch h ig h er th an th eir risk of b eing disab l ed during th eir w ork ing years. Today s LTC product designs don t reflect l ong evity needs, advancem ents in h eal th care tech nol og y or current trends in retirem ent p l anning. M any com p anies continue to m ark et p roducts q uite sim il ar to th ose th ey sol d 2 0 years ag o. Y es, p rices are significantly higher, but benefit and funding m ech anism s are l arg el y th e sam e. D esp ite th e increasing dem and f or L TC coverag e, p roducts h ave not k ep t p ace w ith th e evol ving needs of everyday consum ers and young er b uyers in p articul ar. Th us, insurers h ave yet to tak e f ul l advantag e of a significant growth opportunity. S o h ow can carriers reverse th e situation? Th is articl e outl ines f our step s th at p roactive insurers can undertak e to revital iz e th e L TC m ark etp l ace. 1. U nderstand l essons f rom th e p ast 2. Ap p l y sim p l icity, af f ordab il ity and val ue considerations in th e p roduct desig n p rocess 3. Adopt flexible funding mechanisms 4. E m b race p redictive anal ytics to p rovide val ue The annuity landscape: five areas to watch in

18 Redefining the future of long-term care: four opportunities for insurers 1 2 nderstand lessons ro the past First and foremost, LTC insurers must reflect on their past if they are to shape a better market in the future. Specifically, insurers m ust understand p ast m isstep s and h ow th ey h ave sh ap ed today s m ark et. M ost im p ortant, th ey need to th ink ab out h ow to create val ue f or th eir f uture custom ers, w h il e m inim iz ing th e p ossib il ity of rep eating h istory. K ey l earning s coul d com e f rom : The haphazard addition of benefits in order to increase m ark etab il ity w ith out considering l ong - term costs Th e assum p tion th at underw riting adj ustm ents w oul d p rovide w ider m orb idity saving s Th e neg l ect of day- tw o initiatives, such as cl aim s op erations, th at l ead to cl aim l eak ag e and p oor p rocess p erf orm ance Th e p recedent of f ront- l oaded, h eap ed com m issions The precedent of fixed, and level, premium payments W e b el ieve individual insurers sh oul d not sh y aw ay f rom ch al l eng ing th e status q uo and sh oul d avoid treading too caref ul l y as th ey seek new innovations in f unding m ech anism s and p roduct desig n. Af ter al l, L TC insurers did g et m any th ing s rig h t, such as th e p rom otion of h om e health care models and linking benefits to the Consumer P rice I ndex. b l p l l l f h f f m Th e ottom ine is th at insurers can and sh oul d ap y th e val uab e essons rom recent istory as th ey desig n of ering s or an evol ving ark et. pply si plicity a orda ility and value considerations in the product desi n process To f oster g row th, L TC p ol icies sh oul d b e sim p l e enoug h f or a w ide cross- section of consum ers to understand th e val ue of th e p roducts b eing of f ered. L eg acy p roducts h ave traditional l y scared aw ay consum ers due to th eir h ig h cost and th eir use it or l ose it nature. I n truth, L TC is not l ik e any oth er insurance p roduct. I t l ack s f am il iar f eatures, such as deductib l es, and instead consum ers m ust sel ect f rom a rang e of unf am il iar op tions, including benefit levels, benefit periods, elimination periods and inflation rates, when they purchase their policies. S im p l er desig ns can m ak e it easier f or ap p l icants to navig ate th is com p l exity, and th us reduce th e risk th at th ey w il l f al l out of th e sal es f unnel w h en f aced w ith too m any q uestions. 3 S l h L p w p p ( k ) b w h p g p l p m o- cal ed catastrop ic TC roducts are one ay to cl arif y the value proposition to consumers. Large, early benefits th at rotect ag ainst accidents and cl aim s and th at reserve al ances oul d el consum ers et ast th e ing ering concern th at th eir rem ium s ay never yiel d any benefits. Th ese p ol icies sh oul d b e p riced to m eet th e needs of m iddl e- market consumers, while protecting them from financial ruin. Additional l y, th e cost of p roviding such catastrop h ic benefits could be reduced through the addition of an early duration deductib l e th at vanish es over tim e. U l tim atel y, tail oring p roducts th at m eet th e needs of today s targ eted dem og rap h ics, rath er th an th e overl y com p l ex and unf am il iar ap p roach th at is p reval ent today, w oul d g reatl y h el p to m ak e th ese p roducts m ore attractive and p ossib l y m ore val uab l e to today s consum er. dopt e i le undin echanis s S everal insurers are w eig h ing m ul tip l e variab l es w h en determ ining th e b est w ay to structure L TC p rem ium s. F or instance, forward-looking carriers are assessing the benefits of a tem p orary p rem ium rep rieve, or p rem ium h ol iday, for policyholders facing financial hardships (such as job l oss or m edical costs). Th ere is w idesp read consensus th at a significant portion of lapsed policies result from such situations. S l f p l C m p L p w p l p b p w h p m h p p w h g f im il arl y, som e insurers are exp oring th e viab il ity of employing an adjustable benefit and premium structure across th e dif erent stag es of a ol icyow ner s if e cycl e. onsum ers ay ap reciate an TC roduct ith such flexibility. Of course, this would come with certain underw riting constraints and ossib y up er ounds on benefits, but it would allow policyholders to retain their ol icy even in adverse tim es ith out aving to rove financial hardship. In the long run, this type of LTC product ay el custom ers retain th eir ol icies, ich is ood or everyone. Premium reprieve and benefit flexibility could demonstrate th e industry s understanding of and sensitivity to consum ers real - w orl d needs and insig h t ab out w h ere L TC insurance fits in the hierarchy of those needs. After all, in th e f ace of im m ediate- term h eal th care costs, L TC insurance may seem like a luxury. Ultimately, offering such flexible funding mechanisms may not decrease the profitability of L TC p roducts, b ut m ay increase m ark etab il ity. 1 7 The annuity landscape: five areas to watch in 2016

19 W Redefining the future of long-term care: four opportunities for insurers 4 race predictive analytics to provide value e b el ieve th e L TC industry sh oul d f ol l ow th e l ead of th e h eal th insurance industry s increasing f ocus on w el l ness, w h ich incorp orates such initiatives as req uired ch eck up s f or p renatal care and th e use of w earab l e tech nol og y to of f er p rem ium discounts on g roup p ol icies. B y creating rel ationsh ip s w ith consum ers in a m ore p ositive, val ueadded w ay, th e industry coul d h el p reduce cl aim s costs and p ossib l y l ow er p rem ium s. F or instance, p redictive anal ytics can h el p L TC insurers identif y p ol icyh ol ders w h o h ave th e h ig h est p rop ensity to suf f er inj ury f rom a f al l an event th at is exp ected to cost th e h eal th care system $ 5 5 b il l ion b y W ith th is k now l edg e, an insurer m ay b e m ore w il l ing to p roactivel y w ork w ith its p ol icyh ol ders to p revent such an event, p erh ap s even p aying to f al l - p roof th e h om e. S im il ar ap p roach es can b e used to p rotect ag ainst dang erous com b inations of m edications, and h el p f am il ies determ ine th e rig h t tim e f or th eir f am il y m em b ers to use ride services, rath er th an driving. T h e b o t t o m l i n e Th ere are cl ear reasons th e L TC m ark etp l ace sh oul d b e a g row th eng ine f or insurers, esp ecial l y w el l - estab l ish ed and financially stable carriers. Rising health care costs incl uding th ose associated w ith assisted l iving and custodial care are of g reat concern to th e h ug e w ave of retiring b ab y b oom ers. O f al l th e op tions avail ab l e ( sel f - insurance, reverse m ortg ag es, f am il y- p rovided care), p rop erl y desig ned L TC insurance m ay b e th e b est w ay to address th ese concerns. I nsurers need to m ak e th e necessary adj ustm ents to th eir p roducts and p rocesses to convert th is p otential into real ity and, m ore im p ortant, p osition th em sel ves f or a successf ul and sustained return to th e m ark etp l ace. To f oster g row th, L TC p ol icies sh oul d b e sim p l e enoug h f or a w ide cross- section of consum ers to understand th e val ue of th e p roducts b eing of f ered. The annuity landscape: five areas to watch in

20 19 The annuity landscape: five areas to watch in 2016

21 W m W 4 h at s next f or annuities: top five trends shaping th e m ark et b y G erry M urtag h, E rnst & Y oung L L P 1 l ong evity; th e im m inent retirem ent of th e ith in th e annuity industry, increased b ab y b oom ers; continued l ow interest rates; volatility in financial markets; and, of course, the proposed DOL fiduciary rule remain the top concerns of th e industry. M ark et and dem og rap h ic trends underscore th e stark real ity th at m ore p eop l e need to g enerate m ore g uaranteed incom e across l ong erterm retirem ent h oriz ons. Th at incl udes th e so- cal l ed m iddl e- m ark et seg m ent of retirees, w h o h ave rel ativel y l im ited investab l e assets b ut stil l need to g enerate sustainab l e incom e f or 2 0 years or m ore. B ut w h at does th is m ean f or th e annuity m ark et? W il l it continue to rol l al ong in a b usiness- as- usual m indset or is th ere a b ig g er and so f ar untap p ed op p ortunity? Th ere is a cl ear and exp anding need f or p roducts th at del iver g uaranteed incom e and new m ark et seg m ents to eng ag e as an ag ing p op ul ation f aces retirem ent. I n th e sum m er of , E Y conducted a series of interview s w ith senior executives f rom 2 0 U S l if e insurance and annuity m anuf acturers, distrib utors and reinsurers as p art of an ong oing ef f ort to understand h ow our industry can surm ount current ch al l eng es and m ove f orw ard. H ere s w h at s on th eir inds w ith resp ect to annuities. The types o annuities sold are chan in as evidenced y recent sales trends S l ig h tl y h ig h er interest rates and continued consum er dem and f or l if etim e incom e are g eneral l y p ositive indicators f or annuity sal es. Th us, it is l ik el y th at sal es of annuities w il l rem ain strong ; h ow ever, th e m ix of sal es w il l continue to sh if t and th e m ark et l eaders w il l ch ang e, too. Th e l eading driver of annuity sales growth is fixed index annuities (FIAs), w h ich h ave seen steady sal es increases f rom to G row th of F I As continues to b e strong am ong al l distrib ution ch annel s, and b rok er- deal ers continue to increase th eir f ootp rint in th is sp ace. I n th e p ost- recession p eriod, several annuity carriers intentional l y reined in V A sal es, w h il e com p anies are entering th e F I A m ark et and adding l if etim e incom e riders to existing fixed-index annuities. FIAs continue to appeal to consum ers b ecause of th eir p rincip al p rotection and g enerous b onuses and w ith draw al rates on th eir g uaranteed l if etim e withdrawal benefits (GLWBs). Some GLWBs on F I As of f er b onuses of 8 % and w ith draw al p ercentag es h ig h er th an th e w ith draw al p ercentag es avail ab l e on G L W B s on V As. V ariab l e annuities h ave not exp erienced any real g row th over th e p ast f ew years since m any insurers h ave stop p ed sel l ing l iving The annuity landscape: five areas to watch in

22 M What s next for annuities: top five trends shaping the market 2 benefits on VAs or have increased the cost of the benefits. Th e recent sp ik es in vol atil ity al so didn t h el p V A sal es since consumers fled to more conservative investments. According to th e L if e I nsurance M ark eting and R esearch Association ( L I M R A) S ecure R etirem ent I nstitute, total annuity sal es in g rew 3 % and reach ed US$236.9 billion, driven by strong fixed annuity growth. S al es of index annuities reach ed record l evel s in , up 2 3 % f rom th e p rior year w h il e sal es of variab l e annuity sal es decl ined 4 % to th e l ow est annual l evel of sal es since Th ese g ains f or F I As h ave h el p ed com p ensate f or decl ines in variab l e annuity sal es, w h ich h ave sl ow ed despite strong equity markets. For the first half of 2015, net sal es f or F I As w ere U S $ b il l ion, yet net sal es w ere neg ative U S $ b il l ion f or V As. D ef erred incom e annuity ( D I A) p roducts w ere introduced a f ew years ag o, and p rem ium s h ave g row n f rom U S $ m il l ion in to ap p roxim atel y U S $ 2. 7 b il l ion in Th ese are dram atic g ains, and w h il e th e sh are of D I As rem ains rel ativel y sm al l com p ared to th e rem ainder of th e annuity m ark et, w e b el ieve th at th ey w il l continue to g ain m ark et sh are. Th ese recent sal es trends sug g est th at annuity p roviders w il l attem p t to k eep up w ith sh if ting m ark et needs even as th e l ow - interest- rate environm ent l ing ers. As one survey resp ondent stated, our ch al l eng e is to create and sel l af f ordab l e p roducts so th at w e don t h ave h ig h l ap se rates. ore evolution in product desi n ore evol ution and innovation in annuities are l ik el y to resul t f rom th ese m ark et sh if ts. I t is cl ear th at variab l e annuities m ay not l ook l ik e th ey did six or seven years ag o, and FIAs will change significantly, too. As one respondent stated, w e add p roduct f eatures not b ecause w e th ink of th em, b ut b ecause p eop l e w ant th em. Th en w e g o th roug h a D arw inian p rocess w h ere th e l osers die and th e w inners th rive. F I As are now increasing l y seen as a source of g uaranteed incom e f or retirees. B ab y b oom ers are stil l th e p rim ary b uyers of F I As, and carriers are creating new indexes and devel op ing new F I As th at of f er consum ers g reater ch oice and flexibility, both of which are important to boomers. However, with the effects of the financial crisis still l ing ering, F I As coul d increasing l y ap p eal to young er g enerations since m any are w ary of stock s and are l ook ing f or m ore stab l e op tions. To seiz e th is op p ortunity and m eet th e needs of th is rel ativel y new custom er coh ort ( i. e., m il l ennial s), com p anies w il l h ave to continue to innovate and adap t to th eir needs. 3 Today, V A p roduct innovation h as sl ow ed th oug h th e retooling of living benefits continues, with companies introducing rate sh eet sup p l em ents to adj ust th e l evers m ore q uick l y. S im il arl y, oth er com p anies are l ink ing l evers in their living benefits (LBs) to a formula involving the V I X X or U. S Y ear Treasury rate to al l ow th em to react to ch ang ing m ark et conditions m uch m ore q uick l y. As one resp ondent said, th e ab il ity to ch ang e q uick l y is k ey in th is environm ent. Guaranteed living benefits (GLBs) still resonate with VA b uyers, b ut th e l ion s sh are of today s op tional incom e and w ith draw al g uarantees com e w ith h ig h er f ees, tig h ter investm ent restrictions and g reater com p l exity, as com p ared to G L B riders of years p ast. N ew investm ent- onl y V As, or I O V As, are b eing sol d strictl y f or tax- def erred accum ul ation, g iving contract ow ners a l arg er rang e of investm ent op tions in w h ich to invest p rem ium p aym ents. Th ese are th e variab l e annuities of th e s and earl y s b ut w ith f ar m ore f und ch oices. B ecause of th e vast num b er of sub account op tions, I O V As ap p eal to young er, p re- retirem ent investors as a w ay to diversif y and accum ul ate saving s. Many DIA companies have introduced qualified longevity annuity contracts, or Q L AC s. L ast year, th e U. S. Treasury adop ted th e Q L AC rul e to im p rove accessib il ity and usab il ity of DIAs in qualified retirement plans, including individual retirem ent accounts. Today, nine com p anies are of f ering Q L AC s, according to L I M R A. L ook ing at p roduct desig n, com p anies h ave m any ch oices to m atch p roduct f eatures and targ et m ark ets. Th ese ch oices can drive dif f erentiation ( a critical concern in an increasing l y com p etitive m ark et) and stay w ith in an insurer s risk ap p etite. I f com p anies are to tak e f ul l advantag e of th e g row th op p ortunity rel ative to th e annuity m ark etp l ace, th is is th e b al ance th ey m ust strik e. atchin up with technolo y leaders b h b p f p I f h l b l g B l f f M b p m l f f - m F p l b l h ( m w p. Tech nol og y- ased innovation as never een a articul ar streng th or annuity roviders. n act, th e industry as ong een considered a ag ard. ut, ook ing ah ead, rising consum er exp ectations are orcing aster adop tion of advanced tech nol og y. ore executives recog niz e th e road ap eal of ob il e ch annel s, esp ecial y or sel service and com on adm inistrative task s. or exam e, today s consum ers exp ect to e ab e to access th eir annuity account val ues via th eir sm artp ones uch as th ey can ith stock ortf ol ios) 2 1 The annuity landscape: five areas to watch in 2016

23 What s next for annuities: top five trends shaping the market 4 S im il arl y, th e devel op m ent of straig h t- th roug h p rocessing f or transf er b usiness ( f or exam p l e, on I R A rol l overs and exch ang es) of f ers considerab l e val ue f or b oth consumers (a more efficient process and streamlined exp erience) and insurers ( reduced costs). I m b p m b w p h h - q h w l l G l h b f p I w nsurers ust e rep ared to ak e investm ents in etter tech nol og y, ith a val ue rop osition al ig ned to increased custom er eng ag em ent. Th e ig ual ity exp eriences consum ers ave ith dig ital eaders ik e oog e and Am az on ave raised th e ar or everyone, incl uding annuity com anies. As one resp ondent stated, n today s orl d, everything has to be mobile first. Not desktop, not , but mobile first. Distribution channels are another area where significant and rap id tech nol og y evol ution is to b e exp ected. N ew and dif f erent distrib ution ch annel s ( incl uding direct dig ital and m ob il e ch annel s) and th e rise of new b usiness m odel s and com p etitors ( such as rob o advisors ) are am ong th e tech nol og y- b ased f orces resh ap ing th e m ark et. R ob o advisors in p articul ar are p l acing m ore p ressure on annuity p roviders. As anoth er executive stated, b uying h ab its are ch ang ing, and w e re g oing to h ave to ch ang e w ith th em. el policin and a ore thou ht ul approach to client service Th ere are m any reg ul atory initiatives under w ay th at are aim ed at b etter educating and p rotecting annuity customers against financial abuse. Over the last few years, m any insurers h ave enacted m eth ods to col l ect custom er inf orm ation, estab l ish p rop er record- k eep ing p ractices and req uire p roduct education and training. B y al l accounts, th ey are f ocused on th e l ong - term b est interest of th eir cl ients. S om e com p anies are g oing one step f urth er b y adj usting th eir of f ering s and m orp h ing th eir b usiness m odel s. F or instance, one b rok er- deal er h as stop p ed sel l ing a p articul ar V A sh are cl ass w ith riders and h as b eg un req uiring cl ients w h o w anted to p urch ase th is sh are cl ass w ith out riders to sig n a th ird- p arty cost anal ysis rep ort th at com p ares th e cost of different share classes offered by the same firm. Adop ting th ese ch ang es w il l not b e easy, b ut th ere is p otential val ue in streng th ening custom er rel ationsh ip s b y becoming advocates for their financial security. There is a cl ear need, across m ark et seg m ents and at every l evel of society, for more financial guidance and products that increase financial peace of mind. Some forward-looking l eaders see an op p ortunity f or th e industry to do w el l b y doing g ood in m eeting th e needs of f am il ies and individual s. Annuity p roviders w il l need to w ork cl osel y w ith their advisors and agents to find a way to profitably seize th e op p ortunity w h il e stil l m eeting reg ul atory req uirem ents. 5 ore disruption or distri ution S im il arl y, th e p rop osed D ep artm ent of L ab or ( D O L ) rul e coul d cause radical ch ang es in th e w ay com p anies h andl e distribution. Though the final rules are still in the works, the impact of the proposed DOL fiduciary rule could be p rof ound. Th ere are im p ortant im p l ications across th e b usiness, f rom th e service and advisory m odel s to p roduct discl osure to C R M. O n th e p roduct side, th e p rop osed fiduciary rule will increase compliance costs. Advisor com p ensation m odel s w il l m ove aw ay f rom com m issions and increasing l y b e b ased on f ee- b ased m odel s. Th e scop e and severity of th e p rop osed ch ang es l ed one industry C E O to concl ude th at th e p rop osed D O L fiduciary rule could force companies to choose between m anuf acturing or sel l ing p roducts since th ey m ay not b e able to do both. The fact is that the proposed DOL fiduciary rul e coul d f undam ental l y ch ang e th e w ay annuity b usiness is w ritten and h ow advisors are com p ensated. T h e b o t t o m l i n e : t h e i n d u s t r y m u s t t o i n n o v a t e t o m e e t t h e n e e d s o f c P rof ound f orces of ch ang e continue to resh ap e th e annuity landscape, with significant impacts on multiple dim ensions of th e b usiness f rom p roduct desig n and sal es to tech nol og y and reg ul atory com p l iance. Th at is w h y innovation is increasing l y view ed as an im p erative, as dem onstrated b y th e resul ts f rom E Y s survey of industry executives. Annuity p roviders sim p l y m ust em b race innovation if th ey are to m eet th e needs of today s customers, navigate the significant challenges in front of th em ( incl uding th e p rop osed D O L rul ing ) and seiz e th e considerab l e op p ortunities p resented b y ong oing m ark et evol ution. The annuity landscape: five areas to watch in

24 23 The annuity landscape: five areas to watch in 2016