The annuity landscape - EY

The annuity landscape Six trends to watch for in 2014 and 2015

The annuity landscape Six trends to watch for in 2014 and 2015

Our editor and our authors:

Christopher Raham Editor and Principal Ernst & Young LLP [email protected] +1 212 773 9064

Doug French Principal Ernst & Young LLP [email protected] +1 212 773 4120

Jennifer Marquino Manager Ernst & Young LLP [email protected] +1 617 375 3701

Dave Czernicki Principal Ernst & Young LLP [email protected] +1 312 879 3666

Gerry Murtagh Product Manager Ernst & Young LLP [email protected] +1 212 773 5667

John Thelen Senior Ernst & Young LLP [email protected] +1 312 879 3564

Ben Yahr Manager Ernst & Young LLP [email protected] +1 215 841 0577

Carl Ghiselli Manager Ernst & Young LLP [email protected] +1 312 879 3307

Brad Rokosh Manager Ernst & Young LLP [email protected] +1 617 425 7314

Avril Castagnetta Senior Manager Ernst & Young LLP [email protected] +1 212 773 0586

Introduction page 1

Letter from the editor

01 02 03 04 05 06 page 3

page 5

Top five things to watch for in the life insurance product space

Top five developments to watch for in the annuity space

by Doug French and Jennifer Marquino

by Dave Czernicki and Christopher Raham

page 7

page 11

Building a better and bigger marketplace: four things the annuity industry can do today

The five most important questions facing middle wealth boomer retirees (and how advisors can help find the right answers)

by Gerry Murtagh and John Thelen

by Ben Yahr and Carl Ghiselli

page 15

page 19

The Five Top Issues and Opportunities in LTC Insurance

Five Ways for Life Insurers to Boost Customer Engagement

by Gerry Murtagh, Carl Ghiselli and Brad Rokosh

by Christopher Raham and Avril Castagnetta

Letter from the editor

Introduction by Christopher Raham, Ernst & Young LLP

Welcome to the third edition of our Annuity Market Landscape review series. I’m pleased to present the 2014 edition of articles focused on helping our clients understand the changing landscape of the insurance and annuity marketplace. As I look back at our series of perspectives dating from 2012, one thing that seems to continue to be true is the state of continuous change our industry is experiencing: what was in focus two-years ago is now commonplace (e.g., fixed indexed annuities with guaranteed lifetime withdrawal benefits), or has come to pass (e.g., increasing consolidation in the variable annuity space). Whether due to competitive forces, the challenging economic environment or uncertainty in our regulatory landscape, what is different for the insurer of today vs yesteryear is that the pace of change does not appear to be slowing.

1

| The annuity landscape Five trends to watch for in 2014 and 2015

In recognition of this change of pace, we’ve added a perspective on boosting customer engagement from our Customer Practice, and interview-based perspectives on improving trust in the annuity industry and emerging competitive dynamics in the life insurance space. Of course, if there are topics that you would like to see us cover in the future, please don’t hesitate to let us know. 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.

The annuity landscape Five trends to watch for in 2014 and 2015 |

2

Top five things to watch for in the life insurance product space

01 by Doug French and Jennifer Marquino, Ernst & Young LLP

Against a backdrop of stagnant industry growth and technological innovation, the US life insurance industry has begun to experience a shift in the balance of power away from distributors and manufacturers and towards the end consumer. Technological advances embraced by other financial service industries have created a consumer base that is armed with more information and whom expects a certain level of service. As an industry that has also been challenged by external factors such as low interest rates and an uncertain regulatory environment, US life insurers will need to find ways to answer the needs of these end consumers to foster industry growth. What does this change in bargaining power mean for the life insurance industry and the product landscape as we know it? At EY, we continuously monitor the product and solution landscape to help manufacturers and distributors keep abreast of the ever changing market. We have identified the top five things to watch for in the life insurance product space, all influenced greatly by this shift in bargaining power. 1. Simplification in product design and processes: In order to build scale in the retail market and address the demands of consumers, the industry needs to simplify processes and architecture. Complementing these streamlined processes are simplified products, which address consumer needs without all the confusing bells and whistles. Despite the industry readily acknowledging this need for simplification, some of the most recent products are the most complex yet. The current product space has too many product features and the differentiators are not clear, confusing the end consumer and distribution. Companies that focus on

3


designing simplified products that are supported by streamlined distribution and maintenance processes will be able to better embrace the technological advances consumers are accustomed to, therefore allowing them to play in this new space while addressing consumer’s needs and creating a value proposition for both the customer and the company. 2. Increased prevalence of combination products with accelerated benefit riders: Accelerated benefit riders, including long-term care and critical illness, are not necessarily a new concept, but they have recently been on the rise and will continue to represent a growth area for the life insurance industry. While the premise of adding accelerated benefit riders to life products goes against the move towards simplicity, these combination products address a specific consumer need, especially regarding long-term care costs. As lifespans lengthen and the costs associated with a critical illness or use of an assisted living facility continue to rise, combination life insurance products offer a more affordable option to consumers looking for insurance coverage for these events, while removing the “use it or lose it” value proposition associated with the standalone version of these products. These products have a more acceptable risk profile for the manufacturer, while adding value for the consumer when priced right. There are a lot of reasons these combination products with accelerated benefits should be considered by consumers, and through the right education and awareness, this is an area where the industry could see sustained growth in the future.

3. Underwriting advancements and streamlining: In an era where the rest of financial services have enhanced the buying process for consumers, the insurance industry has continued with a more burdensome and invasive underwriting process. Current underwriting procedures and processes are a known pain point for consumers and represent an area that is ripe for change. Companies need to rely on the data and analytics available to them to develop a more streamlined underwriting process that is less invasive for the consumer. They need to leverage electronic health records, prescription databases, credit information and other big data sources along with their familiarity with predictive underwriting techniques to offer more affordable simplified issue products, while still controlling their underwriting risk. Underwriting enhancements is a crucial step for all life insurance organizations that want to remain competitive — those that choose not to adapt and make changes will be left behind. 4. Changes to the advice model: In recent years, consumer expectations have changed and today’s consumers desire the best information available to make educated purchase decisions. They seek much of this information through the digital space — specifically the internet and social media. The breadth of information now available on the internet has created a consumer base that is now able to research and self-educate from many places they trust. The knowledge obtained through this selfresearch becomes the driver behind the decision to shop for and purchase products. This is prevalent for retail products and financial services alike and will have a great influence on the advice model currently

employed by the life insurance industry. Consumers now desire the ability to find the best information available with an assurance that it is high-quality and reliable information — the shift is that this assurance no longer needs to come from a traditional agent. With this shift towards a self-educated consumer, agents are being used to confirm what the consumer already wants. The agent’s role will begin to change as they serve as a confirmer of the information already obtained by the consumer and a facilitator of the actual purchase. 5. Internet distribution: During the last two decades, the internet economy has transformed industries and become a powerful driver of economic growth — there is no reason to believe it will not have the same effect on the life insurance industry. Simpler products and processes, enhanced underwriting capabilities and changes in the advice model will all help support a shift toward the distribution of life products over the internet. This distribution channel has been slow to gain traction, but generational differences create a need for life insurance companies to place strategic bets in this area so as not to lose access to a key consumer base. Life insurance companies that build a brand amongst the younger generations now will situate themselves for future growth as the needs of these consumers increase with age. Those companies that sit on the sidelines will watch their competitors or outside entrants take their market share. Historically, the life insurance industry has been slow to change, but as dynamics continue to shift and consumers demand more from their financial service providers, insurance companies will need to embrace these changes or be left behind.


4

Top five developments to watch for in the annuity space

02 by Dave Czernicki and Christopher Raham, Ernst & Young LLP

For several years following the global financial crisis, annuity market dynamics remained relatively static, consisting of a fairly stable set of companies leading in product sales year over year, a relatively quiet merger and acquisition (M&A) scene, and most product development action aimed at de-risking and reducing product risk profiles. In the last 12 to 18 months, however, significant catalysts for change have come forth, shaking up the market. New entrants have emerged and have taken market share, product rotations have commenced, sales leaderboards have been reshuffled and a spate of M&A activity has taken place. At EY, we continuously monitor the product and solution landscape to help manufacturers and distributors keep abreast of the ever-shifting market, and we have identified the top five things to watch for in the annuity space, all serving as catalysts for market change. 1. Private equity firm impact. Private equity firms have made a significant splash in the annuity market over the last few years with a slew of major annuity block acquisitions. Their entrance led to an almost immediate impact on the annuity space, with several of their branded products taking considerable market share away from established leaders, leveraging lesser regulatory compliance requirements and more aggressive investment portfolios. But going forward, private equity firms could face some headwinds in preserving competitive advantages. The prospect of increased disclosure and capital requirements (on a case-by-case basis), as proposed by the New York Department of Financial Services, lingers. Competitors in the annuity space, already

5


likely to have significant investment and capital markets discipline, should over time begin to narrow the gap on the performance of their general account portfolio and, subsequently, to increase the competitiveness of their products. Nonetheless, despite the headwinds, we still expect private equity firms to continue as a major factor within the annuity market and to provide traditional annuity writers a continued competitive challenge. 2. In-force block management. Several annuity writers, variable annuity writers in particular, have developed over time large legacy in-force annuity blocks whose inherent risks warrant very careful management going forward. Options to mitigate risks proved minimal coming out of the financial crisis in 2008, but several industry and market trends suggest new avenues opening up to these writers that will make the management of the blocks potentially less onerous. A more robust M&A market now exists for companies looking to exit the space or divest specific blocks of business, fueled by new market entrants on the reinsurance and private equity side. Product features that have applicability on a retrospective basis, such as target volatility funds, have been introduced to lower the volatility and risk profile of the block. From an operations perspective, some have explored outsourcing or offshoring solutions for annuity blocks in run-off to execute actuarial functions at a lower cost base. With the right mix of product, operations and marketbased solutions, companies should remain vigilant about exploring all alternatives to better manage

the associated cost and risks of their legacy in-force variable annuity blocks. 3. Technology evolution expands beyond operations. A large number of insurance providers have gone through, or are in the process of going through, actuarial and finance transformations focused on updating existing technology and process infrastructure to optimize internal operations. As the use of digital technology and social media continues to expand, we expect carriers also to transform the advice and fulfillment models that support the delivery of annuity-based savings solutions to the market. These outlets provide a cost-effective approach to reaching consumers that has the potential to engage the next generation of retirement income buyers in a more effective way than traditional approaches. Annuity providers that remain confined to traditional distribution and fulfillment models run the risk of a rising cost base and a less engaged set of consumers as time goes on. 4. Continued product rotation away from variable annuities. There are a number of factors that suggest a continued rotation of premium dollars away from variable annuities and into fixed annuity products. Variable annuity market leaders continue to face capacity constraints and reduce the richness of product feature to control sales levels as a result; at the same time, the number of remaining active providers continues to shrink. Fixed indexed annuities continue to set sales records and are

offering a compelling alternative to variable annuities for retirement income via lifetime withdrawal benefit riders. With interest rates rising, the book value fixed annuity market could begin to reverse its sales slump as credited rates become more competitive. While variable annuity products are not going away any time soon, these developments seem to be turning the heads of providers by offering alternative avenues to growth. 5. Deferred income annuities. With sales now reaching the US$2 billion mark and several providers having recently brought new products to market, deferred income annuities are igniting a new-found spark in the previously stagnant immediate annuity market. These products are offering consumers another savings-vehicle alternative for retirement income needs, with more flexibility than traditional singlepremium immediate annuities and more simplicity than competing fixed indexed and variable designs. Providers have also addressed initial product concerns by including liquidity options that provide payoffs in the event of death and inflation-protection options. Given the success of fixed indexed annuities, the potential for rising interest rates and the swelling tide of a widening retiree pool, deferred income annuities should continue to build on their early market success. Annuity providers need to be cognizant of these emerging catalysts for change and become more nimble than ever to navigate the ever-evolving competitive landscape.


6

Building a better and bigger marketplace Four things the annuity industry can do today

03 by Gerry Murtagh and John Thelen, Ernst & Young LLP

Executive summary The last several years have been very turbulent for the individual annuity industry, especially for traditional insurance providers and the advisor community. Coming out of the financial crisis of 2008, lingering low interest rates, non-traditional new market entrants (including private equity firms and start-ups) and changing regulatory requirements have proved extremely challenging. Significant shifts of the competitive landscape, with significant consolidation and several large players exiting the variable annuity (VA) market have further complicated matters. The impacts of these shifts have been felt quite acutely by advisors, as reflected by their current skepticism toward insurance companies and wariness regarding their annuity offerings (most notably VAs). As the industry is aware, sales per advisor have drastically shrunk over the past 20 years. But, despite the setbacks, underlying demand for guaranteed income streams and higher yields remains strong, even as trust in insurers has been considerably weakened. Indeed, the trust factor should not be underestimated. The frequent changes in pricing and funds, coupled with high-profile firms exiting the market, have seriously undermined the credibility of the insurers in the eyes of advisors. (Of course, consumers share these concerns, and for many of the same reasons.) As a result, many analysts and observers have been asking what the industry — including large insurers, broker-dealers and distributors — can do to rebuild trust with advisors, seize current opportunities and establish a foundation for future success.

7


So where do we go from here? Are there better ways to deliver the guaranteed incomes that the market is demanding? This article will highlight specific recommendations for insurers. Based on more than 100 hours of interviews EY conducted with insurers, distributors and others in the annuity industry, these recommended actions are designed in the spirit of our discussions to more clearly define the market, expand profit pools, create new bases of competition and generally improve the outlook for all annuity market participants. 1. Acknowledge the need to rebuild trust with advisors. To a large extent, the industry is still suffering from the fallout of recent actions by large players. The constant variations and modifications of living benefits, prices and funds leave advisors wondering if they can strongly recommended products to their customers. It’s a dire situation, but EY research suggests that many in the industry have not yet acknowledged the gravity of these actions and their negative impacts. There were intense financial pressures from low interest rates and depressed market conditions that forced insurers to make some drastic changes. All of the modifications were also “fair game” in the sense that they were featured in prospectus language. But these justifications have done little to placate a disgruntled and skeptical community of advisors. Only when insurers and suppliers fully come to terms with the consequences of their actions can they begin the process of rebuilding trust. The business case for rebuilding trust rests on the strong influence distribution channels have over the

end customer. Their strong bargaining power must be recognized. 2. Continue to simplify and rationalize products. In the past, many buyers of annuity products simply didn’t know what they bought just six months after making the purchase. In some cases, a single product might have had a dozen or more versions and permutations. Advisors unsurprisingly felt frustration from this as well. To put it bluntly: the more complicated products are, the harder they are for advisors to recommend and sell. In the past several years, progress has been made. Some variable annuity products have become more rational, as companies are no longer acting aggressively to gain market share, but rather balancing their own needs and objectives with those of advisors and clients. However, manufacturers still have farther to go in developing simpler products. Irrational pricing still exists. Take fixed-index annuities (FIAs) as an example. FIAs are very difficult to understand, and are often further complicated by the addition of new riders. Some have equated the “froth” in the FIA market — it’s estimated that they may overtake VA sales within a decade ¬¬¬– to the early days of the VA market. All this suggests that the sins of the past may be repeated. It’s unclear if advisors truly understand these products. There are also concerns about long surrender charges and high commissions. Again, the more indexes and crediting strategies are involved, the harder it is for distributors to understand and, ultimately, sell a product. Thus, there is a real competitive imperative for insurers to develop simple, stable products with long life cycles. Such products compare well to substitute offerings, such as mutual

funds, and defend against new competitors from outside the insurance industry. That’s why advisors are clamoring for such products. 3. Focus on service and experience — and deemphasize price. Traditionally, players in the annuity market have competed on complex features and price. Moving forward, however, the emphasis will shift to performance, service and experience. This shift aligns to the stated preferences of advisors for simple products, with easy-tounderstand features. Further, anything that insurers can do to support advisors in their service delivery to clients is likely to pay off over the long term. In this sense, future competition in the annuity market will look more like the mutual fund and banking industries. Insurers that show that they are focused on good outcomes are likely to gain an advantageous position in the market. 4. Rethink innovation. Given the cyclical nature of innovation in the annuity market, there is a growing sense that the next wave is on the horizon. This is a positive development as the last real innovation (the introduction of GMWBs) occurred in 2004. Such innovation is likely to be more customer oriented and market facing, and aligned to producing favorable outcomes. This represents a significant shift from the past, when innovation programs were often undertaken with the goal of impressing analysts and stakeholders. In this sense, advisors can become important collaborators to positively influence product design and distribution


8

models supported by rational, valuable guarantees and appropriate compensation. Again, regaining advisor confidence is likely to produce higher consumer confidence. There is a seeming paradox here in that insurers feel a clear imperative to innovate, even as they must also reduce their risk exposure. New product development often leads to unexpected risks, especially when product lifecycles are long, as with annuities. To safeguard that future products are profitable and avoid some of the costly errors of the past, insurers must embrace more sophisticated modeling techniques and scenario analysis to confirm they understand how products will respond to different sets of economic conditions and market reactions. Early adopters have already defined a few leading practices relative to more fluid and flexible product structures, such as those with the ability to adjust bonus rates and withdrawal rates more quickly and efficiently than in the past.

The bottom line Collectively, the activities and actions described above add up to growing the pie, or building both a bigger and better marketplace. Indeed, these recommendations and leading practices can provide an overall boost to the industry. That is, by making products simpler and more stable and by offering them to broader segments, it is likely the annuity market can return to growth mode.

9


Clear communication and a firm commitment to the business are essential variables of the equation for expanding the market. Insurers must clearly articulate their plans to be in the market for the long term, as well as the unique benefits of their offerings to advisors. To a large extent, this is a matter of insurers doing what they say they’re going to do — above and beyond the narrowest reading of contract terms. Listening more closely to inputs from advisors would also help rebuild trust and help boost the overall market outlook. Indeed, some stakeholders believe advisors have the power to change the industry for the better. This is not to say that competition between individual players will cease, but rather that a healthier overall market benefits all participants. The growth of the entire market is a universally beneficial development, no matter the positioning of individual companies. As much change as has occurred in the annuity marketplace in the last several years, more change is likely to come. To establish it is change for the better, annuity stakeholders must simplify their product offerings in the context of building stronger relationships with both consumers and advisors. There are clear reasons for optimism regarding underlying demand for guaranteed income streams. The choices insurers make in the near term regarding innovation, restoring trust and growing the overall market will go a long way to determining how effectively they can profitably serve that demand.

Annuities offer clients predictability and security in any market, and we will continue to see the insurance industry focus on them.

The five most important questions facing middle wealth boomer retirees How advisors can help find the right answers

04 by Ben Yahr and Carl Ghiselli, Ernst & Young LLP

Executive summary For years, investment advisors and financial planning professionals have been aware of the looming wave of “baby boomer” retirements. The interest of advisors has been focused squarely on high-wealth boomers — as reflected in the significant expansion of wealth management offerings from both large institutions and independent service providers. To date, however, a large and potentially profitable market segment has been overlooked. That segment is sometimes called the average, or middle-wealth boomer. Thanks to limited assets and a perceived inability to pay for traditional advisory services, these individuals have been underserved by the financial services industry. Today, it’s become clear that the size of this market opportunity is too substantial for institutions and advisors to ignore. To convert this potential into strong and profitable relationships, the industry must come to terms with a number of critical issues and questions middle-wealth boomers face as they near retirement. Like their higherwealth counterparts, the average boomer must confront the complexities and risks associated with longevity, inflation, market turbulence and the prospect of catastrophically high health care costs. However, unlike higher-wealth individuals and families, most boomers face a significant gap in their replacement incomes — one that advisors can help them bridge by finding the best answers to critical questions highlighted below. For advisors, there

is a clear “sweet spot” opportunity to help the average boomer navigate these decisions and develop strategies and action plans that can significantly improve outcomes. The biggest risk faced by middle-market retirees is a significant gap in retirement income, which for most will be well below the recommended replacement ratio of 70-80%. There are ways to narrow the gap, however. However, to serve this market effectively (and costeffectively), advisors and institutions must shift their thinking about the middle market and develop new operational approaches. Those approaches are likely to combine robust online advisory services, automated data analysis and traditional advisor-based delivery. More fundamentally, advisors must gain clearer insights and broader understanding of the needs of middle-wealth boomers.

The top five retirement questions for middle-wealth boomers Based on EY’s analysis1, effectively addressing these questions for many middle-market clients will positively affect their after-tax outcomes by between 70% and 155%, and will mean that their retirement plans will remain stable during periods of economic turmoil such as the recent global financial crisis.

Internal EY research performed using Retirement Analytics™, our proprietary analysis platform focused on evaluating retirement outcomes. 1

11


1. When to retire? First and foremost, boomers must decide when to retire, which is a decision with multiple impacts. For instance, by continuing to work until age 70 (either on a full-time or part-time basis), boomers can boost their retirement savings and acquire more liquid assets. A few extra years of working also reduces the number of years during which boomers will be spending down their assets. There are also implications relative to the timing of the receipt of Social Security benefits (see below). Since many retirees lack the skills and knowledge to “run the numbers” or figure out the impact of a few years of extra income in their unique circumstances represents a clear opportunity for advisors to provide guidance. 2. When to begin Social Security benefits? Retiring boomers must also decide when to start receiving these benefits. For a soon-to-retire boomer, delaying that moment may be beneficial from the perspective of long-term cash flow. The longer the delay, the higher the payout. The impact of a delay may be even larger, potentially, for couples and those receiving a spousal benefit. To be clear, providing guidance can be time-intensive. Plus, advisors are not directly compensated for advising on Social Security. Some strategies may even reduce the assets they are being paid to manage. However, the trust-building and relationship-strengthening opportunity cannot be overlooked. Thus, advisors may think about these decision points in the context of broader

relationships. In fact, many large banks and institutions see that they need to help advisors in this area and are investing in networks and tools to enable advisors to provide effective (and cost-effective) advice in this specific area. 3. Whether or not to purchase long-term care insurance? Soaring health care costs — including those associated with assisted living and custodial care — are among the biggest risks faced by all types of retirees, but those of average means may feel the pinch more than high-wealth individuals and couples. Certainly, considerable planning is required. Most middle wealth boomers will not be able to “self-insure” these risks, so they will have to carefully consider the costs and benefits of long-term care (LTC) policies. Advisors can help retirees understand their options in this critical area. 4. How to allocate investable assets? Risk tolerance is an important variable in the income generation equation. Conventional wisdom says that people should adopt more conservative investment and asset management strategies in their retirement years. This investment strategy may be effective for high-wealth boomers with ample assets to achieve their income goals while protecting their assets and livelihood against market turbulence. However, the average boomer may need to take on more investment risk, especially if they have limited investable assets relative to the value of their Social Security benefits. Though this sounds


12

counterintuitive, it may be necessary to invest in assets that have more investment risk in order to generate the income they need. Advisors can provide great value in helping their middle wealth boomer clients strike the right balance between risk and income generation. Allocating investable assets without considering goals holistically may lead to suboptimal outcomes. 5. Whether to tap home equity? For most middle-wealth boomers, their house is their largest, if not only, non-pension asset. Therefore, it is more a question of when, not if, they will need to tap their home equity. The emotional issues that often accompany selling a home can be difficult on their own, but retirees must also address challenging practical issues. Primary among them is the question of selling a home outright or taking a reverse mortgage. Reverse mortgages are designed to generate cash flow over a period of time, but they are complicated and typically involve considerable fees and expenses. As a result, only a small percent of retirees have decided to use them. Outright home sales generally yield more net cash, but then retirees must figure out where to live and determine the optimal investment strategies to generate necessary income. It is a very difficult task for anyone to compare the model cash flows from a reverse mortgage versus investing the net proceeds from an outright sale. For the average retiree lacking professional advice, it’s truly a daunting task.

13


Other considerations These five questions are not the only factors in retirement planning. Purchasing an annuity, working part-time beyond retirement and increasing savings are other options that can impact the retirement income gap. A small but significant percentage of middle wealth boomers will retire with a vested defined benefit pension plan. They have additional strategic thinking to do. Advisors may examine these options, recognizing that giving clients too much information can lead to inaction.

Looking ahead Wealthy boomers take for granted their access to professional assistance in making retirement lifestyle and cash-flow decisions. The average boomer requires just as much — perhaps even more — financial education and real-time guidance. But currently, they are mostly left to fend for themselves. Access to practical, actionable advice is truly an imperative for this large segment of the population — largely because they face a serious retirement income gap. We expect a combination of online analytical tools and traditional advisory services to fill the current gap. New business models will integrate these services with a certain degree of tailoring to meet the unique needs of the market and protect the bottom lines of financial services institutions and their advisors. The key components of this new model are likely to include: • Rich multimedia education content and self-service capabilities

• Interactive online information collection — including customer financial data, specific demographic factors and retirement lifestyle/attitude expectations • A robust, automated analysis platform that provides for scenario generation and usable comparisons • Access to a range of products — especially those that have been simplified (e.g., streamlined rollover processes for 401(k) balances) • Budgeting assistance • Some form of real-time interaction with a financial advisor on an as-needed basis to ask questions, discuss scenarios and conduct transactions The bottom line is that understanding customer needs and servicing those needs in an appropriate and timely manner can be the difference between growing a relationship and losing a customer. Sensing a solid growth opportunity, some forwardlooking organizations in the financial services industry are moving aggressively to develop these capabilities. In addition, new online self-service providers have emerged to target this segment. They have designed operating models from the ground-up to be able to service this market in a cost-effective manner. While conventional wisdom has held that the middle wealth boomer market was not worth the time and effort of professional advisors, a gradual shift in thinking has occurred as the scope of the opportunity comes fully into view. It is true that most advisors are not directly compensated for providing guidance on the complex

questions faced by non-wealthy individuals and couples. However, over the longer term, it is likely that the average boomer will not be particularly demanding or “high maintenance” clients. Nor will they be likely to switch providers once the assets are in place. Therefore, there is a good chance that the initial advice and engagement will be paid back over time. Consequently, we believe that it is not a question of if, but when, the industry leaders in this large important market will emerge.

The five top issues and opportunities in Long-Term Care Insurance

05 by Carl Ghiselli and Brad Rokosh, Ernst & Young LLP

How LTC carriers can create growth opportunities through simpler product design and reduced risk

Executive summary As society has undergone significant demographic and technological change over the last few decades, the long-term care (LTC) insurance industry has struggled to keep pace. In many cases, policies that were designed in the early 1990s are still being sold today. Though prices are significantly higher, benefit structures are largely unchanged. LTC products simply do not account for advancements in longevity, health care technology, or the changing nature of retirement planning. Similarly, the replacement of defined benefit pension plans with 401(k) accounts is not yet fully reflected in the design of most LTC product offerings today. To a large degree, this is why the market is demanding new types of products that reflect today’s realities. Of course, the lack of evolution in product design is not the only challenge LTC insurers have faced recently. Lower-than-expected lapse rates and investment returns, as well as unintended coverage expansions, have placed real pressure on profits. Other factors that have limited growth and put insurers on the defensive include large premium increases, increased litigation and regulatory reluctance to approve rate increases. Some industry veterans look at these issues and conclude that LTC is a product line fraught with peril that is too difficult to model and requires excessively high capital. But, taking an alternative view, other stakeholders see significant opportunities to seize rising market demand for LTC insurance. The key is for insurers to rethink and redesign LTC policies so that they reflect today’s financial and demographic realities while meeting naturally higher demands for the product. Though more consumers

15


want and need such products, carriers must find ways to reduce their risk exposure. This article highlights several steps insurers can – and should – take to deliver such win-win outcomes in addressing the top issues and opportunities in LTC, which include: 1. Recognize the growth opportunity in demographic and technological changes 2. Design simpler products to attract more consumers and reduce risks 3. Streamline the buying (and selling) experience 4. Focus on wellness to offer new value 5. Share risk through experience-based plans 1. Recognize the growth opportunity in demographic There are clear reasons why LTC should be a growth engine for insurers. Rising health care costs – including those associated with assisted living and custodial care – are of great concern to the huge wave of retiring baby boomers. This population may look to LTC policies as a vehicle to help protect against rising health care costs, which are a particular risk for older people. As highlighted in other articles in this series, LTC insurance has become an essential element in effective retirement planning. The design, sales and servicing of such products must reflect where LTC fits in consumers’ portfolio and overall outlook. The bottom line is that LTC insurance is a product that nearly all retirees need. To date, however, policies have focused primarily on the higher end of the market – that is, wealthy and upper middle-class consumers who can afford the high premiums.

2. Design simpler products to attract more consumers and reduce risks Because long-term care insurance is fundamentally a retirement planning product, insurers can boost sales by creating simpler products that are designed specifically to protect assets against health care catastrophes. The insurers’ goal for products is to be simple and inexpensive enough to attract consumers on the broadest possible scale. Some industry observers would argue that scaleddown products with long elimination periods meet this need for catastrophic policies, though their limited adoption to date suggests that different products might result in more sales. For instance, a commoditized, catastrophic LTC product would need to reflect the reality that most “middlemarket” consumers can’t typically afford combination products that require a significant lump sum deposit or upfront payments. Looking at traditional LTC products, middle-market consumers will be highly sensitive to rate increases over time. Insurers that could get the premiums down to manageable levels (say $1,000 annually) would likely attract a great deal of attention from consumers who intuitively grasp the need for and the value of such products. Optimally, these policies would cover only the actual cost of care and services, regardless of where care is delivered (e.g., a home, nursing home or assisted living facility). Another option would be to develop combination products, with both universal and LTC features, as some insurers have done. Accelerated benefits could be made available as an additional free feature or via a 10-15% in additional premium. These products can address the catastrophic needs of upper middle-class consumers,

who can afford a large, single-premium payment and are not looking for a large death benefit. This is a win-win: carriers like it because consumers use their own money first to pay for LTC care; consumers like it because they receive benefits on an accelerated basis and because it’s not a “use-it-or-lose-it” product. 3. Streamline the buying (and selling) experience One significant advantage of simpler, commodity products is that they would be considerably easier for consumers and agents to understand. These products would simplify both the buying and selling process, though there are additional steps insurers can take to streamline the experience from the perspectives of both agents and consumers. Looking at the selling side of the equation, the complexity of LTC product makes it a hard product to sell. Few, if any, new agents want to focus on LTC because it’s a complicated product with long sales cycles. Further, many agents are uncomfortable asking personal questions and collecting sensitive information about the health histories of their policyholders. Currently, LTC policies require very specific information in long, applications that can reach 25 pages or more. One alternative is to streamline the application process by focusing initial application process on knockout questions only. Then, nurses and other providers could be used to obtain fluids and follow up with more detailed questions for qualified prospects. More accurate responses from consumers for more real-time underwriting and an easier, more familiar process (which mirrors current life underwriting practices and eliminates potentially uncomfortable situations) make this a win-win approach that would also reduce the barrier to entry. The annuity landscape Five trends to watch for in 2014 and 2015 |

16

4. Focus on wellness to offer new value The extra efforts during the application process and future “monitoring” visits by health care professionals can help lead to more effective underwriting. In return, carriers can offer consumers such benefits as eligibility for reduced premiums, discounted gym memberships or reward points redeemable with specific merchants. The improved rating is an obvious benefit for carriers, while policyholders can save money on their premiums and lead healthier lives. Similar, win-win models based on increased information sharing are rapidly becoming the norm in health insurance. From required check-ups (such as those for pre-natal care) to the use of wearable technology, wellness promotion strategies have proven their value in health insurance and could easily be applied to LTC. For carriers, the up-front investment is all about reducing future claims. “Fall-proofing” the homes of insureds and using advanced analytics tools to examine prescription databases for risky combinations of drugs are additional proactive steps that could help reduce risk and, thus, boost profits. 5. Share risk through experience-based plans Widespread uncertainty has been one of the major challenges in the LTC market. Some forward-looking insurers have reacted by adopting various risk-sharing strategies. For example, some products on the market today allow consumers to choose their own benefits, with premiums adjusted accordingly.

17


Then there are “experience fund” products, such as those available through the Federal Long-Term-Care Insurance program, in which premiums are adjusted based on actual outcomes. The benefit here is that the huge numbers of policyholders reduce or make the overall risk more predictable, with the potential of positive experience being shared with the consumers through premium rebates or enhanced benefits. Carriers may end up serving a primarily administrative role, but the value in terms of reduced risk is potentially enormous.

The bottom line Given the past challenges in the LTC market, many insurers may be reluctant to move forward with new offerings and new service processes. However, the rising demand merits action for carriers seeking new avenues to growth. As with the retirement planning space more generally, consumers in need of LTC products more than ever. However, they are looking for products that are carefully tailored to their needs and fit their budgets. Product design may be the key to unlocking this demand and serving it profitably, but a broader strategic rethink of the market may open up further opportunities. In other words, though the time for action is now, LTC insurers should keep a long-term horizon in mind in planning for future growth.

The industry will seek to achieve the optimal balance of what is best for the client, advisor and shareholder.

Five Ways for Life Insurers to Boost Customer Engagement

06 by Christopher Raham and Avril Castagnetta, Ernst & Young LLP

Insurance isn’t the only industry in the world that is struggling to deal with the “Amazon factor,” but it certainly has as much work to do as many other sectors. The Amazon factor refers to the very high customer engagement bar that has been set by digital and e-commerce leaders (indeed, it could just as well be called the Zappos, Netflix or Uber factor). That standard sets the baseline for companies in other industries, whose customers expect similar easy-to-use tools and personalized interactions. Thus, insurers find themselves being evaluated in comparison with firms well outside their traditional peer group and competitive set.

Customer engagement: what it is and why it matters

Easily accessible account information, detailed customer histories, wish lists, tailored recommendations, repeat ordering tools and free shipping — these are the features that lead to world-class levels of customer engagement. Life insurers in particular struggle to get over this engagement gap. Some have established multiple channels for sharing information and simple, self-service tools to take care of basic administrative tasks. But, to date, a bare minimum of interactions of tasks have moved online. The insurance industry has yet to discover its own equivalent of free shipping. Certainly they have not achieved levels of engagement that will anchor their existing customer base, help individual policyholders achieve better outcomes, resist intense competitor activity and, ultimately, boost their bottom lines.

To some extent, the major metrics for engagement are whether or not customers feel valued and want to keep doing business with a specific company. In this sense, engagement goes beyond basic utilization of and satisfaction with basic transactions (like bill paying or email notifications). Does the company provide relevant and valuable information that consumers actually want? Does it meet individual preferences for interacting and transacting? Does it help consumers meet their objectives easily and efficiently? These are the questions that must be asked by any company seeking to deepen, strengthen and extend relationships in our consumer-driven world.

This article will highlight five actions steps insurers can take to boost customer engagement, as well as define the parameters of customer engagement. As you’ll see, the key is to think holistically and creatively in applying leading practices from other industries, especially those that go beyond basic connectivity to deliver high-quality user experiences and create customer advocacy. 19


It’s worth defining our terms, because customer engagement has become something of a buzzword, and one that can mean different things to different businesses and industries. Generally speaking, customer engagement refers to the ability of a company to promote loyalty and advocacy on the part of its consumers and generally good business outcomes through a full ecosystem of externally facing touch points and channels (including online and in-person or face-to-face networks).

The business case for customer engagement is perhaps easier to grasp than the definition. More engaged consumers equate to lower costs and reduced churn, which benefit policyholders and insurers alike. Further, competitive advantage results when consumers spread the word about a company’s great service or helpfulness in solving a problem (whether it’s related to a specific claim or a broader topic like retirement planning).

So what can life insurers in particular do to engage customers? 1. Communicate, communicate, communicate. For many insurers, increased engagement will start with more effective communications. Improving the quality and clarity of standard communications is a seemingly small improvement that many insurers can make — but one that can send a potentially big message to consumers that insurers value their business. In streamlining premium statements, cover letters and disclosures, insurers should focus on sharing meaningful information in clear language that ordinary people can understand. Even more importantly, insurers and agents must be very sensitive on the timing of their communications, which are often distributed during periods of stress. For example, the first notification of death benefits is not an appropriate vehicle for upselling or cross-selling beneficiaries, though some insurers automatically include information about additional products in such communications. 2. Get proactive with relevant content and timely offers. After mastering basic communications, insurers can move on to higher-value activities, such as sharing personalized content. For instance, when sources of direct deposit change, insurers can share information about what other clients do after changing jobs. Similarly, they can make special offers, such as free reviews of IRA fees or investment account strategies, in advance of a projected retirement date. Such content can also be used for “defensive purposes;” by reaching out to consumers

who have searched the company website for information about cancelling a current product, insurers might be able to save a policyholder who is otherwise inclined to switch. Currently, very few insurers take a proactive approach to protecting their base. 3. Integrate data to get everyone on the same page and get to know your customers better. Integrated repositories of customer data and systems that can speak to each other are a requirement for such proactive communications capabilities. The goal must be to eliminate the differences between digital and traditional channels and confirm that the company always acts like a single, unified entity, rather than an assemblage of standalone departments. That means call center agents and field representatives must have ready access to current, consistent and complete information from all recent interactions — including web activities, correspondence, service notes and purchase and declination histories. Further, integrated data — as well as robust analytics capabilities — are necessary to the design and distribution of personalized communications of the sort described above. In fact, the vision of “right message or offer to right consumer at right time via right channel” is simply impossible without integrated data. Effective data collection across internal and external channels and data management set the stage for deep consumer knowledge by enabling detailed analysis of specific behaviors, which in turn leads to a deeper understanding of what’s relevant to specific individuals.


20

4. Take an incremental approach to engagement. Executives feeling that they can never achieve consumer experience parity with the leading eCommerce platforms can take comfort in knowing that major gains are possible without huge, “big-bang” transformation projects and enormous budgets. In fact, rethinking the basic relationship dynamics with current policy owners doesn’t have to cost a dime, though it is a critical change on the strategic and cultural levels. The most basic question is: how can the company make everything it does easier, clearer and more beneficial to consumers? It should be asked across and at every level of the organization. Many companies seek to incorporate specific customer experience objectives and strategies into existing transformation projects or change initiatives within customer service, claims or other functions. That can mean adopting self-service channels to simplify payment processes, for example, or adding more communications options (e.g., texts or automated notifications) to core processes. 5. Create advocacy by building on engagement. With basic building blocks in place, insurers can begin to use more advanced tools and techniques to enhance their relationships. Again, it all starts with knowing — deeply and subtly — what customers really want. Some of that insight will come from channels (e.g., social media), as well as correspondence and service notes. Advocacy is a two-way street, of course. Insurers can — and should — serve as advocates for consumers by providing valuable information and offering timely recommendations (e.g., to consult with an advisor or

21


re-balance a portfolio). When such offers resonate, consumers will be willing to spread positive messages about their carriers. Here again, other more digitally savvy industries point the way forward. Amazon-like recommendations make intuitive sense in insurance — “People like you also purchased a similar annuity.” Or: “75% of people in similar circumstances typically adjust their portfolio.” The “gamification” techniques used by the travel and fitness industries could also be a good fit in insurance. Customer-centric insurers could make retirement planning feel more like preparing to run a marathon or planning a special getaway. The key is to have the data, systems and cultural commitment to provide appropriate nudges and inspirational reminders along the way. As an industry, we know that trying to scare people into savings has not delivered optimal results. So why not try more engaging approaches that are familiar to consumers from other aspects of their lives? In the future, the rules of engagement are likely to shift and expand — a development that could present new opportunities for insurers. For instance, some consumers may be willing to share more personal information in return for valuable content or specific guidance, provided they are compensated and appropriate security guarantees are in place. In return for completing a questionnaire, consumers might receive special discounts or other compensation (such as gift cards or sessions with financial planners). As consumers recognize that their data is valuable, they are more likely to expect something in return for sharing it.

Playing the long game of engagement As an industry, insurance is coming to terms with the idea that we operate in a fundamentally different era. That’s why forward-looking executives are benchmarking their consumer experiences against those offered not just by the most popular eCommerce platforms, but also by Mint. com, Personal Capital and other firms somewhat closer to home. Why can’t we offer policyholders the ability to consolidate information about their insurance holdings? Why wouldn’t we strive to enable financial account integration or eliminate policy administration fees for our most valuable clients? Imagine the customer affinity and advocacy that would result for the insurer that got it right. Insurers must also gear themselves for the long game, when it comes to customer engagement. In our consumer-driven world, where digital leaders will continue to up the ante on customer experience, it will only grow more important. To keep their best customers, carriers will have to offer value in new and creative ways. That will require better analytical capabilities to identify what consumers want, effective tools for sharing meaningful information and offers, and the strategic savvy to know when to share information and when to sell products. It can sound like a daunting task, but through a set of small tactical steps, insurers can start moving forward toward value today.

EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.

EY professionals in our financial services practices worldwide align with key global industry groups, including EY’s Global Asset Management Center, Global Banking & Capital Markets Center, Global Insurance Center and Global Private Equity Center, which act as hubs for sharing industry-focused knowledge on current and emerging trends and regulations in order to help our clients address key issues. Our practitioners span many disciplines and provide a wellrounded understanding of business issues and challenges, as well as integrated services to our clients. With a global presence and industry-focused advice, EY’s financial services professionals provide high-quality assurance, tax, transaction and advisory services, including operations, process improvement, risk and technology, to financial services companies worldwide.

Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US.

© 2015 Ernst & Young LLP. All Rights Reserved.

EY is a leader in serving the global financial services marketplace. Nearly 35,000 EY financial services professionals around the world provide integrated assurance, tax, transaction and advisory services to our asset management, banking, capital markets and insurance clients. In the Americas, EY is the only public accounting organization with a separate business unit dedicated to the financial services marketplace. Created in 2000, the Americas Financial Services Office today includes more than 6,500 professionals at member firms in over 50 locations throughout the US, the Caribbean and Latin America.

SCORE No. CK0866 1502-1408702 NY ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.

ey.com