(Forbes) Insurers still aren’t doing enough to modernize the process of buying an annuity. This creates a vicious cycle — longer time spent by agents on a time consuming process that yields an inadequate customer experience, which leads to lower conversion-to-sales rates, which lead to the need for higher compensation in order for agents to justify offering annuities, which leads to lower value products for consumers, which in turn make the products harder to sell and pushes conversion-to-sales rates lower.
Although there’s finally more attention being paid to this issue, it seems like the lion’s share of insurance company spending is being dedicated to improving legacy systems, rather than building modern quoting, application processing, and policy administration systems from the ground up.
In some sense, it’s easy to understand the insurers’ hesitation — the cost of addressing these issues is immediate and direct, but their benefits are mostly deferred and indirect. But the alternatives are far less attractive — do nothing and fall even further behind, or pursue an incremental approach that kicks the can down the road and will eventually necessitate the same “rip it up and start over” approach that could be done today.
In this article, I discuss seven specific ways insurers can modernize the annuity buying experience, from product development all the way to ongoing policy management.
1 - Standardized Product Terminology
An immediate annuity might be called a single premium immediate annuity, a SPIA, or simply an income annuity. Longevity insurance is usually synonymous with a deferred income annuity, a.k.a. a DIA, but sometimes it’s used to connote only a subset of deferred income annuities — those with very long deferral periods (but how long?). And to further confuse matters, sometimes longevity annuity is the terminology used instead of longevity insurance or deferred income annuity. And we’ve even heard these products called deferred immediate annuities. Yikes, a seeming contradiction in terms.
Deferred can have two meanings — deferred can mean that the decision about annuitization is deferred until later (i.e. a fixed deferred annuity) or it can mean that annuitization is selected upfront but it simply doesn’t start right away (i.e. a deferred income annuity).
And, perhaps worst of all, there’s an indexed annuity that’s called an income annuity. Calling an indexed annuity an income annuity confuses all but the closest market observers. It’s completely unreasonable to ask busy people to wade through all of this and feel like they’re making an informed decision.
Insurers should commit to standard nomenclature. Every product doesn’t need its own name. You really just need to know (1) the insurer; (2) the type of product it is; and (3) which other insurers have a product that does the same thing.
2 - Standardized Illustrations
An annuity illustration should be standardized across insurers and distribution channels, much the same way a loan estimate for a mortgage is. The standard annuity illustration should start with the cost of the most basic version of the product that an insurer offers. To use the example of the immediate annuity, illustrations should start with a life only policy with no inflation protection. Every included feature of the product (those you can’t get rid of to lower the cost) should be listed. Then, every available feature that can be included or excluded should be shown, with both benefit and incremental cost clearly spelled out. The illustration, ideally, would be the same for a given product category across all insurers, such that just like a mortgage loan estimate, buyers can easily compare different annuities from one insurer to the next or from one broker to the next on an apples-to-apples basis.
3 - APIs
Digital applications (or what is commonly referred to the industry as eApps) are better than paper applications, but they’re not cutting edge. Insurers should be exposing an API that allows third-party developers (specifically distribution channel partners) to quote and apply for policies all within the distribution channel’s own interface. At Blueprint Income, we built this kind of integration with Pacific Life’s new brand, Next by Pacific Life, and are able to issue policies in as little as 24 hours with a (mostly) automated digital process. This process nearly eliminates human error, reduces the stress of long processing times, and significantly reduces costs by avoiding the legacy systems.
4 - A Domino’s Pizza Tracker For Your Annuity
It’s important to have a portal where agents and applicants can see the status of pending business, including any outstanding requirements. This is especially important during long applications processes, such as qualified transfers and 1035 exchanges. Consumers often grow frustrated when they can fill out an application for a policy in 5 minutes, but then must wait 5 weeks for the policy to be issued. Cutting down on processing times would help, but giving people better, real-time information is also part of the fix.
5 - A Common System For 1035 Exchanges
When moving money from one insurer to another via a 1035 exchange, it is sometimes possible to use a digitally signed transfer request form. Other times, a “wet” signature is required. And still other times, it can require a medallion guarantee. These rules are inconsistent across insurers, and there’s no rhyme or reason based on the size or type of annuity being exchanged. Every insurer plays both the role of the one transferring a policy and the role of the one receiving a policy. Within reason, making this process easier no matter what side of the transaction an insurer is on will reduce client frustration and grow the entire pie. Having an antiquated process is never good for business in the long-run, even it means slightly less stickier deposits in the short-term.
6 - Simple Online Accounts At Insurer
We’ve built out account functionality that allows our clients to see all of the contributions they make across multiple policies, as well as how much income or expected returns they can generate. But us providing this information is only so useful. We have to pull most of this data manually, and the client will always have the desire to see the data straight from the source. Some insurers have antiquated systems and some have none at all. Banks figured this out long ago, and there’s no reason insurers can’t deliver the same experience to their clients.
7 - Integrations With Yodlee And Plaid
Whether you use Personal Capital, Fidelity Full View, or a host of other account aggregation tools, the data is probably being fed through the pipes of Yodlee or Plaid. You provide these systems with permission to check balances (typically by logging into the accounts on your behalf) so you can see in one place how your financial life is trending over time. But there’s only one problem — annuities aren’t included. I have to manually enter my annuity balance every time I make a contribution to my own Personal Pension, for example, in order to see it on my Personal Capital dashboard, whereas all of my brokerage accounts update automatically. Not having these integrations is an impediment to creating an annuity asset class.
These changes are necessary if insurers hope to deliver the kinds of buying experience that the next generation (and increasingly this generation) of annuity purchasers expects.
Like the insurers we work with at Blueprint Income, I believe strongly in the importance of guaranteed income in retirement. I believe that annuities should be the foundation of a new pension system. From the process of building Blueprint Income, I’ve witnessed the limitations of the current system and the ways in which the industry winds up turning people off to the products. These 7 suggestions are improvements that I believe are necessary to position simple income annuities to fill the gap left by defined benefit employer pensions.
