#294 | Dispatches from Annuityland – Part 2
In the first dispatch from Annuityland, I made the overarching observation that most folks in our industry carry one of two passports – either for life insurance or annuities – but that there is a lot to learn by traveling between the two. When it comes to product, there are clear and easy similarities between prevailing annuity and life insurance products. But there are also numerous structural and optical differences that often make annuities and life insurance product feel like they are worlds apart, even though they’re not. The same goes for other elements of the annuity and life insurance markets, particularly when it comes to distribution.
Theoretically, life insurance and annuity distribution overlap almost perfectly. Both products are sold in the institutional, independent and career channels, with smaller RIA and Consumer offshoots. The institutional channel encompasses banks, independent broker-dealers and wirehouses. The independent channel is composed of insurance brokerage firms that work with “independent” agents and advisors that are not usually affiliated with a bank or broker-dealer. The career channel encompasses life insurers with affiliated financial advisors or, for a slightly looser definition, advisors who are registered with a life insurer-owned broker-dealer. The final two pieces of the puzzle are Direct-to-RIA (D2RIA) and Direct-to-Consumer (D2C) operations, both of which are increasingly a focus for both products.
Before I dig into each one of these categories and point out their differences, I think it’s important to point out that annuities and life insurance are sold in very different ways and for different reasons. Permanent life insurance is a complex product sold to generally wealthy people that involves a cumbersome, time-intensive underwriting process. Annuities are also complex, but do not require any underwriting, and are generally sold to middle-income folks in a process that is intended to mirror the ease and simplicity of investment options. Annuities are all about volume. Life insurance is all about premium, preferably from a few large policies rather than a multitude of small ones.
These differences are even apparent in the generic names of the distribution middle-men for each product – Independent Marketing Organizations (IMOs) for annuities and Brokerage General Agencies (BGAs) for life insurance. The primary value-add for a BGA is assisting agents with business processing. That is literally why they exist. Life insurers don’t want to deal with tens of thousands of independent agents attempting to process business directly, so the life insurer pays the BGA a healthy override to package the business for them, providing fewer and more regulated connection points to the life insurer. They are brokerages first and foremost. But that’s not the only reason why they exist. The best BGAs also provide agent education, product intelligence and advanced sales support. They’re life insurance experts. And with life insurance, the complexity of the product and processes requires expertise.
IMOs, by contrast, exist for a different reason – they are marketing organizations. Their highest function is to wholesale annuities to agents and financial advisors, educating them on the benefits, features and applications of the product. They are marketers, first and foremost. But these days, they do far more than that. They are all-encompassing ecosystems that provide a wide range of services to grow and sustain the businesses of the agents and advisors who work with them, everything from creation of marketing collateral, succession planning, business valuations, direct mail campaigns, video production, you name it. Advisors who work with a large IMO increasingly come to rely on the IMO to help them grow their business. It’s a symbiotic relationship that benefits both parties.
That’s one of the reasons why it’s been difficult for IMOs to replicate their success in annuities in life insurance and vice versa for BGAs. The functions are fundamentally different. The chief goal of an IMO is to grow the market (and their market-share) for annuities, especially in their own ecosystems. The chief goal of a BGA is to efficiently position and process business, because life insurance is just so damn hard to transact. But crossover is starting to happen. The largest IMOs are building legitimate back-office processing capabilities to win life business that might be going elsewhere and to cultivate more life insurance sales within its current advisor base. Some IMOs now have life insurance operations with $30M+ in annual production, putting them in the same ballpark as some of the largest life-focused BGAs. And at the same time, BGAs are realizing that they can cross-sell annuities to a subset of their advisors, bringing a couple of large and notable BGAs into the realm of the top IMOs in terms of annuity production.
That’s the simple view. The more nuanced view is that there are two offshoots in the Life space that are worth noting. The first is the rise of so-called Network Marketing firms, which I wrote about in my very first Quick Take a couple of years ago. Again, the name supports the core function – marketing. These firms provide the same sort of lead generation and business support as an IMO, but in the context of what is often referred to as multi-level marketing. As with annuities, the game is all about volume. These firms each sell tens of thousands of tiny policies per year. Business processing is generally handled by the life insurer itself through a simplified underwriting process, which is why these Network Marketing firms usually only work with a handful of life insurers who are willing to play by the rules set by the firm. The life insurers who play ball are rewarded by, in some cases, tens of millions of dollars in premium.
The second offshoot is the elite, upper-crust of the life insurance industry – advisors and agents who focus exclusively on delivering specialized life insurance services to ultra-wealthy clients, often in conjunction with their other professional advisors. More often than not, life insurance is being used in these situations for estate planning purposes, which automatically means that the policy sizes are massive compared to traditional mom-and-pop life insurance policies. Massive policy sizes mean massive premiums and massive commissions. In terms of policy count, the life insurance elite comprises a tiny fraction of the overall market. But in terms of total premium and commissions, it’s a significant – and extremely influential – part of the market. There is simply no counterpart for the life insurance elite in Annuityland because the planning application for gargantuan annuity placements just isn’t there in the way that it is with life insurance for estate planning.
The differences between Annuityland and Lifeland become even more clear in the Institutional channel. In Annuityland, the vast majority of annuity production written by financial institutions – banks, broker-dealers and wirehouses – is handled by a direct relationship between the institution and the insurer. The insurer essentially gets a slot on the product platform at the institution and, from there, sends out its legions of wholesalers directly to advisors at the firm to sell its wares. In Annuityland, when an insurer says that it works with (for example) Broker Dealer A, it means quite literally that there is a formal selling agreement between Broker Dealer A and the insurer that stipulates compensation, marketing allowances, rules of engagement and a variety of other terms.
That’s not how things work in Lifeland. Financial institutions regularly move tens of billions of dollars in annuity premium on an annual basis through a well-oiled, (usually) well-supervised process. Not so for life insurance. Both the product and process are disjointed and exponentially more difficult, which means that many financial advisors either avoid talking about life insurance, refer the business to a traditional agent or already have an arrangement with a third-party brokerage firm to process their business, often as an outside business activity (OBA).
Financial institutions have historically struggled with how to incorporate life insurance into their corporate infrastructure due mainly to the lack of integration into order entry systems and time-consuming underwriting requirements. The usual model is to hire experienced life insurance sales professionals from an outside firm and bring them in-house. There are cases where this has worked spectacularly well, particularly in smaller, tightly knit and relatively homogenous (in terms of client profile) firms. But for every 1 case of that model working well, there are 3 cases where it doesn’t and a couple of notable situations where it was an unmitigated disaster, costing the institution tens of millions of dollars and untold manhours before shuttering the initiative altogether.
As a result, institutions have increasingly come to rely on third-party firms to wholesale life insurance into their organizations. This relieves the institution of the fixed cost of staffing a life insurance unit, but it introduces a host of other issues. How do you know that the brokerages are calling on the right advisors? How do you know what the brokerages are selling and if it’s “good” business? What happens if the brokerages do a poor job of processing and advisors have a bad experience? Some institutions have just thrown up their hands and allowed basically any brokerage to have a shot at their advisors. Other institutions have tightly controlled platform of partners. Just managing the brokerages, controlling the platform and attempting to supervise the business is a full-time job in and of itself. There’s just no perfect way to do it.
The fact that the models for reaching institutions are so different for the two product lines is why the data isn’t comparable. Sales data for annuities has clear attribution to the institution, but not so for life insurance. Life insurers usually don’t know if the piece of business is coming from an advisor affiliated with an institution because the case is being processed by a BGA and that’s how it gets categorized. If you were to look at the raw sales data reported by groups such as LIMRA, you’d think that there is hardly any life insurance being written at institutions. But if you talk to BGA principals, you get a totally different story. For many large BGAs, their institutional business is the majority of their production and has been for several years.
The interesting bit is that Annuityland is starting to take a page from Lifeland when it comes to institutional distribution. The old model of throwing a hundred wholesalers or more into the field to hawk Variable Annuities with Living Benefits or, these days, Registered Index-Linked Annuities (RILAs) is becoming less common. Wholesalers aren’t cheap but, more importantly, they also aren’t always effective at reaching every corner of the market. Historically, a wholesaler’s time is spent on advisors who are already producing lots of business, versus tackling the arduous process of converting and cultivating new advisors to annuities. Wholesalers are great at winning a share of the business. They’re not always great at growing the breadth of the business, in terms of bringing in new producers to the category.
That’s where alternative distribution comes in. Annuityland is increasingly seeing the rise of firms that are designed to wholesale specific products for specific companies into specific distributors – in other words, outsourced wholesalers with multiple products and carriers in their bags. This model has been around for years in the fixed insurance space, but it’s also starting to pick up in registered products as insurers are continuing to look for accretive growth with new producers. Outsourced wholesalers tend to have relationships in different places than most insurers wholesalers. The reality is that there are just too many firms and too many advisors for any one carrier to cover, even the biggest and the best ones. Outsourced wholesalers can fill the gap on a variable cost basis. It’s a win for both parties and a model that, I think, is going to continue to grow in the coming years.
The difference between Lifeland and Annuityland is also readily apparent when you look at career distribution or, in looser terms, advisors affiliated with a life insurer-owned broker-dealer. These firms – Northwestern Mutual, MassMutual, Guardian, New York Life, Penn Mutual, OneAmerica, Ohio National and a handful of others – have all traditionally been focused on life insurance. There is no analogy on the annuity side, no massive life insurer with a “captive” field force selling primarily annuities. At least, not anymore. I would argue that the MetLife agency system was primarily focused on selling annuities. Hence, one of the reasons why MassMutual has transformed into a significant player in the annuity business after acquiring the MetLife field force. But these career shops are changing form. Increasingly, they look more like traditional institutions with massive broker-dealer operations and a full suite of financial products and planning services on offer – all of which are being sold by field forces that are made up of registered representatives. The lines are blurred and becoming even more so all the time.
Now, to the pertinent question: why are annuities and life insurance distributed so differently in the same channels? My view is that it goes back to three things – positioning, process and product. Annuities are understood and positioned first and foremost as financial instruments. Life insurance is understood as an insurance product with some characteristics of a financial instrument. Annuities are sold through a generic, drop-ticket process. Permanent Life Insurance is a fully underwritten product where the process is individually experienced based on the client’s specific health history, which involves numerous and cumbersome steps to complete. Annuities are generally simple and straightforward products – at least compared to life insurance, which is complex even in its simplest forms.
In other words, annuities are viewed as a commodity and life insurance is not. Annuities are distributed like a commodity, life insurance is not. You can even see the distinction when you listen to life insurance and annuity wholesalers give presentations back-to-back, like I did yesterday. The life insurance wholesaler talked about the product and its differentiators, plus a sophisticated planning application geared towards high-income clients. The annuity wholesaler talked about the 2 Ps of FIA success – performance and pricing. The life insurance wholesaler was on stage for half an hour with a polished slide deck. The annuity wholesaler walked up and down the middle aisle and used his hands – along with a solid repertoire of jokes and stories – to make his point about why his FIA was the one to use. The difference between the two wholesalers was night and day. Both were great, but they were doing very different things.
What happens when life insurance becomes a commodity? The past few years in life insurance have seen the wide adoption of rapid underwriting programs that move the life insurance process much closer to annuities. There really isn’t that much of a difference between dropping an FIA ticket and selling a rapid-issue IUL product. And there really isn’t that much of a difference between the way an FIA is positioned for retirement income and the way an IUL is positioned for retirement income. And although an IUL is far more complex than an FIA, the core mechanics of the pure crediting strategy are essentially identical, and that’s about as far as most agents will dig. So much of life insurance distribution is built around managing a cumbersome process. If that process goes away, will distribution have to change as well?
This brings us to the final distribution category – Direct. When most people say Direct, they mean Direct to Consumer, but I’m going to bundle Direct to RIA in here as well. The reality is that building a product and a process for a D2C model is essentially identical to what you’d do for a D2RIA model. Most RIAs know only a bit more about life insurance than their customers. They want an easy and simple process and product, just like their customers do.
All of the other distribution channels are marked by the differences between life insurance and annuities, but not this one. Here, the Direct efforts of life insurers and distribution firms are nearly identical between life insurance and annuities because the acquisition process and positioning are nearly identical. Gainbridge, for example, is the brokerage entity owned by Guggenheim that sells a D2C MYGA product online with a slick interface focused on displaying the rate. Ethos Life isn’t owned by a life insurer, but it sells a D2C Term product online with a slick interface focused on displaying the price. They are basically identical models. The same goes for D2RIA, where life insurers and/or Outsourced Insurance Desks (OIDs) sell RIA-focused life and annuity offerings side-by-side. When you turn life insurance into a commodity, it gets distributed like a commodity. That’s going to be a threatening thing for a lot of folks in the life insurance space.
But not for the top end of the market. Life insurance used for high-end estate and business planning applications essentially can’t be commoditized. It’s hard to imagine that a life insurer will ever outsource underwriting a $50 million policy to an algorithm. But even more importantly, the application of the life insurance itself is a complex and convoluted affair. You have to be an expert in both product and planning to successfully place policies of that size. The irony of the life insurance market is that, in one sense, there’s never been a worse time because it’s possible that many of the middle-men in our industry get cut out by more efficient processing. But for true life insurance specialists and experts, there’s never been a better time. There are more planning applications for life insurance than ever and efficient processing takes a lot of pain out of the process. To quote Dickens – “it was the best of times, it was the worst of times.” Which one depends on you, your skillset and your target market.