Are Personal Pensions the Antidote for Diversifying Your Book?

Aging baby boomers and autonomous vehicles—you probably don’t give much thought on a daily basis to how these two things will affect the future of independent agencies.

But what do the “greying” of America and autonomous vehicles have in common? Together, they are conspiring to kill your personal lines book.

The Boomer Impact

As the U.S. population becomes increasingly diverse, independent agencies are adapting their marketing and insurance offerings to reflect changing demographics. Today, success strategies may involve hiring multilingual staff and including diverse messaging in marketing materials. By contrast, however, many agencies have been slow to acknowledge the “greying” of America.

As young people continue to abandon smaller towns in favor of suburban and urban areas, the average household has gotten older. In 2004, one-third of U.S. households had at least one person age 55 or older; today, that number has increased to two-fifths, and is heading toward half, according to the Consumer Expenditure Survey from the Bureau of Labor Statistics.

And customers aren’t the only ones getting older. According to the latest Future One Agency Universe Study, the median age of agency owners, producers and CSRs correlates consistently with that of the overall U.S. population. Since many agency principals count their peer group among their primary network, they’re likely aging right alongside their best clients.

Aging impacts spending patterns. Older households tend to decrease spending on transportation and housing, particularly after age 65. As some 10,000 baby boomers retire every day, they are increasingly downsizing to smaller homes or opting out entirely of homeownership in order to prepare for retirement, according to Bank of America Merrill Lynch—which also reports that over the last decade, baby boomers accounted for more than half of the nation’s renter growth.

The study also found that three out of four baby boomers would downsize their home to lower ongoing costs and gain home equity to help fund retirement. Two out of three, meanwhile, would be willing to move to a less expensive location—a bad omen for colder climates and less tax-friendly states, especially in light of the recent tax law’s capped deductions for state and local taxes.

Auto: An Uncertain Future

For independent insurance agencies whose personal lines books will be impacted by these demographic trends, autonomous vehicles pose another existential threat. Many independent agents believe that the timeframe of autonomous vehicles is far enough in the future that it won’t immediately threaten their personal and commercial books. But, as the expression goes, “objects in your mirror may be closer than they appear.”

It’s true that the necessary technological innovation and relevant legislative response will take time—possibly as long as a decade. But while autonomous vehicles are not a next-week or even next-year threat, their proliferation will increase sooner than expected because the largest stakeholder of health care costs—federal and state governments—are desperate to reduce the financial burden of Medicaid and Medicare in paying for automobile accidents. According to a recent analysis performed by Michele Bertoncello and Dominik Wee for McKinsey & Company, the improved road safety created by autonomous vehicles will save as much as $190 billion a year in accident-related health care costs.

Meanwhile, insurance carriers are already lobbying state lawmakers regarding potential regulatory changes affecting the development and deployment of autonomous vehicle technology. Many are taking the position that state financial responsibility laws should be extended to either autonomous vehicle manufacturers or fleet operators whose services utilize autonomous vehicles.

An important related issue relates to the data that autonomous vehicles will generate. It is not entirely clear who will “own” this data, but insurers will need access to it to accurately underwrite the risk and to adjust individual auto accident claims.

A number of carriers already collect specific vehicle information in the form of telematics devices which track driving behavior and offer discounted rates for safe driver habits. This is the same type of data insurers will need to collect from autonomous vehicles in order to ensure prompt accident investigation and payment of damage and injury claims: information about vehicle speed, braking, sensors and more.

While autonomous vehicles should ultimately reduce the frequency and severity of accidents, the larger threat to independent agents is that the traditional auto insurance policy, which focuses on the vehicle and driver(s), will morph into a product warranty policy—disintermediating many agents and carriers in the process, as auto manufacturers partner with the largest insurers to insure (or reinsure) vehicles.

Finally, like the sharing economy, the proliferation of autonomous vehicles will also lower the need for personal ownership of vehicles, eventually eliminating the expense of a driver and leading to lower user fees.

Time to Adapt

The intersection of baby boomer demographics and autonomous vehicle technology means that many Main Street agencies may see declining auto premiums over the decade of 2020-2030. What does that mean for the long-term viability of agencies with significant personal lines and commercial auto books?

As an agency owner, your agency is an investment. What’s the No. 1 rule of investment in an uncertain environment? In a word: diversify.

An investor who’s looking to reduce the risk of their portfolio—also known as the standard deviation—may choose to invest in other asset classes such as stocks, bonds or real estate, especially if the assets are not likely to move in the same direction or magnitude after a certain economic event.

In other words, agencies that have meaningful auto insurance premium volume should consider other lines of business that complement their existing book. And given the country’s changing demographics, wouldn’t it make sense for an agency to diversify by offering products and services that correspond to the needs of the aging population? The nexus between p-c and l-h is helping clients manage the risk in their personal and professional lives.

The State of Life Insurance

Almost all independent agencies have at least one life insurance-licensed staff member, according to the Agency Universe Study. But with the exception of the largest-revenue agencies, life and annuity sales account for only a small percentage of agency revenues: less than 5% (excluding health insurance premiums), according to the latest Big “I” Best Practices Study.

What a missed opportunity. LIMRA’s 2016 Insurance Barometer Study found that 34% of Americans were likely to purchase a life insurance policy within the next year. In addition, 66% of consumers were at least somewhat likely to recommend the purchase of a life insurance policy to a friend—an 11% increase over the previous year. Finally, 86% of consumers believed people should have “some” life insurance.

Why, then, have individual life insurance premium volumes have been overall flat the past several years?

Consider millennials as an example. Although millennials are now the largest single demographic group in the U.S., more than half of millennials have never been approached regarding purchasing life insurance, according to LIMRA. Targeting millennials for life insurance in a systematic way could be a great way for independent agents to generate sales and high closing ratios.

The life insurance distribution channel has undergone radical change over the past 30-some years. Traditionally, career agents maintained the largest footprint—the distribution system that used life insurance carriers to recruit, train and fund agents to enter the life insurance industry and primarily sell their product line. Today, most life insurance companies broker their life insurance products through independent producers.

While this development is good news for independent agents, it also means they have to understand many more products with various policy rider nuances. To make it even more complicated, life insurance companies have different underwriting appetites and treat some medical conditions more favorably than others. As a result, most agents that write a meaningful amount of business typically have a relationship with a life insurance managing general agent.

Life insurance deals with mortality risk—financial risk due to the death of an individual. The flip side is longevity risk—the possibility of outliving one’s financial resources.

Longevity risk has emerged as a burgeoning national issue—it’s even been referred to as a national crisis, thanks to longer life expectancies, an overall lack of retirement savings and the fraying of “entitlement programs” like Social Security, Medicare and Medicaid.

Whereas retiring generations used to have guaranteed lifetime income through defined benefit pension plans, these plans have been on the decline. Even state and municipal pension plans are facing the consequences of persistently low interest rates and lack of adequate funding.

The Need for Annuities

This need for guaranteed life income is a huge opportunity for independent agents, who can help their clients deal with longevity risk by creating their own “personal pension”: a floor of guaranteed retirement income that enables them to take more risk with their remaining retirement savings to invest in stocks and other vehicles. This can be accomplished by using immediate and deferred life annuities.

The term “annuity” has earned a bad rap in some instances due to misconceptions surrounding the variety of annuities, the complexity of some products and features, and, in some cases, high annual expenses and long surrender periods. Most independent agents will find that lifetime immediate annuities are a better, less complicated fit for their clients, because they don’t require security licensing.

Another retirement income planning concept is using “buckets” over a 30-year retirement. The first-decade bucket consists of immediate life annuities, Treasury Inflation-Protected Securities and Social Security benefits. The second-decade bucket can include bonds, deferred income annuities and some lower-risk stocks. The final-decade bucket may involve more volatile investments, such as small cap stocks, emerging market stocks and other long-term higher-risk, higher-return investments.

One of the key concepts related to lifetime annuities is the importance of mortality credits. A mortality credit is the dividend an annuitant earns by pooling their mortality risk with others. Over time, as owners of income annuities die and the contracts’ guaranteed periods expire, their assets pass to the remaining annuity owners, supplementing their income.

Of course, in a life-only immediate annuity, upon the death of the annuitant, the payments stop. Many people may be dissuaded by the notion of not leaving a legacy for their beneficiaries, but they can address that concern by selecting joint-and-survivor options, term certain and life refund—if the annuitant dies prior to the full amount of principle being paid, the balance goes to the beneficiary. The trade-off for these product features is that the initial payment is lower.

Considering an independent agency’s typical personal lines book consists of an aging middle-class to mass-affluent clientele, here are several compelling reasons that make immediate lifetime annuities a strategic opportunity:

• No underwriting is involved—just suitability considerations.
• Quotes from multiple carriers can be provided on a common platform.
• No security licensing is required—just a life insurance license and a four-hour annuity licensing class.
• It can generate meaningful revenue: Commissions range from 2-3%.
• Minimal ongoing service work is required.
• It’s a logical complement to your personal lines book.
• Binding coverage is easy.

Many consumers and agents may be confused about the difference between variable annuities, which are complex and can contain high fees, and immediate annuities, which are straightforward and allow for easy comparison of the monthly benefit amount.

If you’re interested in offering life annuities, your primary role will be discussing longevitiy risk, educating the client about the different forms of immediate annuities—life only, joint-and-survivor, etc.—and explaining the importance of carrier ratings.

Variations include deferred income annuities, which Congress helped make more attractive by allowing the lesser of 25% or $130,000 to be used from an IRA or 401(k) plan to purchase an annuity that isn’t immedate but rather will pay out at a later age. For example, a person who purchases a deferred income annuity from their IRA with $130,000 at age 65 could receive $60,000 annually at starting at age 85 for the rest of their life. This would enable them to use their retirement savings to enjoy their desired lifestyle, knowing they have a meangingful annual revenue to rely on starting at age 85—and they didn’t have to pay minimum required distributions on the amount of money they used to purchase the deferred income annuity.

Remember: Lifetime annuities are not a silver bullet. They should serve as a strategic component of a comprehensive retirement income strategy which provides guaranteed income that will not vary with market conditions. Lifetime annuities are certainly subject to inflation risk, but a holistic approach involves investing remaining assets in stocks to address that, as well as laddering an immediate bond portfolio.

Retirement savings data is clear: Most people don’t have enough guaranteed lifetime income to meet their necessary expenses in retirement. A lifetime or deferred income annuity can be the foundation that facilitates more risk in their retirement portfolio. Interested in learning more about retirement income planning? The American College’s Retirement Income Certified Professional (RICP) designation coursework is well worth the time and effort.

The Big “I” and its consumer brand, Trusted Choice^®, recognize the importance of devoting agency resources to providing personal pensions for their clients. Bob Rusbuldt, Big “I” president & CEO, says that the association’s leadership recognizes the connection between defined contribution plans and adequate retirement and longevity risk planning.

“We see the opportunity for members to offer retirement risk management products to create personal pensions,” Rusbuldt says. “We are pleased to be devoting educational and product resources to help members fulfill those client needs.”

Dave Evans is senior vice president, Big I Advantage^® Life & Retirement Solutions.