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New Research on 401K Plans, from Top Researchers
Most 401(k) participants barely notice, but the products and services in their plans undergo constant tinkering. The updates might be small or huge. At a big corporation, subtle fee reductions might occur. At a small shop, employees might punch in one morning and discover that they can save at work for the very first time.
Changes at a single plan are often inspired by innovations that are rippling through the whole defined contribution (DC) industry, and those innovations are sometimes the subject of scholarly investigation. Three recent studies shed light on three of the latest trends.
In one study, the Defined Contribution Institutional Investment Association (DCIIA) publishes, for the first time anywhere, data on the use of custom target date funds (TDFs). Another study, by the Center for Retirement Research at Boston College, looks at the results of the UK’s experiment with nationwide auto-enrollment in plans, known as NEST. A third study, by Morningstar, offers evidence that plan advisors should invest time and effort in identifying and replacing unsatisfactory funds.
DCIIA’s custom TDF survey
TDFs are funds-of-funds into which the contributions of auto-enrolled participants can be automatically deferred. A company might offer 10 TDFs, each assigned to a different retirement date (e.g., 2020, 2025, 2030), whose exposures to equities gradually and automatically shrink (following a common “glide path”) as their retirement dates (maturities) approach.
Just as senior executives at large corporations might wear bespoke suits, a giant company might create a uniquely tailored TDF as its plan’s qualified default investment options (QDIAs) instead of using an off-the-rack TDF from one of the major vendors.
But apparently nobody was measuring this phenomenon until DCIIA, an association of asset managers that distribute mutual funds and other investments through DC plans, decided in 2017 to gather data from nine custom TDF designers on 673 unique funds at 65 retirement plans with some $990 billion in assets.
Overall, DCIIA estimated that about a third ($340 billion) of that $990 billion was in custom TDFs as of the end of 2017. That $340 billion represented 16% of total industry-wide TDF assets and 80% of custom TDF assets. Overall, DCIIA found an estimated total of $2.1 trillion in TDF assets at year-end 2017. The main components were:
- 51% mutual funds, with a market value of $1.1 trillion
- 29% collective investment trusts (CITs), with a value of $622 billion
- 20% custom TDFs, with a value of $430 billion
The $2.1 trillion represents a 61.5% increase over the $1.3 trillion estimated for 2015. “Improved reporting, auto-enrollment, and a bull market over the period contribute to the significant increase over the three-year period,” said the DCIIA Research Center in its March 2019 Custom Target Date Fund (cTDF) Survey.
“The fact that [DCIIA] could gather this information at all is significant,” said Stacy L. Schaus, author of Designing Successful Target-Date Strategies for Defined Contribution Plans (Wiley Finance, 2010), in an interview. “There’s been very little research that showed the size of the market, and now it’s over $400 billion.”
The study didn’t provide details on individual custom TDFs. Instead, it showed the range among custom TDFs in their allocations to equities, fixed income, “inflation-sensitive” assets (TIPs, commodities, etc.) and “diversifiers” (bank loans, hedge funds, etc.). The custom TDFs appeared to differ most in their final allocations, at the retirement date.
For equities, the final allocations ranged from 12% to 39%; for fixed income, they ranged from 32% to 67%; for inflation-sensitive investments, they ranged from 5% to 46%; for diversifiers, they ranged from 1% to 30%.
“Custom TDFs allow investment options that packaged TDFs don’t provide for,” Schaus told RIJ. “A packaged TDF wouldn’t have CITs or private equity. A custom TDF gives you more exposure to high diversifiers, like commodities and REITs [real estate investment trusts]. Any packaged TDF can give you access to institutional pricing, but at the custom level the pricing is even lower, assuming you have enough size to meet the investment minimums” required by asset managers.
One flew over the 401(k) NEST
California, Oregon and other Democratic Party-controlled (“blue”) states are initiating statewide auto-enrolled salary-deferral IRA plans for workers whose employers don’t offer retirement savings plans. The experience of NEST (National Employee Savings Trust), the UK’s public-option savings vehicle, has helped guide the US states in designing, establishing and evaluating their own fledgling plans.
As reported in a recent Issue Brief from the Center for Retirement Research at Boston College (CRR), auto-enrollment in the UK under NEST has gradually increased private sector retirement plan participation rates to 67% in 2017 from 32% in 2012. That breaks down to around 90% for workers at medium and large employers and 70% at small employers.
The CRR reported these lessons from the NEST experience:
- Re-enrollment efforts don’t seem to have boosted participation any further. Most workers who chose to opt out when first enrolled also chose to opt out when re-enrolled three years later.
- For employers with fewer than 500 workers, the UK participation rate flipped from being much lower than the US rate to significantly higher.
- Employers with 50-57 and 30-49 workers saw substantial increases in participation, with participation rates reaching 74% and 67%, respectively.
- Most new enrollees are making minimum default contributions, but the share of employees contributing at higher rates has also risen significantly.
The NEST experience “suggests that an equivalent reform in the United States could generate a sizeable increase in retirement plan participation, primarily among employers with fewer than 500 workers,” the CRR said.
Replace those burnt-out funds!
In a new report, “Change Is a Great Thing,” David Blanchett, head of retirement research at Morningstar, Michael Finke, chief academic officer at The American College, and Jim Licato, vice president, product management, Morningstar Investment Management LLC, questioned the conventional wisdom that plan sponsors are wasting their time in monitoring their investment menus (even though, in these litigious times, they risk accusations of a lapse in fiduciary duty if they don’t).
The three authors used “a unique longitudinal data set of plan menus from January 2010 to November 2018 that includes 3,478 fund replacements” in the plans of three retirement plan recordkeepers that use Morningstar’s managed account services. They found evidence that the conventional wisdom isn’t true.
“We find significant evidence that the replacement fund outperforms the replaced fund over both future one-year and three-year periods. The outperformance remains even after controlling for various fund attributes and risk factors. This analysis suggests that monitoring fund menus can improve performance, although more research on why this effect occurs is warranted,” they write.
“Large-blend was the investment style with the most replacements, averaging 42.7 funds per year, which was 10.8% of the total funds replaced,” the report said. “Equity was the most common broad style group, averaging 67.7% of replacements. Replacement funds tended to have lower expense ratios, averaging 5, 4, and 14 basis points for equity, bond, and allocation funds, respectively. Replacement funds tended to have higher historical returns, most notably at the five-year period, averaging 164, 41, and 70 basis points for equity, bond, and allocation funds, respectively.”
Social Security reckoning point
With the exhaustion of the Social Security reserves (“trust fund”) only 15 years away, Americans face a reckoning. They can ask the government to prevent Social Security benefits from dropping about 25%, but that would probably require taxes on high earners.
Alternately, they can choose to let benefits drop and possibly offset the lost purchasing power through contributions to some new form of universal DC plan.
Either solution would create new winners and losers, and therefore provoke opposition. The experience of other countries teaches that the less radical the change, the easier it would be to make.
© 2019 RIJ Publishing LLC. All rights reserved.
The Awful Optics of Fighting Fiduciary Rules
Last Monday, the state of New Jersey invited public comment on a proposal by the N.J. Bureau of Securities to “establish by regulation (N.J.A.C. 13:47A-6.4), the common law fiduciary duty and apply it to broker-dealers and agents, and to codify it for investment advisers and investment adviser representatives.”
Two financial services trade groups, the Insured Retirement Institute (IRI) and the Financial Services Institute (FSI), promptly responded with press releases denouncing the regulatory move. A month ago, they issued press releases opposing a similar effort in Maryland.
Despite the terrible optics of their war on investor protections, members of the brokerage industry seem determined to keep fighting. Flush with their victory over the Obama DOL fiduciary rule (with help from a sympathetic federal appellate judge in Texas), they may underestimate the cost to their reputations and overestimate the value of the conflicted business model that they’re trying to preserve.
In its release, the IRI warned that independent efforts by the states to regulate advisors would create inconsistent rules across the country, resulting in “fewer advisors, higher compliance costs that imperil smaller broker-dealer or financial advice firms, advisors less likely to take clients with moderate investment funds, and less product innovation and reduced availability of lifetime income products.”
The IRI’s members include many advisers who accept compensation (commissions) from life insurance companies when selling annuities to investors. The industry knows that this form of vendor-financing facilitates a lot of sales that otherwise might not occur, but regulators fret that the practice is not transparent and that it incentivizes inappropriate transactions.
For its part, the Financial Services Institute, which represents more than 100,000 broker-dealer reps, said, “states should refrain from issuing their own fiduciary duty rules. FSI has long supported a federal uniform standard of care for all investment advice, and we believe the SEC is the appropriate authority to develop such a standard.”
What would the New Jersey rule do? Here’s an excerpt from the proposal:
Proposed new N.J.A.C. 13:47A-6.4(a)1 specifies that for a broker-dealer, or its agent, failing to act in accordance with a fiduciary duty to a customer when making a recommendation or providing investment advice is a dishonest or unethical business practice.
As set forth in subsection (a), a recommendation includes one for an investment strategy, the opening of or transfer of assets to any type of account, or the purchase, sale, or exchange of any security. Subparagraph (a)1i states that when making a recommendation, the fiduciary duty obligation extends through the execution of the recommendation and shall not be deemed an ongoing obligation.
To address the concerns over dual registrants “switching hats” when dealing with the same customer and the resulting investor confusion, the Bureau proposes subparagraph (a)1ii, to state that if a broker-dealer or agent also provides, in any capacity, investment advice to the customer, the fiduciary duty obligation is an ongoing obligation to that customer.
The fiduciary duty will be applicable to the entire relationship with the customer, regardless of the security account type. Paragraph (a)2 provides that it is a dishonest or unethical business practice if an adviser, or a broker-dealer or its agent who has discretionary authority over the customer’s account or a contractual fiduciary duty, or who is acting as an adviser, fails to act in accordance with a fiduciary duty to a customer when providing investment advice.
New Jersey is geographically small, but demographically and financially large. With about 9 million residents, it’s the eleventh most populous state. The median household income is close to $80,000, or about 33% higher than the US household median. In 2014, New Jersey ranked sixth in the US in sales of variable annuities, at $6.1 billion.
Other Eastern blue states that are contemplating fiduciary rules—Maryland (which includes professionals and government officials who work in Washington, DC) and New York—are rich too. Along with Nevada, which has a fiduciary rule initiative, those states represent about 13% of Americans likely to buy annuities, according to Information Asset Partners.
The registered-reps and advisers who are represented by IRI and FSI say they want a national standard of care. The Obama DOL offered them a nationwide standard of care, but it was a “fiduciary” standard, and any “fiduciary” rule worthy of the name will disrupt the brokerage distribution model, which, as noted above, relies in part on manufacturers to help finance its sales and marketing functions.
In truth, the brokerage industry doesn’t want any new regulation that might interfere with that model—not state or federal, patchwork or uniform. If there has to be regulation, the industry, as the FSI said, would prefer that the Securities & Exchange Commission (SEC) regulate it. The SEC knows the brokers best and—judging by that agency’s vague new “best interest” proposal—would probably regulate them least.
© 2019 RIJ Publishing LLC. All rights reserved.
Fewest Open Variable Annuity Contracts Since 1997: Morningstar
New sales of variable annuities (VAs) came in at $22.5 billion in the fourth quarter of 2018, a 4.3% decline compared to a year earlier but in line with average quarterly sales figures over the past two years.
Sales of VAs with guaranteed living benefits posted a fifth consecutive quarter of positive year-on-year (y/y) sales growth, versus negative sales growth for VAs without a living benefit in three of the past five quarters (including Q4).
Sales shifted away from some traditional market leaders and toward newer VAs offering more generous living benefits and/or negative return protection. The ten top-selling VA issuers stayed much the same and accounted for more than 83% of total sales. TIAA dropped to fourth place from second and AEGON/Transamerica replaced New York Life in the top ten.
Among the five leading sellers, Jackson National remained the overall leader by a wide margin but AXA, Lincoln Financial and Prudential all gained market share at the expense of Jackson National and TIAA.
Jackson National introduced the only new VA in Q4 of 2018, the Elite Access Advisory II I-share. With no M&E fee and only a $240 annual fee, the contract is one of only about 10 deferred VAs currently available with no explicit asset-based fee linked to longevity risk. The product offers no living benefit riders.
Three of the best-selling VA contracts over the past several years—Jackson National’s Perspective II (7-year), TIAA-CREF’s R1, and Riversource Life’s RVS RAVA5 Advantage (10-year)—saw new sales fall by a combined $1.377 billion, or 22%, in the fourth quarter compared to a year ago, equivalent to a five-percentage-point decline in market share in just one year.
There were three newcomers to the top 10 contracts in sales, including two VAs issued within the previous 12 months.
Pruco’s Defined Income and Premier Retirement O-share policies were two of the fastest-growing VAs, thanks to strong living benefits. Defined Income jumped to sixth place from 12th place in sales, while Premier Retirement moved up one place, to third.
Each Pruco VA offers a guaranteed minimum withdrawal benefit (GMWB) with annualized step-ups equivalent to 6.3 and 5.5 times the associated benefit fee, corresponding to minimum withdrawal percentages for a 65-year-old of 6.3% and 5.8%, respectively. Perspective II and RVS GMWBs have step-up-to-fee ratios of 4.0 and 4.8 respectively, corresponding to guaranteed withdrawal fees for a 65-year-old of 5%.
Registered index-linked annuities (RILA) saw continued sales growth. Also known as structured, buffered, or hybrid annuities, these products include VAs that offer both variable- and fixed-indexed-like investment options. Others are effectively fixed-indexed annuities (FIAs) attached to a VA chassis.
Morningstar collects only sales data on the former, which we estimate accounted for around 65% of all the RILA sales in Q3 2018. Consistent with the booming popularity of pure FIAs, RILAs have seen significant sales growth in recent quarters, including Q4.
We estimate approximately $2.3 billion in the mixed-RILA space, equivalent to around $3.1 billion for the entire RILA space if we use our “65% rule.” That equals nearly 14% of all VA sales in the fourth quarter, compared to about 10% a year earlier.
Heightened market volatility may have contributed to the shift in VA sales patterns in Q4. GMWBs and RILAs are designed to protect against losses, but flows into managed volatility subaccounts did not increase despite a volatile market environment.
VA contract issuance and closures
Only one new variable annuity contract (VA) was issued in the fourth quarter, bringing the 2018 total to just 13 new contracts versus an average of roughly 33 per year over the 2014-17 period.
New issuance has failed to keep pace with contract closures. The number of VAs open to new investors has continued to decline: excluding New York-only contracts, there were only about 300 open VAs at the end of 2018. By our count, that is the fewest number of open contracts since 1997.
The lone VA brought to market in Q4 was an I-share from Jackson National. I-shares, also known as fee-based contracts, now account for around 22% of the open VA universe, up from 15% three years ago.
The lack of commission is attractive to investors looking to minimize costs at purchase, while uncertainty about the future of trail commissions—particularly following recent events concerning Ohio National—has made fee-based compensation that much more appealing to advisors.
VA benefit changes
Sun Life introduced a new guaranteed lifetime withdrawal benefit (GLWB) in the fourth quarter. At 0.30% for the single beneficiary version, the fee for the new Sun Life GLWB is among the lowest in its cohort. The benefit is available through the company’s Masters Prime VA, introduced in September, which has total annual expenses of 1.2%, above average but in line with other recent-vintage VAs.
The total number of available GLWB riders in the VA space was 112 as of end-2018, up from 94 a year prior and 66 three years ago. Such growth has coincided with the significant increase in sales of fixed indexed annuities (FIAs), many of which also offer an optional GLWB.
VA GLWBs tend to cost about 20 basis points more on average than their FIA counterparts, but the potential size of VA withdrawal benefits can be much larger. VA carriers offering GLWBs appear to be trying to compete by offering lower fees, as Sun Life has done.
Pacific Life lowered fees on several of its existing GLWBs in the fourth quarter. Fees on the CoreIncome Advantage Select series—which is still available to new investors—declined by 10 to 25 basis points. Fees on several other (closed) Pacific Life GLWBs also declined.
There were 22 non-fee-related benefit changes in Q4, many of them increases in withdrawal rates, which enrich the benefits without increasing the cost.
In the pipeline (based on preliminary SEC filings)
Prudential Annuities is preparing to release a new I-Share, called the Premier Advisor.
© 2019 Morningstar, Inc.
The Big Shift (from VA to FIA)
Why Living Benefits Are Dying
One of my takeaways from last week’s LIMRA-Society of Actuaries Retirement Industry Conference in Baltimore was that sales of income-generating variable annuities (VAs) and fixed indexed annuities (FIAs) have shrunk during a period when they should have been rising.
In a presentation of data on past, present and projected annuity sales, LIMRA Secure Retirement Institute director Todd Giesing and research analyst Teddy Panaitisor showed a reversal in the percentage of sales annuities with income benefits in recent years, from 56% with a rider in 2011 to 56% without a rider (such as guaranteed lifetime withdrawal benefit, or GLWB) in 2018.
Sales of annuities rose smartly in 2018 vs. 2017, but mainly on the strength of contracts without income benefits. FIAs as a category grew 26.5%, but sales of FIAs with income-generating riders rose only 11.7%. Between 2011 and 2018, sales for the FIA category grew by 190%, but sales of FIAs with living benefits rose only 64%.
In the VA category, sales of contracts with income-generating riders grew more (7.6%) than VAs overall (2%) last year, but the long-term trend for VAs is negative: VA/GLWB sales are down 62% since 2011. (Indeed, according to the Insured Retirement Institute, there was a net outflow from all VA contracts in 2018 of $79.2 billion.)
The point is this: Instead of buying annuities for lifetime income and protection against outliving their savings, Americans are buying annuities for accumulation. They’re using annuities (or their advisors are recommending annuities) for tax deferral, or for higher returns than they can get from conventional bonds, or for safer returns than they can get from equity mutual funds.
Sales of true annuities—single premium immediate income annuities, or SPIAs—were up 16% in 2018, to $9.7 billion, thanks in part to an increase of about 10% in the level of monthly income they pay out to the owners. But SPIAs are a small discrete market dominated by mutual insurers (vs. publicly held) and sold mainly by captive agents (vs. independent agents and advisors). SPIA sales have not risen above their historic range; sales also reached $9.7 billion in 2014.
The aging of the baby boomers seems to be driving annuity sales only to the extent that boomers use them to reduce their market risk as they (and the bull market) get another year older. But neither advisors nor boomers seem to be gravitating toward the purchase of “longevity insurance,” which involves mortality pooling and is the advantage that only annuities (and annuity-like tontines) can deliver.
Boomers want to de-risk, but they don’t want to miss out on gains. Today’s deferred annuities allow them to have it both ways, more or less. “At the moment we still have strong returns from equity markets and most individuals are still in the stage of accumulation,” Panaitisor told RIJ this week. “They see the equity market rising and defer on locking in those guarantees.” When they do buy annuity living benefit riders, they’re buying them later in life and “taking advantage of equity growth and higher interest rates to grow their underlying assets,” he said.
Why are living benefit sales weak, aside from the fact that the bull market has lulled older Americans into a false sense of security?
Theory One. An annuity distribution executive said recently that the living benefit, which puts limits on the amounts that the annuity owners can spend each year without penalty, doesn’t entice his wealthy clients. They don’t want limits on their spending, and they’re not especially afraid of running low on cash. Their biggest concerns are long-term care expenses and capital gains taxes.
Theory Two. The VA/GLWB was most attractive when it offered the prospect of generous payout rates and gave advisors ample freedom to choose the underlying investments. Now, the income riders for VAs and FIAs usually offer either attractive income or broad freedom to invest, not both. But some advisors wonder why, if their clients are paying a 1% insurance fee to the insurer, there should be any limits on investment freedom. (Perhaps because without limits the insurance fee would be twice as high.)
Theory Three. Thanks to “governors” (volatility management strategies) that often limit the growth of the VA investments, advisors are no longer confident that their clients’ VA or FIA account balances will grow enough to earn “step-ups” in payouts. These step-ups that will help maintain the purchasing power of their income in the face of inflation. Advisors used to tell clients to add a GLWB to their VA “just in case” the market crashes. They’re not doing that as much.
Theory Four. Even if advisors are not inclined to churn annuities and earn new sales commissions, advisors generally want the freedom to move in and out of products. Income-generating annuities, which make sense mainly as buy-and-hold propositions, don’t fit into that worldview.
Theory Five. GLWBs are high maintenance products, and advisors don’t feel like they’re getting much help from the issuers in managing them. The contract owners don’t monitor their contracts, and don’t necessarily know when they to lock in a step-up or take income, especially if they don’t need the distribution to pay for current expenses.
Theory Six. Life insurance companies may not be pushing the sale of living benefit riders because of the hard-to-measure liabilities they can create. The sudden departure of Ohio National from the variable annuity business was a reminder that it’s still possible, even with the use of volatility-management strategies, for a life insurance company to overdose on GLWBs.
As the 21st century began, the typical VA/GLWB (with an annual enhancement to the benefit base during a 10-year interval before the first withdrawal) seemed poised to be the financial workhorse of the Age Wave, providing insurers with both insurance and investment fees and boomers with protection from outliving their savings.
But sales of VA/GLWBs fell to $41.1 billion in 2018 from $107.2 billion in 2011. Sales of FIA/GLWBs haven’t picked up the slack; they peaked at $31.6 billion in 2016. Combined sales of all income-generating annuities (including deferred income annuities, or DIAs) were $133.5 billion in 2011 but only $81.8 billion in 2018. Even as the oldest boomers have reached their “slow-go” decade, sales of income-generating annuities are falling as a percentage of annuity sales overall.
© 2019 RIJ Publishing LLC. All rights reserved.
Honorable Mention
IRI issues 4Q 2018 annuity sales report
Overall annuity sales rose 9.7% in 2018, with the combined sales of fixed and variable annuities reaching $218 billion, according to the Insured Retirement Institute (IRI), which this week announced final 2018 market data for the U.S. annuity industry based on data reported by Beacon Research and Morningstar, Inc.
Total annuity sales
Industry-wide annuity sales in the fourth quarter of 2018 were $58.8 billion, a 7.1% increase from sales of $54.9 billion in the third quarter of 2018 and up 23.5% from the versus fourth quarter of 2017, when sales were $47.6 billion. Full-year 2018 total annuity sales were $218.0 billion, up 9.7% from 2017, when total annuity sales were $198.6 billion.
Fixed Annuity Sales
Fixed annuity sales in the 2018 fourth quarter were $35.9 billion, up 12.7% from fixed annuity sales of $31.8 billion in the previous quarterand 51.6% higher than the fourth quarter of 2017, when sales were $23.7 billion. Fixed annuity sales were $125.0 billion in calendar year 2018, up 17.0% from sales of $106.8 billion in 2017.
Variable annuity sales
Fourth quarter 2018 variable annuity total sales were $22.9 billion, down 0.7% from 2018 third quarter sales of $23.0 billion and 4.3% lower than 2017 fourth quarter VA sales of $23.9 billion. The $92.9 billion in sales during 2018 was an increase of 1.2% over 2017 VA sales of $91.8 billion.
Sales of $19.6 billion for fixed indexed annuity sales in the fourth quarter of 2018 set a new high-water mark. The quarter’s sales were up 8.8% from 2018 third quarter sales of $18 billion (the previous record) and up 42% from 2017 fourth quarter sales of $13.8 billion. Sales of $69.9 billion in 2018 set a new annual record, up 28.8% over 2017 sales of $54.3 billion and 16.3% higher than the previous annual record of $60.1 billion set in 2016.
Book value annuity sales
Sales of book value annuities in the fourth quarter 2018 were $8.9 billion, up 27.7% from the $7.0 billion in the third quarter of 2018 and up 91% from 2017 fourth quarter sales of $4.6 billion. Book value annuity sales were $27.9 billion in 2018 were up 34.5% from 2017 sales of $20.7 billion.
Market value adjusted (MVA) annuity sales were $4.1 billion in the fourth quarter of 2018, equal to sales in the previous quarter. MVA sales increased 61% versus fourth quarter 2017 sales of $2.5 billion. For the full year of 2018, MVA sales were $15.8 billion, up 28.0% from 2017 sales of $12.4 billion.
Income annuity sales were $3.3 billion in the fourth quarter of 2018, up 19.6% from the previous quarter ($2.7 billion) and 24.0% higher than 2017 fourth quarter income annuity sales of $2.6 billion. On a year-over-year basis, income annuity sales reached a new high of $11.4 billion, up 9.1% over 2017 sales of $10.5 billion.
For the entire fixed annuity market, there were approximately $20.6 billion in qualified sales and $15.3 billion in non-qualified sales during the fourth quarter of 2018.
Beacon Research CEO Jeremy Alexander said, “We expect all fixed annuity product types to continue showing robust growth in 2019. as millions of Americans seek solutions that can help them feel secure during retirement.”
According to Morningstar, variable annuity net assets rose in the third quarter as the bull market in equities continued to drive higher valuations in subaccount assets.
Variable annuity assets fell 9.5% from just over $2 trillion in the third quarter to $1.8 trillion, as market volatility weighed on equity and allocation subaccounts. Assets were 8.6% lower than the nearly $2 trillion recorded at the end of 2017. Allocation funds continue to be the largest asset class by share of assets, at $676.8 billion, or 37.3% of total variable annuity assets. Equity funds held $590.6 billion, or 32.6% of total VA assets.
Net asset flows in variable annuities were -$20.2 billion in the fourth quarter, a 4.3% drop from $19.4 billion in the third quarter of 2018. Net flow for the full year 2018 stood at -$79.2 billion, as compared to -$66.7 billion in full year 2017 net flow. Within the variable annuity market, there were $15.3 billion in qualified sales and $7.6 billion in non-qualified sales during the fourth quarter of 2018. For the year, qualified sales were $60.2 billion, or 64.8% of total VA sales, while non-qualified accounted for $32.7 billion, or 35.2%.
“Higher volatility and market losses weighed on VA assets,” said Michael Manetta, Senior Quantitative Analyst at Morningstar, “but we did not see a corresponding plunge in sales. With equity markets recovering in the first quarter of 2019 we should see sales continue to improve, with gains in lifetime income products and structured annuities, which offer protection against the impact of volatility.”
iPipeline favors “best interest” rule in New York
iPipeline, the provider of cloud-based software solutions for the life insurance and financial services industry, today announced its support for NY Reg 187, a proposed regulation in the state of New York, and said that many of its customers support it as well.
The regulation, like the Labor Department “best interest” regulation that was reversed by the Trump administration and a Texas federal appeals court, would require financial intermediaries to act in the “best-interest” of their clients. Currently, a range of intermediaries can call themselves advisors and need only disclose conflicts of interest to their clients, not abandon those conflicts.
iPipeline, which has adapted its proprietary platform to support best interest regulations, said it has assembled a like-minded network of 135 insurance carriers, 1,300 distributors and financial institutions, and hundreds of thousands of agents and licensed financial advisors.
The firm’s ‘SSG Digital’ global platform is designed to support regulatory compliance, suitability assessments, order entry, insurance application quoting, illustrations and processing, underwriting, policy administration, e-Signature, e-Delivery, and analytical reporting, said Tim Wallace, CEO, iPipeline, in a release this week.
Vestwell, a retirement plan fintech, raises $30 million
Vestwell, a digital retirement platform, has raised $30 million in Series B financing in a round led by Goldman Sachs Principal Strategic Investments, working with Goldman Sachs’ Consumer and Investment Management Division, Vestwell holdings Inc. announced this week.
Joining the round were Point72 Ventures, the venture capital arm of Nationwide, Allianz Life Ventures, BNY Mellon, and Franklin Templeton, with additional participation from Series A and Series Seed investors, F-Prime Capital, FinTech Collective, Primary Venture Partners, and Commerce Ventures.
Vestwell claims to be the first digital platform built for the retirement plan working with 401(k) and 403(b) plans.
In the past 12-months, Vestwell said, its client base has grown tenfold and it has entered alliances with BNY Mellon, Allianz, Namely, Dimensional Fund Advisors, OnPay and Riskalyze, with others that will be announced shortly.
Vanguard brings new active commodities fund to market
Vanguard announced that it will launch a new actively-managed fund, Vanguard Commodity Strategy Fund, in June 2019. The Malvern, PA-based mutual fund giant filed a preliminary registration statement with the Securities and Exchange Commission this week.
The new fund will invest primarily in commodities and treasury inflation protected securities (TIPS). It will have an average expense ratio of 1.25%. The fund will solely offer Admiral Shares at a $50,000 investment minimum, with an estimated expense ratio of 0.20%, which Vanguard described as less than a sixth of the cost of competing broad-based commodity-linked funds.
The performance benchmark for the new fund will be the Bloomberg Commodity Total Return Index. It will invest in commodity-linked derivative investments, such as commodity futures and swaps, collateralized by a mix of Treasury bills (T-bills) and short-term TIPS, which add a layer inflation protection.
Vanguard’s Quantitative Equity and Fixed Income Groups will advise the fund. The group is comprised of 35 strategists, analysts, and portfolio managers who managed Vanguard Managed Payout Fund’s commodity strategy for more than 10 years.
At launch of the new commodity fund, the $1.8 billion Vanguard Managed Payout Fund will reallocate its commodities exposure, consisting of $135 million, to the new fund.
Giovanni and Coutts rise at Lincoln Financial
Lincoln Financial Group announced this week that senior vice president Christopher Giovanni has been named corporate treasurer and senior vice president Jeffrey Coutts, who currently serves as corporate treasurer, has been named to the new role of chief valuation actuary, effective May 6, 2019.
Giovanni will assume responsibility for Corporate Treasury oversight, including balance sheet management, debt and capital management, liquidity management and rating agency relationships. He will also continue to oversee Investor Relations and Strategic Planning, reporting to Randal Freitag, executive vice president, chief financial officer and head of Individual Life for Lincoln.
As Lincoln’s first chief valuation actuary, Coutts will be responsible for the executive leadership of actuarial valuation and modeling within Lincoln. This includes the day-to-day management of the actuarial organization. He will continue to have responsibility for mergers and acquisitions and financial reinsurance and report directly to Freitag.
Global Bankers to divest its US life companies
Global Bankers Insurance Group, LLC confirmed this week that it is pursuing a sale of its U.S. life insurance companies and has met with potential acquirers. The company, headquartered in Durham, NC, owns Bankers Life, and the insurance companies acquired by Global Bankers since September 2014 include Southland National Insurance, Life Reinsurance, Colorado Bankers Life, Annuity Reinsurance, Mothe Life, Conservatrix and GB Life (formerly NN Life Luxembourg SA.
© 2019 RIJ Publishing LLC. All rights reserved.
Blueprint Income, a fintech firm, will sell Pacific Life deferred income annuity online
Blueprint Income, a Internet-based, direct-to-consumer annuity distributor, has agreed to collaborate with Pacific Life on the distribution of a multi-premium deferred income annuity for Generation X-ers and others who want “a predetermined amount of monthly income starting at a predetermined retirement date in the future,” according to a release this week.
The contract is called “Next,” and was designed by Pacific Life “to support the purchase of insurance products through digital platforms like Blueprint Income,” the release said. “With a minimum of $100 to get started, it takes minutes to get set up, and in most cases applications are approved instantly, with no paper applications and no phone calls.”
“We’ve heard a clear desire — especially among Generation X — to have the security of a pension that their parents relied on to achieve financial peace of mind,” said Blueprint Income co-founder and CEO Matt Carey, in a statement.
“Next by Pacific Life creates an opportunity for us to connect with the next generation of consumers who haven’t yet taken that first step toward guaranteed retirement income, in a fast, simplified manner,” said Pacific Life Executive Vice President and Chief Operating Officer Adrian Griggs, in a statement.
The Next Deferred Income Annuity is available in 20 states (Alabama, Arizona, Colorado, Connecticut, Delaware, Georgia, Indiana, Kansas, Kentucky, Louisiana, Maine, Michigan, Mississippi, Nebraska, Nevada, Ohio, South Dakota, Utah, West Virginia, and Wisconsin) and the District of Columbia. More states will be added over the coming months, the release said.
© 2019 RIJ Publishing LLC. All rights reserved.
Principal buys Wells Fargo’s retirement business
Wells Fargo agreed to sell its $827 billion retirement plan services unit to Principal Financial Group for $1.2 billion as the bank retrenches in the wake of scandals, according to a report in Bloomberg News this week and other releases.
By acquiring Wells Fargo’s Institutional Retirement & Trust business, Principal will assume ownership of Wells Fargo’s defined contribution, defined benefit, executive deferred compensation, employee stock ownership plans, institutional trust and custody and institutional asset advisory businesses and serve a combined 7.5 million U.S. retirement customers, a Principal release said.
The acquisition will double the size of Principal’s U.S. retirement business by the number of total recordkeeping assets. More than two-thirds of Wells Fargo’s institutional retirement assets are in plans ranging from $10 million to $1 billion. The transaction is expected to close in the third quarter of 2019, pending regulatory approval.
In a release, AM Best commented that the credit ratings of De Moines, IA-based Principal Financial Group, Inc., and its insurance subsidiaries remain unchanged following the announcement of the acquisition, which has a purchase price is $1.2 billion in cash, with up to an additional $150 million payable in two years based on revenue retention.
The transaction increases Principal’s U.S. retirement business’ assets under administration by approximately $820 billion from almost four million plan participants across retirement and non-retirement trust and custody, defined benefit and defined contribution accounts.
AM Best notes that the acquired business will be held outside Principal’s domestic insurance operations upon transaction close with the expectation that this business will be transitioned through its domestic insurance entities over time. The immediate impact on the ratings of Principal’s insurance operations are modest, but support improving diversification, scale and profitability over the long-term.
On Feb. 21, 2019, AM Best revised the outlook to positive from stable for the Long-Term Issuer Credit Rating and affirmed the Financial Strength Rating of A+ (Superior) and the Long-Term Issuer Credit Rating of “aa-”of Principal Life Insurance Company and Principal National Life Insurance Company.
The outlook of the Financial Strength Rating remains stable. The ratings reflect Principal’s balance sheet strength, which AM Best categorizes as very strong, as well as its strong operating performance, favorable business profile and appropriate enterprise risk management (ERM). The positive outlook reflects the continued strength and evolution of the organization’s ERM capabilities.
As of December 31, 2018, the respective Wells Fargo retirement businesses had $827 billion in assets under administration served by approximately 2,500 employees in locations across the U.S., Philippines and India. There are four major employee centers in: Charlotte, N.C.; Minneapolis/Roseville, Minn.; Waco, Texas; and Manila, Philippines.
The bank has undergone a leadership change in recent weeks, announcing in March that it would replace Tim Sloan as chief executive officer after the leader faced calls for his ouster from politicians. C. Allen Parker, Wells Fargo’s general counsel, was named Sloan’s replacement on an interim basis.
“Wells Fargo, the fourth-largest U.S. bank by assets, has been paring smaller business lines since scandals began erupting from its branch network in 2016. Problems have since emerged in more units, prompting the Federal Reserve to ban Wells Fargo from growing until regulators are confident in executives’ ability to oversee their operations. That’s added to pressure on the firm to shed some units and concentrate on those where it can earn the best returns,” the Bloomberg News report said.
“This sale reflects Wells Fargo’s strategy to focus our resources on areas where we can grow and maximize opportunities within wealth, brokerage and asset management,” Jon Weiss, head of Wells Fargo’s wealth and investment-management business, said in a separate statement.
According to Bloomberg News, “At the bank’s 2018 investor day, he said he’s targeting $600 million in savings by 2020. Earlier this year, Weiss hired Nyron Latif from Goldman Sachs Group Inc. as head of operations to review the unit’s efficiency.
“The Fed barred Wells Fargo in February last year from increasing assets beyond their level at the end of 2017, citing concerns about a variety of customer abuses, including the revelation that employees had opened millions of accounts without consumers’ permission. The bank told analysts and investors at the start of this year that it’s planning to operate under the cap through the end of 2019, rather than just the first half.”
© 2019 RIJ Publishing LLC. All rights reserved.
Tell Us What You Really Think
Life insurers increasingly rely on registered reps and financial advisors to recommend or sell their annuities, so insurers tend to listen closely when advisors and their broker-dealers offer feedback about what the insurers are doing right and what they could do better.
Last week’s LIMRA/Society of Actuaries Retirement Industry Conference in Baltimore was the kind of event where life insurers and representatives of advisors exchange such views. During a panel discussion there, executives from Edward Jones, Raymond James, and Simplicity Financial Distributors gave a roomful of life insurance managers and actuaries an earful.
Here are some samples of what the executives said:
Scott Stolz, the president of the Raymond James Insurance Group, explained why sales of variable annuities with living benefits have weakened steadily over the years. Once a favorite of advisors looking to add a flexible source of guaranteed income to client portfolios, its bloom has faded. As Stolz and other distributors have said in the past, the value proposition of the products has shrunk and the products remain stubbornly labor-intensive.
“The [preferred] income layer has been the VA with living benefits, but the products became less attractive as insurers de-risked,” Stolz said. “The performance of the volatility-managed products has been miserable. People now know they won’t get a step-up [in the notional “benefit base” that’s used to calculate income payments]. That’s a shift from eight to ten years ago, when you could get a step-up.”
Variable annuity income riders were once so valuable, in terms of potential income streams for people who waited 10 years between purchase of the contract and the first withdrawals, that advisors readily added the rider and its one percent (of the benefit base) expense. But “too many VAs were sold as ‘insurance in case the market falls,’” Stolz said. “Advisors told clients, ‘Just throw the rider on and we’ll have it if we need it.’ Now we’ve eliminated the ‘maybe we’ll use it maybe we won’t’ sale. Last year the market was driven more by indexed annuities.”
Today’s advisors, he added, are using a logical and justifiable technique on the occasions when they do incorporate an annuity with an income rider into a client’s retirement income strategy. If a client says, “I need at least $3,000 a year above Social Security for essential expenses,” the advisor can say, “Invest X number of dollars in a deferred annuity with a living benefit, wait Y number of years, and then start pulling out $3,000 a month.”
“The advisors are working backwards [from the client’s income goal] now,” Stolz said. “It used to be, ‘Let’s allocate some dollars to an annuity and throw a rider on.’ Now it’s, ‘How much income do we need and how much do we need to put into the annuity to get it?’”
Another panelist was Greg Jaeck, senior product leader at Edward Jones, the 17,000-advisor brokerage firm. There are no fixed indexed annuities on Edward Jones’ product shelf; a senior executive once described their returns as “manufactured.” He offered feedback on the ways Edward Jones generates retirement income for clients.
Edward Jones advisors, for instance, sell a fair amount of single premium immediate annuities, or SPIAs, which produce a guaranteed income stream starting within no later than 13 months after the contract is purchased with a lump sum premium. The increase in bond yields during 2018 helped SPIA sales.
“There’s been an uptick of sales on the SPIA side as we’ve gone from 175 basis points to 315 basis points and back to 250 basis points on 10-year Treasuries,” Jaeck said. For clients who want to combine liquidity with a lifetime income guarantee, Edward Jones offers a simple, CD-like fixed deferred annuity with a living benefit rider. “We’ve gone from $250 million to over a $1 billion in sales [with that product],” he added.
“Simple wins. Of our financial advisors, 50% of them might do one to five annuity contracts per year,” Jaeck said. “They will gravitate to what they understand. That’s why the fixed deferred annuity with an income guarantee is resonating so well. It’s simpler [than an indexed annuity]. Even a SPIA is simpler. We’re up 40% this year in SPIAs or DIAs [deferred income annuities]. That category may never be big as index annuities, but the simpler story works.”
Stolz said that he has tried to impress upon his advisors that when they add a SPIA to a client’s portfolio, the task of managing his or her other assets becomes easier. The advisor won’t be able to charge an asset management fee on the value of the SPIA, but the trade-off can be worthwhile.
“Advisors don’t like to sell SPIAs because the assets go away, and because clients don’t like to delve into their principal,” Stolz said. “The reality however is that the majority of clients will have to spend principal. We tell advisors, ‘If you handle the income piece then it gets easier to invest the rest of the money.’
“When we ask our advisors if it’s easier to manage a client’s money when he or she has a defined benefit pension, they typically say yes. Once they understand that a SPIA is like a pension, a light bulb usually goes off. But you have to tell the advisors four or five times before it sinks in. It would be useful if the insurance wholesalers would reinforce that message.”
There’s plenty of room for life insurers to improve their support for existing annuity business, Stolz said. “We have $52 billion of annuity assets on our books, and the amount of work associated with managing the block is horrific. It’s not like years ago. You have hard-to-manage riders. You have to make sure there are no excessive withdrawals and that the clients are starting income when they should. For instance, clients might be eligible for a 12% [of premium] withdrawal at age 68, but if they don’t need the money they don’t take it.
Scott Stolz
“There’s close to zero help from the annuity companies on supporting the old blocks of business. The first insurer who makes it easy to manage a block, and text the client saying, ‘There’s a step-up due, or here’s how to manage a withdrawal [will get more business from us.] You might have eight versions of a product, all within one prospectus. It’s hard to find somebody at the home office who remembers how each version of the product worked. And if that person dies, I don’t know what I would do.”
Life insurers who help advisors save time will be more popular at Raymond James, Stolz said. “Advisors look at their ratio of revenue-to-time-spent. Anything [insurers] can to decrease the time spent will help. On the FIA side, it’s often about the rate, but all of our products are equally worth selling. So it comes down to the difference in time-spent. Advisors need support not just when the policy is issued but also post-issue, and even four or five years after the policy is issued.”
Regarding the indexes that are used in indexed annuities, neither Stolz nor Fisher showed enthusiasm for the custom indexes that many issuers now offer.
“We prefer the annual point to point crediting method and we use the S&P500 index. It’s recognizable. We’re skeptics on the performance of the new indexes. They scare off a lot of clients,” said Jarrod Fisher. Stolz agreed. “We realized that you’ll get about the same result whether you use a volatility-controlled index or not,” he said. “So about 85% of our indexed annuities are linked to the S&P500 index.”
The panelists were asked what they thought about the introduction of no-commission annuities for advisors who don’t accept commissions from life insurers, and whether manufacturer-paid commissions to advisors, which create a conflict-of-interest for the advisor vis-à-vis the client, will even exist for much longer.
Greg Jaeck
“That’s where the market is going,” Jaeck said. “The fiduciary rules that have been proposed by individual states and the National Association of Insurance Commissioners are driving [the adoption of no-commission annuities].
“My team and other distributors are in the advisory market or looking at it. We need to design annuities to fit into the advisory solution. But it’s not just a matter of stripping out the commission. It’s more about technology,” he said, referring to the fact that annuities are not well integrated into advisors’ electronic workflows. “There will be a tipping point. The industry would double or triple if we can solve the advisory issue. If not, it could go the other way.”
Stolz expects the no-commission annuity market to grow. “A year and a half ago I thought in five years we would no longer see that commission-paying packaged products. It’s coming, judging by the number of meetings I sit in on where we talk about the commission structure so our advisors don’t have to get accused of conflicts of interest,” he said.
“About 15% of our annuity business today is no-commission,” Stolz added. “We will always offer advisors a choice, and we won’t make the decision for them. But more and more advisors will switch to no-commission. We need a lot of infrastructure to support commissions and, with half or more of our [total] business on the advisory side, we’re not doing enough commission business to justify it. About 90% of our compliance chores are related to commissions. If we don’t fix that, you will see annuity sales fall off a cliff in three and a half years.”
As the panel discussion drew to a close, Stolz asked life insurers to please stop using the acronym RILA, which stands for registered index-linked annuities, to describe annuities that offer a floor or buffer against potential loss of principal rather than a guarantee of no loss at all. “I understand why they call it RILA,” he said, “but you have to find something else to call it.” In an industry already loaded with acronyms, “RILA” might be one too many.
© 2019 RIJ Publishing LLC. All rights reserved.
The Case for Collaboration among State-Sponsored Savings Plans
Over the last several years, most states have been actively engaged in exploring ways to enable more private-sector workers to save for retirement. In addition to understanding the need to enhance retirement security by expanding coverage, they recognize that the failure to do this would expose state governments to increased budget pressure, because increasing numbers of retirees with insufficient savings need additional social services.
The proportion of U.S. private-sector workers with access to employer-sponsored payroll deduction retirement savings plans or pensions has not improved significantly for several decades. According to the Employee Benefits Research Institute, approximately one-half of all American workers lacked access to an employer sponsored plan in 2013.
To date, states have considered creating individual retirement savings programs that would serve only their own citizens. However, states should explore other models — ones based on a multi-state or regional approach that would enable participating states to provide even better services to their citizens. Multi-state arrangements offer opportunities for possible economies of scale by spreading both startup and ongoing costs over wider populations. This could enable smaller-population states to make saving opportunities available to their citizens at a lower cost.
Section 529 College Savings Programs and ABLE Accounts: Existing Multi-State Savings Programs
Both the Section 529 college savings accounts and the Stephen Beck, Jr. Achieving a Better Life Experience (ABLE) Act programs provide models for how states have developed multi-state savings programs. For example, most 529 plans are open to residents of other states. Only a handful of states still restrict their college savings plans to their state residents, but even in those states, their residents are not restricted from enrolling in plans of other states.
Most plans have engaged private sector turnkey program managers that provide all necessary services under one comprehensive management agreement. These include investment management, customer service, legal compliance, recordkeeping and administration, marketing and outreach, and distribution. These program managers often run the Section 529 programs in more than one state, which allows them to spread some operational costs among more participants.
The ABLE Act, which gave eligible individuals with disabilities the ability to establish tax-advantaged savings accounts, provides a particularly good example of multi-state savings programs that might serve as a model for structuring multi-state retirement savings programs.
A provision in federal law explicitly allows states to manage ABLE accounts in more than one state, and several of these arrangements exist. The largest is a consortium, managed by Illinois, of 16 states joined together to offer what is essentially the same program, managed by the same firm and offering the same investment choices. Each state can customize the program to meet its individual needs, but use the same basic platform. The consortium allowed them to reduce costs to well below what a similar program would have cost if each state had individually set it up.
Another 11 states have adopted Ohio’s program to establish ABLE accounts. Unlike the consortium, which allows for variations, each state in this case is using the same program. Because it is serving a larger population of savers, administrative costs are lower.
Finally, Oregon has its own program, but consults with other states about how to open and manage their ABLE programs while also offering them the ability to use the same program managers as Oregon uses at a reduced cost.
Strength in Numbers: Options for Multi-State Collaboration to Promote Retirement Security
While any state can choose to create its own program limited to its own residents, a regional or other multi-state approach has the potential to achieve the economies of scale necessary to minimize costs while significantly expanding access to retirement savings options.
There are three general models for multi-state retirement savings programs that states could consider:
An established state program contracts with another state to structure and administer the program for both states. This would be similar to the Ohio ABLE arrangement in that one state would adopt another state’s retirement savings program. The originating program’s private-sector partners would manage both states’ programs jointly.
An interstate alliance or consortium jointly structures and administers a program for the states in the alliance. States could band together and use a master agreement, to build a single system that they would all use, including the private sector partners, creating a true multi-state program. As noted above, several states are currently using this type of arrangement to implement ABLE accounts and allow for some variations in services or investment choices.
A state opens its program to individual savers and employers from other states, and allows them to join its platform. A state that has a retirement savings program could follow the pattern of many Section 529 college savings programs and allow participation by out-of-state individuals or by employers that do not already sponsor plans of their own. While employers that have employees in more than one state typically already sponsor a 401(k) or other plan, not all do.
If an employer had employees in more than one state that offers programs facilitating retirement savings, but the employer had no plan of its own, it could choose to have all of its employees participate in a single state’s program. To work, the other states in which the employees are located would have to accept this arrangement.
While the first two models appear to have the most promise for general use, the third might be used to facilitate employer choice in the event that a multi-state employer did not already sponsor a plan.
Whether a state chooses to create its own program or to join a multi-state program, a decision to offer any state-facilitated program will improve the retirement security of its citizens.
A regional or other multi-state approach is not essential, but it is an option that should be considered. Any state can establish its own, standalone state-facilitated retirement savings program. However, multi-state collaboration could have important advantages. By joining together, states have the potential to offer better services and reduce the cost of building or supporting a retirement savings platform.
A multi-state approach of one kind or another can make the process easier and more cost-effective — and can accelerate the date when a program can become self-sustaining and fees can be minimized. This is true regardless of which type of state-facilitated savings program the states adopt or which method they use to collaborate.
© 2019 Georgetown University Center for Retirement Initiatives, March 2019. Article is available at the link above. Reprinted by permission.
Pfau named director of RICP program at The American College
Wade D. Pfau, Ph.D., CFA, has been named director of The American College of Financial Services’ Retirement Income Certified Professional (RICP) designation program, college president and CEO George Nichols III announced this week.
Pfau will also now serve as Co-Director of the New York Life Center for Retirement Income, joining Steve Parrish, JD, RICP, as Center Co-Director.
Pfau joined The American College in 2013 as a professor of Retirement Income in the Financial and Retirement Planning program. He has been a core contributor to the college’s RICP designation program curriculum. In his new roles, Pfau will lead the Retirement Income Center and its RICP courses and curriculum.
From 2003 to 2013, Pfau lived in Japan, where he worked with the National Graduate Institute for Policy Studies and published a landmark paper challenging the so-called 4% safe withdrawal rule. He won the Journal of Financial Planning’s inaugural Montgomery-Warschauer Award for his paper on the topic.
Pfau holds a doctorate in economics and a master’s degree from Princeton University, and bachelor of arts and bachelor of science degrees from the University of Iowa. He is also a Chartered Financial Analyst (CFA).
The American College also named Colin Slabach as assistant director of the New York Life Center for Retirement Income and an assistant professor of retirement. In these roles, Slabach will continue to develop The American College’s retirement programs, teach courses, and support Pfau and Parrish in leading the Retirement Income Center. Slabach will assume this role over the summer.
Slabach joins The American College from the faculty of Texas Tech University. He holds a master’s in Personal Financial Planning from Texas Tech and bachelor’s in business finance from Eastern Illinois University, and is currently a doctoral candidate at Texas Tech.
David Littell, JD, ChFC, a creator of the RICP designation, will move to working with The American College in a part-time capacity as senior contributor to the RICP program and a mentor to College faculty and students.
In another personnel move, Chad Patrizi, PhD, was named executive vice present and provost at The American College beginning May 1, 2019. This newly created position will be the second-ranking administrative officer at the college. He joins from American Public University System, where he is currently vice president and dean of the School of Business.
© 2019 RIJ Publishing LLC. All rights reserved.
What Will Fuel The Next Recovery?
Ever since major central banks cut short-term interest rates close to zero in autumn 2008, and subsequently purchased huge volumes of bonds as part of their quantitative easing operations, economists have debated about when and how fast the “exit” from these unorthodox monetary policies would be.
But, a decade later, developed-economy interest rates are stuck far below pre-crisis levels and likely to remain so. Germany’s ten-year bond yield of -0.02% (as of March 23) signals market expectations that the European Central Bank will maintain zero policy rates not just until 2020 (the official ECB forward guidance) but to 2030. Japanese bond yields imply zero or negative interest rates for even longer. And while ten-year yields in the United States and the United Kingdom are just above 1% and 2.4%, respectively, both of these suggest minimal or no increases in policy rates for another decade.
The 2008 financial crisis may have inaugurated a full quarter-century of dramatically lower interest rates. In this new normal, still more unorthodox policies – including forms of monetary finance – may in some countries be needed to maintain reasonable growth.
The financial crisis occurred in 2008 because deficient regulation allowed huge risks to develop within the financial system itself. But the depth of the subsequent recession, and the long period of slow growth that followed, was the result not of continued financial system fragility, but of the excessive leverage in the real economy that had developed over the previous half-century. Between 1950 and 2007, advanced economies’ private-sector debt (households and companies) grew from 50% to 170% of GDP and adequate growth seemed attainable only if debt grew far more rapidly than nominal GDP.
After the crisis, loan growth turned negative and remained depressed for many years, not because an impaired financial system lacked the capital to extend credit, but because over-leveraged households and companies were determined to pay down debt even if interest rates were zero. The same pattern was observed in Japan in the 1990s.
In this environment, large-scale fiscal stimulus was the only way to achieve even anemic growth. Britain’s public-finance deficit grew to 10.1% of GDP in 2009, the US deficit ballooned to 12.17%, and even the eurozone’s increased to 6.3%. But the inevitable rise in public debt led many governments to conclude that these large deficits must soon be curtailed. Fiscal austerity, combined with continued private deleveraging, led to inflation rates stuck below target, disappointing growth in real wages, and a populist political backlash.
By 2016, it seemed that governments and central banks were “out of ammunition,” monetary or fiscal, and economists debated whether any policies could avoid secular stagnation when interest rates were already zero and public debt levels were already high. Some, including me, broke the ultimate policy taboo and suggested that we might need to consider monetary finance of increased fiscal deficits. Former Federal Reserve Chairman Ben Bernanke argued that as long as the quantity of such finance was determined by independent central banks, useful stimulus could be achieved without excessive inflation.
Just two years after the gloomy 2016 nadir, however, the skies seemed dramatically clearer. By 2018, forecasts of global growth and inflation had risen significantly, and central banks and markets were again focused on the long anticipated “exit” from unorthodox policies. It is vital to understand what drove this sudden improvement.
The answer is simple: massive fiscal expansion, which in two major economies was partly or wholly financed by central bank money. The US fiscal deficit rose from 3.9% of GDP in 2015 to 4.7% in 2018 and a projected 5.0% in 2019: China’s grew from below 1% in 2014 to over 4%, and Japan’s remained around 4%, abandoning previous plans for a reduction to zero by 2020. And while the US fiscal expansion was financed by bond sales to the private sector, in China the central bank indirectly financed large bond purchases by commercial banks, while in Japan, the entire net increase in public debt is financed by central bank purchases of government bonds. The global economy recovered because the world’s three largest economies rejected the idea that high public debt burdens made further fiscal expansion impossible.
But the impact of that stimulus has faded. US growth is slowing as the one-off impact of President Donald Trump’s tax cuts wears off; China is struggling to curb excessive leverage and manage the impact of Trump’s tariff increases on exports and confidence; and, in October, Japan will implement a long-planned sales tax increase which threatens to slow consumption growth. Eurozone growth, too, is slowing in the face of declining external demand.
So we are back to facing the same question as in 2016: What to do if stagnation threatens when interest rates are already close to zero? Among the proposed answers are variants of monetary finance. Proponents of “modern monetary theory” argue that money-financed fiscal expenditure should be the normal mechanism for managing nominal demand, and the “Green New Deal” presents monetary finance as one option for financing socially and environmentally desirable investment.
The valid insight behind these propositions – that governments and central banks together can always create nominal demand – was explained by Milton Friedman in an important 1948 essay. But it is vital also to understand that excessive monetary finance is hugely harmful, and it is dangerous to view it as a costless route to solving long-term challenges, rather than a demand-management tool for use in exceptional circumstances.
Faced with slow growth, political discontent, and large inherited debt burdens, monetary finance cannot be a taboo option. In Japan, permanent monetary finance is already occurring, even though the central bank denies it. The challenge is to ensure that it is used only within disciplines such as Bernanke proposed, rather than assuming that pre-crisis normality will return any time soon.
Adair Turner, a former chairman of the United Kingdom’s Financial Services Authority and former member of the UK’s Financial Policy Committee, is Chairman of the Institute for New Economic Thinking. His latest book is Between Debt and the Devil.
© 2019 Project Syndicate.
Why Indexed Annuity Sales Are So Strong
For Jim Fahey, an Ameriprise advisor in Center Valley, PA, 2018 was a hockey-stick year for fixed indexed annuity (FIA) sales. “FIAs were roughly 25% of my business in 2017. But in 2018 they represented 50% to 60%,” he said this week. “I still have variable annuities on the books but I don’t think I sold any last year.”
Fixed indexed annuities, he found, appeal to jittery clients who want to lock their equity gains into a vehicle with more pizzazz than short-term bonds. “We took profits out of the market, quite frankly,” Fahey told RIJ. “When you start seeing a company like Apple, for instance, selling at nosebleed levels, you have a conversation with clients about taking some marbles off the table.”
In 2017, uncertainty over the status of proposed new federal regulations chilled FIA sales. But after the so-called fiduciary rule was swept aside by the Trump administration and a Texas federal appeals court, sales rebounded in 2018 to new records of $19.2 billion for the fourth quarter of 2018 (up almost 41% from the same quarter in 2017) and $68.4 billion for the year (up 26.8% from 2017).
Relief from regulation may not be permanent, however, and it explains only part of the FIA surge. FIAs, as they typically do during low interest rate periods, enjoyed a yield advantage last year over certificates of deposit; that helped. The aging of the baby boomers and their need for safe and/or income-producing financial instruments continued to provide some demand tailwind—but that doesn’t explain much. Accumulation FIAs have actually been selling better than income FIAs in recent years.
More fundamentally, the supply of FIAs has risen as many life insurers de-emphasize the sale of hard-to-hedge, capital-hungry variable annuities in favor of less volatile indexed annuities. The number of distribution channels for FIAs has increased as well, now extending beyond independent agents to independent broker-dealers and even, via no-commission platforms, to registered investment advisors.
“Part of [the increase in FIA sales] is carrier driven,” said a full-service national broker-dealer executive who could speak to RIJ only on background. “You have many insurers coming into the FIA space. They came in part because the volatility management strategies that insurance companies were putting into variable annuities after the financial crisis didn’t work as well as anticipated. We continued to see strong sales for the Jackson Nationals of the world” [who offered less restrained investment strategies.] But insurers who focused on volatility management strategies pulled back.”
Drivers of the sales rebound
“There was a large demand for indexed annuities in 2018 for two main reasons: Volatility in the markets and continued low interest rates on fixed money instruments such as CDs and fixed annuities,” Sheryl Moore of the annuity sales tracker, Wink, Inc., told RIJ in an email this week. “Eighteen of 20 indexed annuity manufacturers had increases in sales from the prior year.
“CDs were crediting an average rate of 1.69% (per BankRate.com) in 2018. Fixed annuities were crediting an average rate of 2.89% in 2018. Indexed annuities were much more competitive, offering average annual point-to-point caps of 5.37%—and ‘uncapped’ products yielded even greater potential returns. Sales were down in 2017 because of the DOL’s rule distracting product manufacturers and distributors. So a 26.82% increase in sales was easier-to-achieve,” she added.
“Indexed annuity sales increased for all channels, but none more than the wirehouses [full service national broker/dealers], which increased 21.14% in the fourth quarter of 2018 from the third quarter of 2018. But this channel still accounts for the least sales (except for the direct-to-consumer channel, which accounts for almost no sales). The independent agent channel increased sales only 5.77%, but took home 54.24% of the sales.”
[At the LIMRA Retirement Industry Conference in Baltimore yesterday, one life insurance executive said that recent growth has been stronger among accumulation-oriented FIAs than among FIAs with lifetime income benefits. A few years ago, about 70% of his sales involved income-oriented contracts, he said; that percentage is down to about 50%—possibly because bank advisors and broker-dealer reps want the highest crediting rates. Accumulation-driven FIAs typically offer higher crediting rates than income-oriented FIAs.]
Scott Stolz, president of the Raymond James Insurance Group, told RIJ in an email: “March was a record month in indexed annuity sales for us. We also did far more fixed annuities than this level of interest rate would typically create. Here’s what we think is going on:
- The baby boomers are older and are therefore getting more conservative. Many of them just can’t take the risk of another 2000-02 or 2007-09. They like the idea of getting 4-5% on average with no downside risk. I asked one of our advisors why he was now selling indexed annuities instead of variable annuities. His answer was simple: ‘My clients are older now.’
- Every time the market corrects, we get another spike in both fixed and indexed sales. When the market recovers, indexed sales fall off a little, but remain above the previous levels thereby creating a new plateau.
- Indexed annuities have performed as advertised over the last 10 years. Clients (and therefore advisors) have had a good experience and are more comfortable using them. The products have gotten better, with shorter surrender charges and better caps and participation rates.
- More traditional annuity companies have introduced products, thereby adding to the credibility of the product as well as the marketing. More financial institutions are offering the product (and actively marketing it to their advisors).”
More ‘digestible’ for issuers
At the manufacturer level, the rise of FIAs reflects in part a retreat from VAs, whose problems during and after the financial crisis drove many life insurers out of that business entirely. Several surviving VA issuers tried managed-volatility subaccounts to shift risk onto the contract owner, but those strategies backfired, in a sense, when the stock indices steadily rose.
“The FIAs are clearly more digestible for the insurers than VAs with managed volatility,” said the wirehouse executive. “The volatility management strategies just didn’t perform as well as expected during the V-shaped stock market recovery from the financial crisis. “Even if VA issuers were 100% hedged, they could have encountered situations where the subaccounts underperformed. And they had to reserve for that potential loss. After that experience, they said, ‘we don’t want to take on that risk anymore.’
“So as an advisor you ended up with an anticipation issue. Clients said, ‘I should have gotten 12 when the market went up 20. So why did I get five?’ Advisors were having a lot of conversations that they didn’t want to have about how these VA volatility strategies worked. The black box approach of FIAs is easier to explain to a client than the black box of volatility managed funds in VAs.”
“The FIA is a sweet spot for insurers,” said Scott Hawkins, an analyst at Conning, a consulting firm that tracks life insurer profitability. “FIA is not as risky as a VA. It requires a little less capital than a fixed annuity, which requires a bit more capital than a VA. And there are a lot of distribution opportunities with an FIA. They started out being sold by independent insurance agents, but now many broker-dealers sell them and they’re accessible in no-commission form to registered investment advisors (RIAs). You don’t need to own a broker-dealer to sell FIAs, so that increases the number of life insurance companies that can sell them.”
Too much of a good thing?
But Hawkins thinks that life insurers might have trouble putting all that new FIA premium to work in the bond market, where it might be difficult to find sufficiently high returns at acceptable risk levels. If not, they might have to exercise their annual right to lower the caps or participation rates of in-force contracts, which would hurt sales.
“We see a potential headwind or fallout from this increase in sales,” Hawkins told RIJ. “Insurers have to put large sums of money to work and they have to find safe assets to invest in that don’t reduce their overall portfolio yields. That creates a potential margin squeeze. They might promise 3% to the client on the assumption that they’ll earn 5%. But what happens if the company can only earn 4.5%?
“We track the changes in asset allocations and risk profiles of the insurers and we have seen a shift in both quality and duration of the bonds. They’re adding investment risk to generate more yield. For example, my colleague looked at the difference between the insurers’ average yield and the 10-year Treasury yield. In 2007, the difference was 132 basis points. In 2017, the difference reached 214 basis points.” To beat the safe return by that much, they had to take more risk, Hawkins said.
Another potential headwind: a new round of regulation. “One of the major factors [in the indexed annuity sales rebound], was that the regulation battle settled,” Hawkins added. “But now the SEC is looking at a new ‘best interest’ rule, and the states are getting involved. The DOL fiduciary rule was the first shot across the bow in terms of increased regulation, but it won’t be the last. Life insurers will need to continue to respond to that issue with the development of no-load annuities and life products.”
Clients lead themselves to the product
The wirehouse executive who spoke with RIJ believes that FIAs will continue to sell well. “As advisors get more holistic, it will undoubtedly lead to broader utilization of the products,” he said. “There have also been advances in the ability of the planning software to illustrate the benefits of annuities. The software is getting better at quantitatively optimizing the annuity in the portfolio.
“Historically, advisors would leverage annuities as part of a core-satellite strategy. They would have annuities off to one side. But the software now enables them to manage annuities as an asset class inside a broad portfolio.” It’s also easier to compare FIA crediting rates than to compare potential VA returns, he added. “So the flows naturally go to the most competitive solution. That gives issuers a clear incentive to compete on product quality.” His company intends to start selling no-commission FIAs later this year.
To be sure, FIAs aren’t quite selling themselves. Annuities are still sold, not bought. “The client isn’t coming in and asking for an FIA; it has to be put in front of them,” said Jim Fahey of Ameriprise. “Usually the clients lead themselves to the FIA. Once they express the purpose of a certain portion of their money, they’re amenable to the product.”
© 2019 RIJ Publishing LLC. All rights reserved.
Different folks, different retirement strokes
After surveying groups of African Americans, Hispanics, Caucasians, Chinese, Koreans, and Asian Indians in its retirement plans, MassMutual found ethnic differences in the expected age and length of retirement, sources of income and other related issues.
The results appear in the MassMutual State of the American Family (SOAF) report, whose results were published this week.
“While we see many similarities among multicultural families when it comes to retirement planning, there remain important differences in how people view their retirement,” said Wonhong Lee, Head of MassMutual’s Multicultural Markets, in a release. “Most communities have undertaken retirement planning at about the same rate, although we see differences in expectations for timing, sources of income and confidence.”
About half of the participants surveyed had calculated how much savings they needed to retire, and about a third created a formal plan, according to the SOAF survey. Asian Indians were most likely to calculate how much savings they needed to retire (61%), but only 35% of Indian families have a plan. Only 39% of Korean respondents calculated how much they needed to retire and only 20% had a clear plan.
With the exception of Koreans, 45% of respondents plan to retire by age 65 or sooner, according to the survey, with 22% intending to retire at age 60 or before. The most common response for an intended retirement age was, “I don’t know” (26%).
A quarter of African Americans and 26% of Chinese respondents plan to retire at age 60 or younger – more than any other groups – and only 10% of Koreans said the same, the least of any group. Koreans were more than twice as likely as any other group to plan to retire later than age 70 or not to expect to fully retire at all.
One in five survey respondents overall indicated was “extremely confident” in their projected retirement age, with African Americans (30%) and Hispanics (24%) expressing the most confidence. Asian Indians (12%), Chinese (13%) and Koreans (14%) were the least confident.
African American and Hispanic and Asian Indian households are more likely to have a pension to help support their retirement. Anecdotally, many Asian American households own businesses. Overall, 54% of survey respondents expect to receive income in retirement from a pension, including 63% of African Americans, 63% of Asian Indians, and 59% of Hispanics, and 10% of Chinese.
Tax-favored retirement savings vehicles were the most commonly cited source of retirement income (33%), the survey found. Hispanics (28%) were least likely to depend upon such sources of income. Social Security (22%) was the next largest source of anticipated retirement income. Asian Indian (18%) respondents had the lowest expectations for Social Security as an income source.
Three out of four African Americans and 68% of Chinese respondents expect to live 20 years or more once retired; 36% of African Americans expect to live 30 years or more in retirement, the longest of any group by far.
Isobar conducted the State of the American Family survey for MassMutual between Jan. 19 and Feb. 7, 2018 via a 20-minute online questionnaire. The survey comprised 3,235 total interviews with Americans, most between ages 25-64, with household incomes equal to or greater than $50,000 and with dependents under age 26 for whom they are financially responsible.
For more information about the MassMutual State of the American Family Survey, please go to https://www.massmutual.com/cm/family-study.
© 2019 RIJ Publishing LLC. All rights reserved.
Kindur to Sell American Equity Fixed Annuity with Living Benefits
Last December, RIJ wrote about Kindur, a direct-to-consumer Internet platform designed to help people create ETF portfolios for savings and monthly income and, if they wish, to sell them an income-generating annuity.
At that time, Kindur’ founder Rhian Horgan, a former J.P. Morgan managing director, withheld details about Kindur’s pricing and about the identity of its life insurance partner. Yesterday the news broke.
Kindur’s annuity offering is a no-commission American Equity Investment Life fixed annuity with a living benefit rider that lets them switch on income when they need it. (It also has a 10-year surrender period with a first-year penalty of 9.2%, which seems unusual for a no-commission annuity.)
In an email, Horgan said, “We built a custom annuity understanding the pricing of each component of the annuity. Surrender charges are typically included in annuities to help carrier hedge the interest rate risk on their books and also facilitate the payment of commissions to brokers.
“Even though we have no commission the cost of not having a surrender charge (evidenced through a lower payout) was much higher than the expected value, given that we see this as a lifetime holding for our customers. Customers can still withdraw up to 10% p.a penalty free as well as having access to additional funds for unexpected health events like a terminal illness.”
Before income begins, Kindur charges $250 a year. When income starts, there’s a fee for ongoing advice about optimizing the product. Here’s what the Kindur website says:
“We don’t take upfront commissions like traditional insurance agents so you have more money growing towards your retirement income. Our fees cover the advice we provide as your investment advisor while your policy grows and we don’t collect our management fee until you are enjoying the benefits of guaranteed income. We take a modest fee of $250 a year for providing advice regarding your annuity within the context of your overall portfolio, including recommendations on timing for electing income and assistance with any policy related service requests you may have. Once you elect to receive income under your Lifetime Income Benefit Rider, we take our advisory fee of .5% as a percentage of the account value. That’s $500 a year for a $100,000 account value. Our fee goes down over time as your income is paid out.”
Alternately, or in combination with the annuity income, Kindur can also provide monthly income from the client’s ETF investments:
“If you choose the Kindur Retirement Paycheck option, every month Kindur will deposit into your bank account a predetermined amount based on the spending needs you set. Depending on how you choose to fund your Retirement Paycheck, these deposits could include a combination of annuity income as well as withdrawals from your ETF investment portfolios. Your Retirement Roadmap can help you understand if an annuity may be right for you.”
Kindur will charge 50 basis points a year for managing the client’s ETF portfolio, plus six basis points a year for the ETF itself.
Kindur most recently announced a $10 million Series A round, with investments from Anthemis, Point72 Ventures, Clocktower, Inspired Capital Partners, and angel investors Jake Gibson, co-founder of NerdWallet, and James Walker, former Global Head of Investments at JP Morgan Wealth Management.
Not all of the details about Kindur’s offer or strategy were available before today’s deadline. We’ll be reporting from time to time on the progress of Kindur’s experiment in web-based annuity sales and retirement income planning.
© 2019 RIJ Publishing LLC. All rights reserved.
Allianz Life’s new binary indexed annuity: A remedy for RMDs
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Affluent retirees perennially complain about the chore and sting of taking taxable required minimum distributions (RMDs) from their 401(k)s, 403(b)s or traditional IRAs after age 70½. For those who don’t happen to need the money for current income, the RMD means nothing but confusing paperwork and an unwelcome tax bill.
Don’t bother reminding these folks that RMDs are the price of tax deferral or that their qualified accounts are much larger for having grown tax-deferred for the past 20 or 30 years. Better to offer them financial aspirin for their financial headache. That is the intent of Allianz Life’s new two-for-one indexed annuity contract.
The two are called Allianz Legacy Planner and Allianz Legacy Plus, in a package called Legacy by Design. As Allianz Life described it in a press release this week: “Legacy by Design is a combination of two fixed indexed annuities (FIAs) that work together to systematically and efficiently address unneeded RMD income from qualified accounts and the associated taxes, while also potentially enhancing a client’s financial legacy.”
A contract owner would fund the first annuity, Allianz Legacy Planner, with qualified money from an individual IRA or SEP IRA. Starting when the owner reaches RMD age (the year after the year he or she turns 70½ under current law), Allianz Life distributes the correct RMD amount from Legacy Planner and deposits it in Legacy Plus.
“We’ve been thinking about this for a couple of years,” said Matt Gray, a senior vice president for product innovation at Allianz Life. “Boomers first reached age 70½ in 2016. Over the next 20 years, about $10 trillion of their savings will be subject to RMDs. Our research shows that a healthy percentage of that population will not need RMDs for income purposes, and 57% don’t want to get involved in the ongoing management of RMDs. Legacy Planner and Legacy Plus are two legal contracts, but need only one application and one allocation decision. We withhold the tax and send it to the IRS.”
Starting with the first transfer, the Allianz Legacy Plus contract grows annually with each contribution. Growth is supplemented by the increase, if any, in the value of the underlying bonds and index options. The second contract has no sales commission, no surrender period and no limits or penalties on withdrawals.
Although contract owners can convert the Legacy Plus account value to an income stream, Allianz Life positions the product mainly as a way to build a legacy fund for beneficiaries. To emphasis that theme, there’s a bonus on the death benefit equal to 25% of the account value at the time of the owner’s death, minus any prior withdrawals. No living benefit is available on the product. The annual fixed interest rate is 2.0%.
The contract offers six index options: BlackRock iBLD Claria, NASDAQ-100, S&P500, Russell 2000, PIMCO Tactical Balanced Index, and Bloomberg US Dynamic Balance Index II. Current crediting rates are available here.
Crediting methods and available indices are:
- Monthly sum with cap (available on S&P500, NASDAQ-100 and Russell 2000);
- Annual point-to-point with cap (available on all six indices);
- Annual point-to-point with spread (available on the Bloomberg, PIMCO and BlackRock indices);
- Annual point-to-point with participation rate, available on the Bloomberg (80%), PIMCO (80%) and BlackRock (85%) indices. Those indices are volatility-managed.
We asked Gray about the apparent incongruity between a seemingly generous 80% participation rate and a seemingly modest 3.50% cap on, for instance, the same PIMCO index.
“The participation rates are on volatility-controlled indexes that re-allocate between the fixed income and equity components daily based on volatility,” he told RIJ. “That re-balancing enables us to offer the participation rate strategy on that index. Over the long term, all of the allocations are expected to perform similarly.”
That is, an investor should have similar return expectations from either an 80% participation rate or a 3.5% cap on the annual point-to-point crediting method with the PIMCO index. “But we stress the importance of diversification because any one index or allocation can vary a lot from year to year,” he added.
© 2019 RIJ Publishing LLC. All rights reserved.
Ten Life Principles (In no particular order)
TrimTabs foresees no US slowdown
While the Federal Reserve’s recent shift in monetary policy and the inverted yield curve have stoked doubts about the U.S. economy’s strength, key macroeconomic indicators have improved recently, TrimTabs Investment Research said this week.
“Our indicators are not pointing to a recession anytime soon,” said TrimTabs director of liquidity research David Santschi. “The Fed’s policy shift had far more to do with action in the financial markets than with any change in the economy.”
The TrimTabs Macroeconomic Index, a proprietary index of leading macroeconomic indicators, climbed to a two-month high last week and is just 0.1% below its record high in September 2018.
Real wage and salary growth is also picking up, the firm said this week. Based on real-time income and employment tax withholdings to the U.S. Treasury, real wage and salary growth accelerated to 5.0% year-over-year in the past four weeks, up from 2.7% year-over-year in February. The pickup is too strong to be due to seasonal factors alone.
© 2019 RIJ Publishing LLC. All rights reserved.
Help AM Best Create Metrics for ‘Innovation’
AM Best is creating a new procedure for “Scoring and Assessing Innovation” and wants your help (in the form of email comments) in drafting it. This draft criteria procedure is available here. Commenters should submit e-mails no later than May 13, 2019, to [email protected].
Innovation means different things to different people. AM Best describes it as:
“A multistage process whereby an organization transforms ideas into new or significantly improved products, processes, services or business models that have a measurable positive impact over time and enable the organization to remain relevant and successful. These products, processes, services or business models can be created organically or adopted from external sources.”
Historically, AM Best has captured innovation indirectly through its rating process. Going forward, AM Best’s evaluation of a company’s innovation level, as outlined in the draft criteria procedure, will be based on two elements:
- Innovation inputs: The components of a company’s innovation process, and
- Innovation outputs: The impact of the company’s innovation efforts.
The resulting innovation score will be the sum of these two evaluations.
Within its business profile building block, AM Best explicitly will consider whether a company’s innovation efforts, or lack thereof, have positively or negatively affected its long-term financial strength. AM Best expects eventually to score all rated companies and assign each a published innovation assessment.
“Innovation always has been important for the success of an insurance company, but with the increased pace of change in society, climate and technology, it is becoming increasingly critical to the long-term success of all insurers,” AM Best said in a release.
“While AM Best believes that the pace of innovation in the insurance industry is accelerating and that an insurer’s ability to innovate is becoming an increasingly important indicator of a company’s long-term financial strength, AM Best does not expect any changes to ratings as a result of the release of this criteria procedure.”
Commenters may request anonymity, but not confidentiality. All comments received through the methodology in-box that do not request anonymous treatment generally will be published in their entirety, with attribution to the author/sender at the time of implementation of the criteria procedure.
For a brief overview about the draft criteria procedure, please use the link below to watch a video interview with James Gillard, senior managing director, Credit Rating Criteria, Research and Analytics.
http://www.ambest.com/v.asp?v=innovationcriteria319
© 2019 RIJ Publishing LLC. All rights reserved.
