A tsunami of change is poised to disrupt the life and annuity market in terms of regulation, products, distribution channels, business strategies and customer expectations. The new regulatory ruling from the Department of Labor (DoL) will initially disrupt annuity product sales related to IRA rollovers but will likely have significant impact in the medium to long term with all the products that U.S. life insurance companies provide.
The new ruling places a fiduciary standard on all types of financial services companies and advisers that provide investment advice or sell insurance or other products that affect qualified retirement accounts. Unlike the previous suitability standard that applied to most annuity and other investment product sales, the new fiduciary standard will require that financial advisers be completely transparent about their conflicts of interest and compensation and will make it very difficult to justify commission payments by product companies. To help guarantee objectivity, the preferred fee structure for retirement account-oriented advice and product sales will become fees directly from the consumer. While the fiduciary standard will apply initially to qualified retirement accounts, the recent experience in other countries like the UK and Australia makes it clear that consumers will come to expect a similar level of transparency and objectivity for other types of financial advice and financial products like life insurance.
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Life insurance companies that write a large volume of high-commission, retirement-oriented products like variable and indexed annuities will experience the most significant, immediate and potentially negative impact. Traditional life insurance and other lines of business will experience the impact of the fiduciary ruling more gradually, giving life insurance companies early warning and much-needed time to evolve their products, technologies and distribution strategies.
Insurers should assume that group-led individual product sales sold under something resembling the fiduciary standard will ultimately become the norm for the whole life insurance portfolio.
Adding further momentum to this wave of change are Millennials, now the largest living generation. As also the most educated living generation, they expect objective advice and fees for products that represent fair value. While often very self-directed, Millennials want advice from experts in complex, important areas like employee benefits. Millennials want to receive employee benefits advice from their current employers but then often buy individual products that can follow them to future jobs at new employers. This represents another wave of change because of the dynamic, “gig” economy.
Right behind, Gen Z, is a generation ‘born digital,’ with technology incorporated into all aspects of their lives. They live and breathe innovation, as noted in our Future Trends: A Seismic Shift Underway report. What does this mean to their employers and their desire to build employee loyalty?
This new customer expectation is reinforced in a recent MetLife employee benefits study where nearly two-thirds (62%) of employees say they’re looking to their employer for more help in achieving financial security through employee benefits as compared with 49% in 2011. Furthermore, the study noted that Millennials were twice as likely compared with baby boomers, 44% versus 20%, to say that their employers “ought to help them solve their financial concerns.”
So what does this mean for life insurance companies? It means a new world of transparency, objectivity, fee-based adviser compensation, lower-fee products and employee job hopping will together create a wave of change to long-held business assumptions, operations and more. With the pace of change gathering strength and with limited resources, life insurance companies should seek partnerships that will help them ride this wave. This could involve partnering with technology companies to provide a single modern platform to support both individual and group needs that match the emerging customer needs. It may mean working within an ecosystem of innovative, new investment and insurance distribution platforms that were built with business and operating models that fit properly into the context of this new world.
Rather than acquiring these platforms and stifling innovation, the distribution partnerships provide valuable insights to understand how the platforms connect with Millennials and Gen Z and how to provide value to them. The new “robo adviser” technology-enabled platforms act as fiduciaries and have shown strong, early success with accumulating investment assets from Millennials and other types of consumers by providing automated, institutional-style asset management. Some of the robo platforms like Betterment express an interest in implementing retirement income-oriented advice and product delivery capabilities but will need help understanding the nuances and complexities of retirement income. Interestingly, life insurance companies are in a stronger position than other types of financial services companies to explain the benefits of having a “retirement income floor” and then providing the deferred or immediate income products that can actually provide that floor.
With insurance protection products, the new employee benefits distribution platforms focus almost exclusively on health insurance benefits, but will inevitably diversify into non-health employee benefits products. While technology will help with making protection products more consumer-friendly, combining technology with expert advice from people will provide the formula that Millennials will want.
To provide the multi-channel employee benefits advice that Millennials prefer, life insurance companies should consider investing in dedicated agents/advisers who can act as fiduciary equivalents for employee benefits products and provide objective advice based on the employee’s particular needs. These dedicated agents will find an attractive opportunity in helping employers with fewer than 100 employees level the playing field with larger employers — providing a compelling service to Millennials and other employees that will help to retain and motivate them.
Furthermore, life insurance companies should also seek to partner, tightly integrate with and learn from a few of the early self-service enrollment platforms for employee benefits like Gravie and Connecture, even though they are currently focused on health insurance products. Only by partnering with these types of companies and by understanding how they generate revenue by providing objective advice to Millennials will life insurance companies be able to succeed. For an industry that has relied for many decades on selling commission-based products through traditional, third party intermediaries, this will require a completely new way of thinking and a new business model that is currently foreign to most U.S. life insurance companies.
Finally, to put this all together as a “platform” solution, insurers must look to new technology software that will provide some key elements, including:
- a core platform that supports both individual and group, to enable portability of insurance,
- a digital platform that will enable multi-channel environments and provide a compelling customer experience, and,
- a platform that will easily integrate innovative solutions and partners to differentiate the organization within its market.
