Annuities Reshored

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There was an article in the December 2012 issue of The Atlantic about General Electric moving production of appliances back from offshore sites to the U.S., and I felt the message of the story was so strong that I paid a license fee to copy it and share it with several annuity carrier executives I know. The message of jobs moving back to America is appearing more frequently and was featured in a Special Report in the 19 January issue of The Economist. This may all seem to be unrelated to the fixed annuity world, but please bear with me.

In the ‘70s and ‘80s, manufacturing industries had become complacent and bloated with high costs and production inefficiencies. What this meant was they were very vulnerable to external economic challenges. Companies reacted and one of these reactions was to move jobs out of the country. Now, for all the political talk about “giant sucking sounds” and how more jobs were lost due to technology than those lost to overseas factories; robots and computers eliminated the need for millions of semi-skilled jobs and that trend continues. However, this doesn’t minimize the effect of outsourcing; even recently from 2000 to 2010, 793,000 jobs were moved overseas (The Economist, 19 Jan 2013, p.4). The reason given for foreign outsourcing was it was a way to reduce the cost of production. However, the main reason companies moved jobs overseas was due to the herding effect – in other words, a company would move jobs offshore solely because “everyone else was doing it.” Even if they’d taken a fresh look at the problem, they would have seen there were other solutions.

Today, companies are taking a fresh look and production is now moving back to our shores. Companies recognize that labor costs are increasing overseas – the wages of Chinese workers are increasing 20% faster than their productivity gains; it’s projected that by 2015, the overall cost of manufacturing in China will equal the cost of doing it in America (ibid, p.12). Another aspect is the cost of transporting those goods back to America has increased due to higher fuel costs. A third reason is that U.S. workers can be trained to work more efficiently than foreign laborers because U.S. workers are more highly educated. Because of all this, a survey by Boston Consulting Group found that 40% of American manufacturers were thinking of or in the process of moving production back home (ibid).

Companies are seeing what their labor force can and can’t do and redesigning systems to meet the capabilities of the workers. In conjunction with this, the labor force became more flexible in what they will do. The result is America is now experiencing a manufacturing renaissance. GE added 1,700 manufacturing jobs in the past year; GE suppliers are hiring and building new plants and this is not only happening at GE, but at many other U.S. companies. American companies returning jobs to the U.S. is called reshoring, but it’s not only U.S. companies that are expanding in America. Grupo Bimbo of Mexico purchased Weston Foods in 2009, Sarah Lee’s baking operation in 2011, and is becoming the largest baker in America. This month, the Chinese firm Lenovo opens a North Carolina computer manufacturing plant. Plus, firms from India are opening call centers in the U.S. (ibid). The world believes that the U.S. is a good place to do business.

My article reflects the key point of this research, noticing that America is not in decline, but because of our ability to innovate and be flexible, America is on the cusp of a new era of greatness. Times have changed and the immediate future is somewhat dark, but for those individuals and companies that are willing to look beyond, there will be ample rewards. I felt these stories had special relevance for the annuity industry.

The relevance is not the concern of carriers or agents being replaced by offshore firms. Although foreign money may be invested in U.S. annuity carriers, those carriers remain in the U.S., and agent sales are still done face-to-face in an American home, rather than a cold call from Bangalore. The story is that the annuity industry is also facing problems brought on by systemic changes and a bit of herding behavior, but that the American fixed annuity industry is still a good place to do business.

Fixed annuities enjoyed a 40-year run of high bond yields that enabled them to pay very competitive interest rates, while also receiving higher compensation amounts then previous years. Unfortunately, since rates were so high, agents that were formerly schooled in consultative (problem-solving) sales skills and were used to life insurance selling, now mainly sold according to the best annuity price (highest rate). Annuity products were designed to offer the best apparent price and compensation, and most products were imitations of the others. Over the last several years, bond yields have plummeted, which has forced compensation and lower rates. The reaction by carriers to lower bond yields was first to cut annuity interest rates, then compensation, then refile the annuities to permit lower guarantees. Carriers were forced to react to lower bond yields, but many also reacted to what others were doing and simply followed along. The reaction by many agents was to try to find a way to still sell a fading high return story by searching out annuities that had not yet reduced their bonuses or caps; a losing long-term strategy. However, the bad times are stirring innovation by carriers and agents who refuse to follow the herd.

Some agents are trying a consultative selling approach, focusing on the needs that the annuity meets, rather than the selling rate. With a consultative approach, the most important aspect is the fit of the solution, so the rate earned is only a factor in the sale and not the main factor. With a consultative approach, the fact that an annuity has a 3% interest cap or a 7% growth rate on the income benefit is only important in how it helps the annuity provide the ultimate solution to the client’s need. This makes a consultative approach less sensitive to a poor rate environment.

Carriers are taking a fresh look. One response to lower rates was enhancing the actual return of the annuity in calculating a future guaranteed income benefit rather than simply promising to increase the future payout for every year the onset of income was delayed. This stacking of returns poses less risk to the carrier, while still providing guarantees to the annuity owner. You also have carriers on the fixed index side introducing new indices that permit higher index participation in low rate times. A few carriers are designing fresh new annuities that align more closely with a consultative selling approach, which means sizable sales continue even in low rate times.

The manufacturers took a fresh look at the long-term problems confronting them and came up with solutions that were win-win for the company, the worker and the consumer. They are doing this because they have faith in the future of America. Annuity carriers and agents are also facing a changed world. Eventually bond yields will go up, but the ultra high rates and compensation of yore won’t come back. The good news is the market for fixed annuities is growing day by day and those carriers and agents that refuse to follow the herd and take an innovative approach will share in an unparalleled period of fixed annuity sales.

Jack Marrion is president of Advantage Compendium Ltd providing research and consulting services to select financial companies. He has twice been asked to address the National Association of Insurance Commissioners on annuity issues, his insights on the annuity and retirement income world have appeared in hundreds of publications including Business Week, Kiplinger and The Wall Street Journal, and his research is frequently referenced by regulators.

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