NAFA Member Insights on Industry Challenges & Solutions

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In 2013, NAFA celebrated its 15th anniversary, and we do believe that the next 15 years will be both an exciting and a challenging time for all. Here at NAFA our greatest ideas come from our members, so we asked them to provide their insight and intuition to help answer two questions. To encourage participation, we held a contest asking:

1.  What is the single greatest challenge faced or innovation needed for fixed annuities to successfully meet the challenges of the next 15 years?

2.  What is the single greatest task or solution that NAFA needs to do to help the fixed annuity industry meet these future challenges?

The rules: The contest was open throughout December, and each NAFA member could answer one or both questions.

The prizes: Because it was the culmination of NAFA’s 15th anniversary year, the winner of each question was awarded a $150 gift card for his or her vendor of choice.

The contest was announced with each Monday Media Report produced by NAFA’s Director of Research, Jack Marrion. We had many inspired and thoughtful responses, and, as you can imagine, choosing the best was difficult, but here they are.

Winning answer to this question:

What is the single greatest challenge faced or innovation needed for fixed annuities to successfully meet the challenges of the next 15 years?

The Annuity Perception Problem – By Chris Conroy, VP, Creative Marketing

What’s one of the greatest challenges that our fixed annuity industry faces today? I think it is improving the public’s perception of the product. Those who work in the annuity marketplace recognize the strong value that fixed annuities deliver to our customers, yet the public largely continues to struggle to appreciate the many financial benefits and solutions provided through fixed annuities. For many customers, the need for predictable and sufficient retirement income is a primary and driving financial need. Pre-retirees and retirees desire the attributes and features afforded through fixed annuities; however, we continue to face a product perception difficulty that must be addressed in order for the fixed annuity industry to grow to sales volumes that should be attained to meet consumer financial needs. The consumer demographics and product attributes align perfectly, so what’s not to like about a fixed annuity? Why aren’t sales volumes twice that of current levels or perhaps even the equal of sales of variable annuities? Given this “annuity perception puzzle,” it is incumbent upon NAFA, its membership, and all others who support this important financial product to solve this puzzle. For if we do not crack the consumer perception code in the next few years while the largest wave of retiring Americans in our history are reaching the ideal purchase age, in the long run we might lose the battle to earn the positive attitude toward this product we all know and love.

There are many potential reasons for the annuity perception puzzle, and there seem to be a few simple ones too. We as an industry must understand our shortcomings and accept the reasons that have driven these consumer attitudes. Some may suggest the perception problem has grown from client misunderstanding, regulator mistrust, or media misinformation—things outside our control. Pointing fingers and assessing blame will do nothing to solve this challenge. We must face this problem head-on between and among ourselves. NAFA can serve as the catalyst, but those of us whose financial vitality is maintained by this product must be the ones who champion change.

Academics and industry researchers have pointed to several facets of the annuity perception puzzle. Why don’t many customers annuitize more of their assets when, financially speaking, it makes good sense to do that? Perhaps some of those reasons help explain the annuity perception problem. In early research, Yaari (1965) found that annuities should be a major component of an optimal retirement consumption plan, yet very few annuitized.1 And more recent research by Hu and Scott (2007) reached similar conclusions—that rational consumers should annuitize some of their retirement savings.2 Some research (Brown, Warshawsky, 2004) suggests consumers actually view annuitizing as “gambling,” in that they can “win” only if they live a long time, longer than the insurance company hopes for.3 This mental accounting misunderstanding is likely prevalent and must be addressed. And last, Marrion (2009) aptly points out that consumers do not make financial decisions based on the most rational outcome; rather, illusionary and emotional factors are also combined to reach a final decision.4 Most of us working in the industry recognize the growing longevity problem—we’re all living longer. Actuarial tables from 2000 prove that for an average couple aged 65, one of them will live to age 92 and one-quarter of the time one of them will reach age 95. Most of our customers either don’t realize this or simply ignore this realistic longevity challenge. Framing the fixed annuity, and in particular lifetime income, as “longevity insurance” or maybe “longevity income” can help consumer acceptance.

Indeed, LIMRA consumer surveys have found that consumers desire the features and benefits of a fixed annuity product, but when asked if they desire “an annuity” they frown and resolutely answer “No thanks.” For one thing, we’re trying to convince the public to trust us with their hard-earned retirement savings money, and we’re in a very competitive financial services market. We’re not selling candy bars that cost 50 cents; we’re selling security, peace of mind, and trust that we’ll pay on that retirement income promise. We must earn consumer trust, a trust that is born of agent and insurance carrier confidence.

I also have a personal anecdote that helps me understand what’s driving this annuity perception puzzle. My folks are a 66-year-old retired couple who have managed to save a reasonable amount for their retirement. Despite the fact that their son has worked in the fixed annuity business for over 15 years, I can’t seem to convince them of the value of guaranteed lifetime income through a fixed annuity. They simply won’t buy one. Why? I’ve earned their “trust,” and they are smart enough to recognize the value of lifetime income. This has disappointed me but might explain a few other factors driving our perception puzzle. First, my parents don’t want to face the reality of planning for a potential “older age” retirement. My dad told me, “I’m probably going to die at 85, so I don’t need it.” To which I said, “But, Dad, what if you’re wrong, and also, what about Mom?”

Winning answer to this question:

What is the single greatest task or solution that NAFA needs to do to help the fixed annuity industry meet these future challenges?

By Paul Garofoli, National Western Life

Repealing the 10% tax penalty for distributions from annuities prior to age 59 1/2 is one step that would meet that challenge.

Think of the irony. While our industry is criticized for its surrender penalties, the most unforgiving and longest penalty is the 10% tax penalty! We are also criticized (unfairly) that the business targets seniors … yet the “premature” distribution tax almost compels us to focus on the 60-plus market! And while there are exemptions from the penalty, they are too limited to be of value to most Americans. The complete repeal of the 10% penalty would let the free market work and result in a number of positive benefits for consumers and the economy:

1. Encourage saving (and planning) at an earlier age

2. Provide an alternative to going into debt for likely life expenses (car, college)

3. Spur product innovation

4. Stimulate competition among “safe money” providers

5. Draw younger people into the business as customers and agents!

I hate contradictions. Current tax policy conflicts with suitability and non-forfeiture standards. For example, those standards basically limit a 40-year-old to a 10-year annuity product design, yet the tax penalty will last for 20 years! Eliminate contradictions. Reward savings. Stimulate product innovation and encourage competition. Repeal the 10% penalty!


1 Yaari, M.E., 1965, “Uncertain Lifetime, Life Insurance, and the Theory of the Consumer,” Review of Economic Studies, 32: 137-150.
2 Hu, W., and J.S. Scott, 2007, “Behavioral Obstacles in the Annuity Market,” Financial Analysts Journal, 63(3): 71-82.
3 Brown, J.R., and M.J. Warshawsky, 2004. “Longevity-Insured Retirement Distributions from Pension Plans: Market and Regulatory Issues,” Public Policies and Private Pensions. Edited by W.G. Gale, J.B. Shoven, and M.J. Warshawsky. Washington, DC: Brookings Institution Press.
4 Marrion, Jack. 2009. Change Buyer Behavior And Sell More Annuities. The Advantage Group. St. Louis. See also “Behavioral Retirement Solutions,” Advantage Compendium, Volume 1, Number 2, Autumn 2009.

Kim O’Brien is NAFA President & CEO. NAFA membership represents over 85% of all premium for fixed indexed, declared rate and income annuities written through the independent distribution system. Kim has over 30 years of experience in the insurance industry beginning as in 1981 as office manager for an insurance agency. In 2002 Kim developed and ran her own marketing organization and received the 2002 Entrepreneur Award from Sun Life. In between, Kim worked as a marketing executive for major insurance companies and was responsible for their annuity and term life insurance product line development, marketing, and training processes. In 1993, Kim served as interim deputy director of the Wisconsin Department of Insurance under Governor Tommy Thomson and served Governor Thompson until a permanent replacement could be found. In July 1992, Kim was the first women in Wisconsin to pass the CFP exam established in 1991 by the CFP Board as a single comprehensive examination modeled after the licensing examinations given to attorneys or Certified Public Accountants (CPAs). Kim O'Brien received her BA from Ripon College, her MFA from the University of Northern Colorado, and an MBA with an emphasis in Economics from Edgewood College, Madison, Wisconsin. In 2008, Kim was accepted into the Juris Doctorate program at the William H. Taft Law School and completed her first year and passed the preliminary California Bar as required before continuing her degree. She has recently re-instituted her studies to begin this summer after a hiatus due to her NAFA workload. As an avid musical theater fan and dancer, Kim has directed or choreographed over 60 shows in Milwaukee and Madison, Wisconsin. She lives with her husband and college sweetheart of 39 years, Kelly, in Phoenix nestled in the Thunderbird Conservatory she enjoys hiking the mountains with their Irish setters.

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