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Insurance Industry Must Rethink Approach to Annuities to Build Consumer Trust and Grow Share of Retirement Assets

New TowerGroup Research Explores Steps Insurers Should Take to Improve Annuity Offerings and Reduce Product Complexity

NEEDHAM, MA, April 17, 2008 - With over 20 percent of the U.S. population expected to be over the age of 65 in 2025, there is a growing need for financial products that can guarantee an income stream during retirement – a need insurance companies should be well-positioned to meet with annuity offerings. Yet new research from TowerGroup finds that in order to capture a larger slice of the retirement asset market, insurers must make strategic changes in their approach to annuities to reduce product complexity and improve both the sales process and suitability screens.

Currently, over 40 percent of U.S. variable annuity sales are generated from existing annuity assets. This statistic indicates that insurers have not yet convinced a large percentage of current or future retirees that annuities are central to a comprehensive retirement plan.

“It is imperative that insurers create an environment where customers and advisors feel secure and comfortable with annuities in order to attain real market growth,” said Rachel Alt-Simmons, a senior analyst in TowerGroup’s Insurance practice and author of the research. “Building customer understanding and trust can only be achieved by making both annuity products and business processes more transparent.”

Highlights of the research include:

• TowerGroup estimates retirement assets in the US represented $18.5 trillion (USD) in 2007. Below is a graphic detailing invested retirement assets by type from 2000 to 2007.
  

This chart may also be downloaded at: http://www.towergroup.com/research/content/page.jsp?pageId=3122.

• In addition to demographic shifts relative to aging, ethnographic changes are also reshaping the country. By 2020, the foreign-born population in the U.S. will reach 15 percent, the highest level in more than 100 years. TowerGroup believes that insurers must address this change by adapting their financial products to better suit diverse populations and varying cultural habits.
• Regulations have not kept pace with financial innovation, leaving the door open for investors to purchase unsuitable products. This has led regulatory authorities in the U.S., United Kingdom and Japan to create rules aimed at protecting investors from unsuitable investments and unfair sales practices.
• To appeal to the changing retirement market, insurers must reconfigure and enhance their annuity offerings – reducing product complexity by returning to the basics. TowerGroup recommends that insurers consider: creating a client bill of rights; changing the compensation structure around annuity products; more closely monitoring sales practices; enhancing disclosures for customers; and making it easy overall to do business in this area.

“Insurance companies must become more accountable for suitable sales and operational practices around annuities,” added Alt-Simmons. “The insurers who take on this challenge will both help consumers and drive growth by providing investments that are appropriate and effective in meeting retirement income needs.”

Two new research reports, titled “Growing the Variable Annuity Market: Global Challenges” and “Life Insurers, Act Now! Demographics Are Rocking the Boat,” are available. Those interested in purchasing a copy of a TowerGroup report or subscribing to a TowerGroup research service may call +1.781.292.5200 or email service-info@towergroup.com

About TowerGroup: TowerGroup is the leading research and advisory services firm focused exclusively on the financial services industry. A respected source for trusted information and advice, TowerGroup brings many of the world’s leading financial institutions, technology companies, and professional services firms a deeper understanding of the business and technology issues impacting their organizations. Headquartered near Boston in Needham, Massachusetts, and with offices in North America and Europe, TowerGroup serves a global client base. Visit www.towergroup.com for more information.