Analysis from Gomez: Leveraging Annuities Amid a Down Market

By Tim Carpenter, Gomez, Inc.

Significant opportunity exists for discount brokers to more actively promote annuity products online - and insurers to work with them to do so. This includes products that enable investors to participate in the equity markets, such as variable and index-based annuities, which limit downside risks of market exposure while maintaining upside potential once the markets rebound. The challenge for discount brokers (and insurers) becomes how to effectively market a product as complex as annuities through the online channel, which is essentially an asynchronous medium (videoconferencing and instant chat notwithstanding). Discount firms must thus find ways to succinctly draw interest online and then get the customer to discuss annuities' details more collaboratively on the phone.

To date, carriers have focused much of their energy on extending their annuity sales through the bank and thrift channels. Much of this effort has gone for naught. While longtime players in the bank distribution channel, such as Hartford Financial Services, Nationwide and AIG, and newcomers such as Lincoln National and SAFECO, have been effective, the road to success is quite bumpy, as MassMutual and MetLife discovered.

Proprietary annuity agreements, where the bank's customer is offered annuities whose menus consist heavily of the bank's own fund portfolios, are one of the strongest factors contributing to many carriers' inabilities to penetrate the bank distribution channel with traditional annuities. These agreements, accounting for 19 percent of all variable annuity sales through banks in 1999, have consistently gained traction and now account for as much as 50 percent of banks' variable annuity sales.

In today's market environment, insurance carriers should consider a distribution agreement with brokerages that do not offer annuities, do not maintain their own portfolio of funds and will not demand a proprietary agreement. Discount brokerages are a direct "in" to a large base of battered investors to whom annuities are very attractive. Until annuities are marketed as a solution that addresses specific investor concerns (rather than as a product that touts abstract benefits), this complex product will remain largely untouched by the self-directed masses.

Rather than following the lead of TD Waterhouse, which offers a variable annuity for purchase over the Internet through a third party (AnnuityNet), self-directed brokerages should focus their online efforts on promoting the high-level value and benefits of their products. Aside from decision-support tools—such as Charles Schwab's "Is a Variable Annuity Right for You?"—the online medium should provoke prospects to call an annuity specialist. Firms must then offer back-office support that produces sales. Additionally, for multi-line financial services firms such as E*Trade, which are moving deeper into the advisory space, taking the discussion offline may uncover other issues that need to be resolved from a financial planning standpoint.

Another point to consider: Scenarios put a face on a product. It is not enough to market annuities by presenting a top-level view of their benefits. While an investor may understand "income protection" and "tax deferral." these may not spur a call to action. Instead, financial services firms should look to the examples of Wells Fargo and Legg Mason and market their annuity products via scenarios that put annuities into context by describing conditions where they may be appropriate.

It is also important to pitch the product to the specific prospect. Astonishingly, most major financial services sites do not customize annuity promotion to the current state of the markets. In fact, they still communicate the benefits as they did during more robust financial times. Financial services firms have an opportunity to promote the value of annuities at the point where investors are most uneasy about their current portfolio allocation—when viewing their accounts.

For instance, ING Bank promotes its new SmartDesign Annuities online in simple terms that are sensitive to current market conditions. Many investors are more than willing to limit (but still retain) their upside potential if it means protecting against the downside. Discount brokerages, when promoting their annuity products online, should follow ING's lead and aim their pitch at the wary investor, explicitly marketing the upside/downside relationship as the primary benefit of the product.

Unlike many other financial services areas, the online annuity game is not about online purchasing, data re-purposing or any other convenience measure. The challenge is to convey annuities' benefits in terms that convey wealth preservation, thus spurring action. After that, firms need to focus offline—providing a call-center support group that is qualified to elaborate on and generate increased product sales.

Tim Carpenter is a Gomez research analyst covering the financial services industry with an emphasis on the insurance, brokerage and banking sectors. He can be reached at [email protected].