In the post-recession era, annuities exist in a relatively less turbulent environment, even though the financial market is experiencing radical changes that are shifting its business operations. From changing regulations to digital innovations, market shifts force insurers to reinvent their strategies, services and processes in order to better meet consumer needs. As a result, the industry is moving toward a greater integration of best practices.
The Department of Labor (DOL) fiduciary rule stands to completely reshape the industry and the way advisors operate. The new rule has been described as the most significant annuity industry development since tax reform in the early 1980s.
Under previous rules, most advisors operated on commission. When the DOL fiduciary rule comes into effect, insurance and annuity businesses involving retirement plans and individual retirement accounts might need to adopt a fee-based model. Although the rule contains several concessions, advisors will face legal consequences if they can’t prove their retirement advice prioritized the client’s needs. Under this rule, specific high-commission products may become more difficult to recommend. This would create a ripple effect on retirement sales and advice.
The interplay between the government’s need to raise the compliance cost and an annuity company’s need to comply with new regulation is expected to increase budget allocations toward adopting technology. The impact of the fiduciary rule won’t be known until much later, but it’s undeniable that life/annuity firms must evolve their advice models and daily operations.
Millennials and mass-affluent consumers are purchasing more life insurance products, driving the need for digital tools and automated, algorithm-based financial advice. In addition, consumers expect greater digital access in their lives. This means that financial services companies must reframe the delivery of their services to integrate technology further.
Robo-advisors appeal to young investors but pose a challenge to annuity practices that follow traditional business models. The 2015 Elite RIA Study found that eight percent of top advisory firms offered robo-advice, with another 20 percent expected to do so by the end of this year. Although robo-advisors are able to manage portfolios at a reduced cost and deliver better performance, they never will replace traditional investment and financial planning. More complex areas, such as long-term tax planning and business investing, require an in-depth review to create a financial plan that truly meets the needs of each individual investor.
Practice managers can leverage advanced analytics to re-engineer front- and back-office operations with cloud and on-demand technologies. Insurers will continue to seek strategic partnerships and acquisitions in order to provide more support and innovation. However, it should be noted that digital innovation carries greater risks, making insurers more vulnerable to privacy breaches as they gain wider access to sensitive financial and health information.
The prevalence of digital technology also inspires new competition in the industry. Digital startups and operators who capitalize on the shift toward innovative digital offerings will meet the needs and expectations of those most interested in technology-based solutions.
Insurers must focus on the preferences and demands of the emerging millennial workforce if they are to survive in the shifting insurance landscape. Insurers must redefine their customer relationships, products and services to address new market dynamics. At the same time, insurers must integrate emerging technologies without disrupting traditional distribution.
As financial companies focus on technologically innovative solutions that require collecting and storing customers’ data, they are open to cyber risks such as fraud and data theft. This sensitive data also can motivate politically driven attacks aimed to disrupt the organization. Financial professionals will want to monitor the growing digital connections between their systems and outside parties to ensure protection against serious financial and legal fallout.
In a climate conducive to change for insurance professionals, it’s important to adjust business practices and plans to keep pace with that change. Advisors should monitor regulations, technology and cyber risks, and should note how their competition is adapting to suit the market.