DOL Rule Accelerating Tech Transformation at Annuity Carriers
June 28, 2017 by Jamie Johnson
Simplified and more dynamically priced products, a digital revamping of customer-facing and back office functions, and a narrowing of product focus are among the big changes expected in the wake of the June 9 rollout of the Department of Labor’s Conflict of Interest Rule.
The source of this forecast: Chris Eberly, VP of research and consulting at Novarica, which has issued a report on sweeping information technology initiatives underway at annuity manufacturers, including an overhaul of policy administration and business intelligence systems, agent/advisor web portals and risk management operations. Business processes that for decades resisted modernization are being reworked — changes the DOL fiduciary rule are accelerating, starting with the carriers’ strategic positioning.
“Carriers are becoming much more laser-focused with their strategies,” says Eberly. “They’re doubling down on distribution models and products to gain a competitive advantage in the markets they serve, be they variable or fixed annuities.”
To that end, he adds, the manufacturers are simplifying offerings, often by jettisoning complex moving parts and features (such as guaranteed minimum withdrawal, income and death benefits) that can make sales presentations and closings more challenging for producers.
In tandem, they’re also bringing greater transparency to the products, a result of the heightened reporting and disclosure requirements of the fiduciary rule, most notably best interest contract exemption (BICE) provisions applying to variable commissions that take effect January 1. Agents and advisors seeking to bypass these onerous requirements can instead opt for “BICE Lite,” a streamlined version available to level-fee advisors.
To cater these financial professionals, says Eberly, a growing number of annuity carriers — AIG, Allianz Life, Lincoln National, Pacific Life and Voya Financial have rolled out fee-based fixed-indexed annuities that will now be subject to the DOL rule.
The activity has been even greater in the variable space: According to Morningstar, VA manufacturers unveiled in 2017 22 fee-based contracts incorporating iShare exchanged-traded funds from BlackRock. Those boasting at least a half-dozen iShares contracts include Great-West, Lincoln and Transamerica.
“Many of these carriers are aiming to appeal to RIAs [registered investment advisors] who are already operating in a fee-based environment,” say Eberly. “But in addition to debuting fee-based platforms, they’re also lowering product fees because of the greater transparency demanded by the rule.”
To achieve this reduction, he continues, carriers are leveraging technology to cut costs that (in addition to agent compensation), factor into premiums. Among these: Insurance charges (including mortality and expense or M&E fees) that pay for insurance guarantees; plus selling and administrative expenses of the contract.
Hence the widespread adoption of “straight-through” (electronic) processing, including e-signature technology and cloud-based software, to replace antiquated paper and manual-based systems. Carriers are also leveraging advanced data analytics and artificial intelligence to dynamically price offerings.
Such technology, says Eberly, is giving annuity manufacturers’ chief technology and information officers (whom the Novarica survey polled) greater insight into the accuracy of current assumptions (such as about market conditions, policy risk and customer acquisition costs). Result: the ability to more appropriately price products.
“With these tools, annuity carriers can better price annuities on a per contract basis,” says Eberly. “Some [unnamed] manufacturers are highly advanced in their adoption of analytics that can more accurately forecast customer acquisition and policy administration costs.”
And with this information, he adds, they can gain an edge in the market by (1) availing prospects of more competitive offerings; and (2) securing efficiencies, from the front office to the back office, that previously were unavailable.
All well and good. But technology gains have yet to produce a fundamental transformation in product development. Whether measured in terms of new features and benefits or time to market of product rollouts, progress has been slow, Eberly acknowledges.
To help secure such gains, carriers are partnering with Silicon Valley-based insurtech companies. And a number, including AXA, MassMutual and Transamerica, have launched venture capital arms to tap these companies’ knowledge base and expertise.
As to carriers’ internal IT talent, many are hard-pressed to find the people they need to spearhead technology initiatives — a notable finding of a first quarter Novarica report. Those IT people who are on staff also tend to be older GenXers and baby boomers — many of them ill-suited to the re-engineering of business operations the carriers are striving for.
“Transformative people are rare, especially in mature industries like insurance and financial services,” says Eberly. “The average age in carriers’ IT organizations is over 45 or 50. How they’re going to recruit and retain the tech-savvy millennials they need is a big question mark hovering over the industry.”