By Kelly Rabin and Martin Ruby
Most product and sales actuaries work with distribution without actually being in distribution themselves. Martin Ruby, FSA, has worked on both sides of the table. He sat down with Kelly Rabin to share his perspective about the market, distribution, and possible product development implications.
KR: You're an actuary in a distribution role. How has your career path led you to this point?
MR: I’ve worked in product development most of my 40-year career. Even when I was a young actuarial student, I recognized that the hardest job in an insurance company is sales. I have always been very sensitive to not just what a new product looks like, but how it is being marketed and sold. In other words, it is not enough to just put a product out in the marketplace; you have to consider the entire marketing mix: prospecting, collateral support, agent compensation, proposals, sales fulfillment. The entire product mix has to work together.
In 2001, I founded Stonewood Financial Solutions to bring a combined actuarial and marketing approach to insurance and annuity products. Naturally, I reached out to marketing companies I had experience with and many were interested in partnering with us to design programs for the savings market. Eventually this led to us licensing these integrated programs to agent networks throughout the industry. Locally, I use these programs to sell directly in order to test and improve the programs as well as establish credibility with agents that I am not just a consultant who advises, but also one who sells.
KR: What is your approach to the market?
MR: I believe all products and marketing programs have to start from the customer’s viewpoint. What are the customer needs, risks they face, and problems they need solving? One has to combine this with a clear view of different market segments. The needs and problems of a 35-year-old professional are substantially different from those of a 65-year-old Baby Boomer who is ready to retire. The key for actuaries is to recognize that we have knowledge that few others in the industry have. We have to use this knowledge to “translate” the technical into the understandable.
For example, starting with a problem that a particular market segment needs solving, how can we use our insider product knowledge to re-engineer existing products to fit the needs of that particular segment? How can we design sales material that speaks in a language that a typical prospect will understand? How can we make it easier for the agent to present these sales ideas without the agent having the same technical knowledge we do?
At Stonewood, this is what we call our “brains and beauty” approach. We use our actuarial insider knowledge (the brains part) to make sure we are getting the most out of a particular product applied to solve a particular prospect’s problem. This really proves useful in the indexed universal life (IUL) market, where there are so many products and so much flexibility as to how one uses a particular product.
The beauty part comes when we design programs for a certain market segment. We develop a story that an agent can tell and a prospect can relate to. This story is integrated into every aspect of the program. We actually develop training videos for agents that show how to tell the story. The sales material integrates as well. We have also designed customized proposals that allow an agent to walk a prospect through the story, as well as seminars that agents can use for prospecting.
The key is to use language and visual material that non-technical people can understand. This applies not only to the prospect but also to the agent. You would be surprised how many agents are hesitant to sell certain products because of the technical barriers. They do not understand complex products such as IUL and are afraid of selling them since they may look “dumb” in front of the client.
KR: One of your current areas of focus is helping customers with long-term savings. Have you looked at developing a product specifically for this use?
MR: One of the markets we have been most successful in is the Baby Boomer “safe money alternative” market. Billions, if not trillions, of dollars are languishing in low-yielding CDs, savings accounts, and money market funds. Baby Boomers are frustrated by the lack of meaningful return on their safe savings. They also see this as rainy day money that they may need later in life to cover medical costs or long-term care. Absent these needs, they plan to leave this money to their children.
We recognized this as an opportunity that a well-designed single premium IULproduct could fit. However, from the prospect’s perspective, they did not necessarily define their needs in insurance terms. They were looking for a safe savings instrument that provided meaningful upside, downside protection, accessibility if they needed the money for emergencies or medical expenses, a death benefit if they leave the money for their children, and tax benefits to avoid the well-founded fear of higher taxes in the future. They did not realize it, but they were describing IUL. Our challenge was to find the best product in the marketplace to fill these requirements. We were able to do so and have generated a substantial amount of sales both personally and for our agent networks.
However, in a sense, we’re retrofitting products on the market today to meet this need. A product specifically designed for this market has enormous potential. For example, many agents in our industry focus on the annuity market. For these agents, there are several issues that need to be addressed before they can jump into selling IUL. Perhaps the biggest one is the need for a medical exam. Fortunately, the industry is becoming more comfortable with the tele-underwriting process, where the underwriting is done mainly through a telephone interview, accessing prescription drug databases as well as MVR and MIB. But many of the best IUL products still require fluid collection.
Another issue is the interest-crediting mechanism in the product. The annuity industry has pioneered strategies such as “controlled volatility” indexes that can provide a smoother interest-crediting pattern for policyholders. These indexes are just starting to become available in IUL products. Still another area is agent compensation and simplifying how agents are paid.
Putting all these areas together, we saw an opportunity for a new single premium IUL product that can benefit Baby Boomers and help agents with the sales process, so we have developed a product specifically designed for this market. It satisfies the needs of the “story” we are telling while providing better value to the customer and agent. Discussions are under way with several insurers to partner with us on this product.
KR: What are the biggest barriers you see to product innovation?
MR: I think there are a number of barriers that slow innovation. For example, many insurers take a non-integrated approach to product development. Most companies are organized in silos. Underwriting has their silo, systems theirs, actuarial, sales, new business administration, etc. Each silo is looking out for its concerns, but few people are looking at the big picture. Companies need to make sure everyone understands and buys into the overall strategic objectives of the company, not just their one small piece of it. This requires cooperation and a positive attitude.
Companies also get hung up with the minutiae of cleaning up past problems. Before you know it, you have allocated all your product development capacity and resources to tweaking existing products or responding to new regulatory requirements. Many times the attitude is, “Well, I guess we have no time for new products.” I think this is a real mistake. There are ways to address these resource issues if a company has the right attitude. You might look at outsourcing certain functions for a period of time or use an outside firm to aid in the development. But it’s a mistake to let the back office dictate new product development. Remember, a pessimist sees difficulty in every opportunity, but an optimist sees opportunity in every difficulty.
Conversely, I don’t see regulation and low interest rates as barriers, as I know many in the industry do. To me, the insurance industry has a tremendous advantage over several other types of financial services firms. We have the ability to guarantee things that other firms do not, and can turn supposed barriers into advantages. For example, I use the state-based regulatory structure of the insurance industry as a sales point. In 2008-2009 when banks were failing and mortgage companies and investment banks were going under, the soundness of the insurance industry was apparent. Our industry did not need massive government bailouts or other aid. Policyholders got paid on time and the industry ran rather smoothly. (AIG actually proves my point, as its state-regulated insurers performed well even at the height of the financial crisis). Similarly, the low interest rate environment makes IUL more attractive to both carriers and consumers.
KR: Where do you see the life insurance industry going in the next five to 10 years?
MR: I think we will continue down the path of a being a savings industry. Already, the industry holds more annuity reserves than life insurance reserves. The rapid growth of IUL further fuels this shift toward savings. However, the industry must find ways to continue exploiting its advantages. Besides the tremendous tax advantages (which it must always vigilantly defend), it is in the unique position to transfer and pool risk. This is the essence of insurance.
Our challenge as an industry is to address the risks that are foremost in the public’s mind today: living too long, covering unknown medical and long-term care expenses, investment risk, and taxes. Fewer people see the need to cover premature death via anything other than a commodity market for term life. We need to expand our thinking so our industry can address what people are concerned about going forward.
Kelly Rabin, FSA, CFA, MAAA, is a Seattle-based consulting actuary with Milliman Inc. She can be reached at email@example.com.
Martin Ruby, FSA, is the founder and CEO of Stonewood Financial Solutions, a marketing and actuarial firm focusing on creative uses of IUL. He can be reached at firstname.lastname@example.org.