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The Home Office - Managing Agents & Employees
  Managing Agents & Employees  Financial Theory - pricing & hedging
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The Job Interview Illusion (2/14) 
Gen Y As Agents & Employees (5/13) 
Customer Service: Using A Customer-Centric Approach (12/11)
 
Profile Of The Typical Agent  (12/11)
 
Preferred MOs (8/11) 
What Makes A Great Annuity Producer? (7/11)
 
Trailing Commissions Make Sense (9/10)
 
Creating Not Dissatisfied Customers (8/10)
 
Compliance’s job is to figure out “how” (5/10)
 
Stickier Annuityowners (1/10)
 
Agent Choice Variables In Carrier Or Product Selection (5/09)
 
Who Keeps The Customer? (7/07)
 
Managing Superstars (11/06)
 
What Can A Carrier Control? (11/06)
 

Bawling Out Your Employee (6/06)
 
Manager Tips For Times Of Crisis (6/06)
 

MOs Face Revenue Challenges (11/05)

Alphabetical

Agent Choice Variables In Carrier Or Product Selection (5/09)  
Bawling Out Your Employee (6/06)
 

Compliance’s job is to figure out “how” (5/10)
 
Creating Not Dissatisfied Customers (8/10)
 

Customer Service: Using A Customer-Centric Approach (12/11)
 
Gen Y As Agents & Employees (5/13) 

The Job Interview Illusion (2/14)  
Managing Superstars (11/06)
 

Manager Tips For Times Of Crisis (6/06)
 

MOs Face Revenue Challenges (11/05)
 

Preferred MOs (8/11)
 
Profile Of The Typical Agent  (12/11) 
Stickier Annuityowners (1/10) 
Trailing Commissions Make Sense (9/10)
 
What Can A Carrier Control? (11/06) 
What Makes A Great Annuity Producer? (7/11)
 
Who Keeps The Customer? (7/07)

 

 

The Job Interview Illusion (2/14)
Many bosses persist in the belief that they can determine who will be the best worker for a job opening by having unstructured interviews with candidates, even though numerous studies have found there is zero correlation between the interview "grade" and actual job performance. An  unstructured interview is not the same thing as a structured one. In a structured interview candidates are asked identical questions designed to compare measurable competencies – structured interviews can help determine the most qualified candidate. By contrast, an unstructured one is where the interviewer asks different questions depending on the candidate to get a good "feel" of whether the candidate can do the job.

A recent study had one group of candidates respond honestly to interviewer questions. The second group gave random answers. For the second group if the last word in the interviewer's closed end question started with letters A through M the candidate answered "yes" if the word began with N through Z the candidate answered "no". The interviewers were then asked to rate the candidates. The study found there was no difference in ratings between truthful answering and random answering candidates. Another part of the study found that candidates with worse credentials were selected over far better qualified candidates (based on credentials) if the better candidates could not be interviewed and the worse candidates could be interviewed. This conclusion of this study was the same as the rest. When it comes to making hiring decisions do not use unstructured interviews.

Jason D., J., Dawes, R. & N. Peterson. 2013. Belief in the unstructured interview: The persistence of an illusion. Judgment and Decision Making. 8, 5, 512-520


Gen Y As Agents & Employees (5/13)
I completed a study for NAFA titled
Gen X, Gen Y and Fixed Annuities that talked about what the future of fixed annuities looks like based on the attitudes and personalities of these groups. From an annuity buying point of view the differences between Gen Y and Boomers led me to conclude that Gen Y will be the biggest buyers of fixed annuities ever. What I didn’t get into – because it wasn’t the focus of the study – is what Gen Yers will be like as new insurance agents or as new employees in general.

Who & What Is Gen Y  
Gen Y (Millennials) are typically defined as those born in 1980 or later (I use 1984 as a start date) which makes the oldest of them around age 30. They came after Generation X (1965 to 1980-1983) who came after Boomers (birth years 1946 to 1964).
Feelings about Gen Y go in exactly opposite directions. There are those that say that Gen Y is the next great generation because it celebrates diversity, is achievement oriented, and is the best formally educated of all generations. An example of this extreme view is the book “Millennials Rising: The Next Great Generation”. There are also those that say that Generation Y is really Generation Whine, a spoiled and coddled collection that won’t accept criticism and still has their mommies fight their battles. A book (with the best title ever) taking this view is “Not Everyone Gets A Trophy”. The reality is today’s Gen Yers and their attitudes and actions are more similar than different to those of boomers or Gen Xers at the same age. Most of these differences are because 20-somethings have little to no experience in the working world, but there are certain aspects in which Gen Y is different  

Caring For A Gen Y Agent/Employee  
What I’ve tried to do is put together some key points in effectively managing both new agents and new employees that fall within the Gen Y group. I’ve included some quotes from pieces on Gen Yers. The main point to keep in mind is rather than treating Gen Y as a new species to study you’ll have a better understanding of what drives them by remembering back to when you were in your twenties.  

Provide Structure  
Previous generations were thrown into the deep-end of the first job pool and expected to either swim or sink. Since Gen Y has never been faced with this kind of “no-do-overs” situation they tend to sink. You need to start at the shallow end and teach them how to swim.  

“Paul was always late for work and the reason was usually due to walking his dog, In frustration I made a schedule working backwards: 8:25 Sit at your desk. 8:15 pull into employee parking lot. 7:35 pull out of your driveway. 7:25 get back from walking your dog. Instead of being insulted he was grateful and was seldom late again”  

In some respects Gen Y could be the “organizational man” or woman that employers want; they like stability and respect authority. However, they will also require more managerial attention because their lives have been an ongoing sequence of “if you do these steps you will get this outcome” rather than facing unfamiliar situations and figuring out what to do. Following the plan is how they got through school and were managed by their parents. When there isn’t a plan they tend to be lost. Job tasks need to broken down into well-defined steps and, just as important, how a reward is earned must be described. Gen Y will do the work – (Gen Yers work more hours per week than the two previous generations did when they were in their 20s), but Gen Yers need to know exactly what the work is and exactly how the work translates into the reward.  

They Need To Know Why They Are Doing It  
Gen Y needs to know why they are doing the aspects of their job that they don’t like to do. I mentioned that Gen Y are hard workers, but only when they think something is important and they don’t find “because I’m paying you” to be a good reason.  

“You have to understand that I’m here all day hanging out with my coworkers. Customers are just passing through. To be honest, it feels like they are interrupting my time”

It seems basic, but you need to explain how they get paid. A new agent may ignore prospecting because it isn’t as much fun as making a client presentation and so the agent must be shown how making the phone calls translates into getting the chance for the presentation. The reason the Gen Y employee in customer support wants to keep the annuityowner happy is it takes the money made from 255 annuityowners to pay his or her salary and if they upset too many customers the customers will take their business elsewhere and the employee will be let go.  

Provide Feedback Often But Don’t Overpraise
You can learn the hard way that complimenting a worker whenever they do anything right is wrong if the person has too much self-esteem already and these unearned compliments cause them to believe they are responsible for the success of your business. It can end badly. Even though you shouldn’t overpraise a Gen Yer they still need frequent feedback. Tell them what they are doing right and wrong and don’t wait for the annual review, do it every month. And when telling them what they did wrong...  

Criticize Without Destroying Their Self-Esteem
Gen Y has been accused of being narcissistic with an inflated opinion of themselves. This is usually based on the attention paid to the self-photos on their Facebook pages, the tweets posted about every thing they do and their stated life goals – 81% want to become rich and 51% want to become rich
and famous. Part of dealing with Gen Y is to let them use their ego as long as it helps your goals. Many
impossible things have been achieved by people that thought they could do the impossible. When ego results in mistakes the resulting criticism can be a teaching moment if handled properly.  

A supervisor discovered just in time that a new Gen Y nurse was going to give the wrong medicine to a patient and it would have killed him. The supervisor emphatically started to explain the way you don’t kill a patient is to check the wrist bracelet, then the patient’s chart, then check that it is the right medicine and then recheck everything again. But before she got through the second item the Gen Y nurse interrupted her saying, “You’re doing this all wrong, you’re supposed to give me positive feedback before you criticize!” The supervisor paused, took a deep breath and responded, “Nice shoes. Now, the way you don’t kill a patient is you need to check their wrist bracelet...”

Gen Yers have been getting criticism for years, but it has usually been couched as “You did great, but you could be even greater if you...” The same criticism technique will help the Gen Y agent mature.  

Why The Easy Answer Is Not Always The Best Answer
Gen Y is the web generation and Googlemasters. They can find an answer on the internet faster than anyone, but they often fail to understand the internet answer can be wrong. Indeed, they may not understand that the first solution derived from any source may not be the best solution. Teaching critical thinking to any generation is difficult. It starts with asking people to consider that their answer may be wrong. Are your assumptions valid? Is the source of your answer credible? If we made a different assumption where would that lead us? Using actual or creating informal case studies helps Gen Y to go beyond the quick answer. Set up different scenarios an angry customer, a customer that won’t make a decision, etc. and have the Gen Yer come up with different solutions.  

Turnover
It has been argued that Gen Y job-hops more than others, but their turnover rate is no higher than when previous generations were the same age. They understand that their first job may not be the perfect job and they’ll accept this and still work hard because they see it as a necessary step in their long-term career path. The key is not eliminating turnover, it is retaining the high performers.  

“They tell me what I’ll get in 5 years,10 years...but what do I get tomorrow?”  

A bad performer might do the task. A good performer will go beyond the task and wait to see how you respond. The first key to retention is to respond by providing feedback. The second is to give good performers what they want, but since resources are limited give the best of the best the most attention. Gen Yers are not used to being ignored and want attention. The problem is even the bad performers won’t believe they’re bad and so want equal attention. Spend your time identifying and communicating with the good performers. Challenge them by giving more and more difficult assignments. The bad performers will be upset that they’re ignored and self-select right out the door giving you the chance to find more good performers. 

Gen Y
Most of the qualities attributed to Gen Y are not unique, but simply related to being young; however, there are differences. Gen Y drinks less and uses fewer drugs than previous generations. They tend to trust both government and business to do the right thing (81% agree that, “the strength of this country today is mostly based on the success of American business”). They even work harder than Gen X or Boomers did in their 20s – provided they believe in the reason for the hard work. They have a higher regard for order and authority than previous generations and tend to view bosses more as mentors than taskmasters.  

Gen Y also requires far more personal attention. They don’t do well in unstructured situations (72% of Gen Yers agreed with the statement, ‘‘I prefer a structured environment with clear rules’’ as compared with just 33% of Gen Xers). They require frequent feedback. And although they have a high regard for authority they aren’t intimidated by it (which can lead to chain-of-command problems).  However, when all is said and done, Gen Y is worth the extra effort because they can be your best workers.


Customer Service: Using A Customer-Centric Approach (12/11)
I
was asked to review a phone script that a carrier was using to contact new annuityowners after their annuity was delivered. The calls were to determine whether the annuity purchase appeared to be suitable and that the annuityowner knew what they’d bought, but they were finding that too many annuityowners tried to cancel their purchase and asked for a refund after the call was made. With a little editing to hide carrier identity here was the first part of the original phone script:

Mr./Ms. Client, this is ____. I am calling from the home office of ____regarding the recent purchase of your [annuity product]. We are contacting all of our new contract owners. Do you have a few moments to discuss your annuity contract?

If yes… We are on a recorded line.  The information referenced was taken directly from the application paperwork submitted by you and your agent.

1. Our records indicate that you received your annuity contract, is that correct?

2. Did the funds for this annuity contract come from an existing life insurance or annuity product? 

3. According to our records, your approximate annual household income is [“income”]. Is that correct?

4. You indicated on your application paperwork that your approximate net worth, excluding the value of your primary residence is [“net worth”].  Is that accurate?

...And it went on from there with a total of thirteen questions. Some version of “according to our records” was said four times. The word “contract” was used eight times. And almost every question concluded with “Is that correct” “Is that accurate” or “Are you familiar.”

This is a great script if the annuityowner is on the witness stand and you are trying to trip them up during the cross-examination and a lousy one if your goal is to see if the annuity meets their needs and you want to leave a favorable impression.

Talk with customers, not at them
Say that you had purchased salami from a local deli that you’d never bought from before. On the drive home the radio says some deli salamis in another city were tainted and people died. That evening you get a call that begins: “I am calling from the deli. We are contacting all salami buyers about the salami they bought. Do you have a few moments?”

What emotions are you feeling at this moment? Fear? The urge to return the salami? Now, instead of a salami say it was an annuity that you purchased from an agent and carrier that was new to you. You had heard some negative things about annuities, but you went ahead and bought one anyway. You then get a very officious call from the annuity carrier that seems to be questioning the actions of the agent and implying that they doubt your word. How does this call make you feel?

The problem with the script is the writer didn’t put themselves in the customer’s shoes. They didn’t ask how they would feel if they received a call like this. They didn’t stop to consider what would be influencing the frame of mind of the person they are calling. If you put yourself in the customer’s shoes you might begin the call this way:

Mr./Ms. Client, this is ____. I am calling from ____ regarding your [annuity]. Everything is fine. One of the things we do is call our new annuityowners to say thank you, see if they have any questions, and get a little feedback so we can know how to better serve you. Do you have a few moments? If yes… This is recorded for training purposes. I’d like to briefly go over the information you provided on the application to see if we got it right. Okay?

1. You did receive your annuity policy, right?

2. You indicated that the reason for purchasing this annuity is [“objective”], is that correct?

3. By the way, did the money come from an existing life insurance or annuity policy? 

4. You mentioned your annual household income is [“income”] and approximate net worth, without including the value of your home is [“net worth”].  Did we get that right?

8. Do you have any questions for me?

I was able to get the questions down to eight – and that was after adding a new one – “Do you have any questions for me?” The carrier was still able to achieve their goal, but the customer is less likely to be negatively affected by the call.

Put yourself in the customer’s shoes
Too often we approach the customer from our perspective and not theirs – how we want to sell them and not why they really buy. An example is how tax deferral is usually shown as the upper jaw in a two line chart with after-tax growth being the lower jaw. From the agent’s view this shows the power of tax deferred growth. However, for many buyers this shows the creation of a future tax bill that will bite them someday. A chart should be added to address this perception that would show how tax deferral can result in more money in the pocket even after paying the tax.

From the agent’s view a fixed index annuity has a minimum guarantee, protection of principal and credited interest from market risk, and a couple ways to receive a lifelong income. From the customer’s view they might be looking for something that won’t lose 30% of it’s value (like their investment portfolio did three years ago) because their main goal is to preserve financial independence in retirement. The agent has the solution, but until it is transmogrified by showing how the index annuity features help keep the customer independent, no sale will result.

The same customer-centric focus should be reflected on all carrier communications. On an annual statement most annuityowners want to see how much interest did I earn last year, what is my account value, and what can I walk away with if I cash it in? However, some annual annuity statements mix that in amongst columns for minimum values, lifetime income account values, performance of every index the carrier offers whether selected by the annuityowner or not, and any explanatory footnotes are written in lawyer-talk. Annual statements, and all communications, need to reflect on what the customer would feel is important and flow from that perspective.

Before any letter gets sent out, marketing brochure gets printed, or sales presentation gets approved you need to sit down and pretend you are the customer. You need to look at it all from the customer’s perspective and see how it comes across. If you can’t get your mind to bend that way then have a real prospective customer take a look and have them tell you what it says to them. If you want more sales and fewer problems use a customer-centric approach.


Profile Of The Typical Agent  (12/11) 
Thanks to the wonderful people at American Equity I was able to conduct a survey this fall researching decision making. Based on the composition of the survey base and the demographics of the 916 independent annuity agents that completed the survey, I am confident that this accurately reflects the overall index annuity agent field. I’d like to share what some of the results say about the independent index annuity agent.

The typical agent is between age 51 and 65
55% of index annuity agents are between those ages. 23% are age 36-50, 19% are over age 65 and only 4% are age 35 or younger.

The typical agent sells the annuities of 2 to 5 carriers in a given year
80% of the agents sold at least one annuity for 2 to 5 carriers within the last year, only 15% used more than 5 carriers and only 3% used a single carrier. An agent may will be contracted with more than 5 carriers, but at any one time they’re only actively using two or three.

Over a third of the agents sell over $2 million of annuities a year
To be specific, 37% sell over $2 million, 25% sell between $1 and $2 million, 27% sell $400,000 to $1 million, and 11% sell under $400,000 a year. Based on the data the median agent (not the average) is selling over $1 million a year and based on average commission paid is earning $90,000 to $120,000.

Top selling agents think more 
Top agents spend more time gathering and analyzing data and just plain thinking than other agents. All agents enjoyed thinking, but the results showed that top producers thought things through a little more than the rest.

All annuity agent suffer from decision biases...
Herding behavior means following the crowd – it explains the Justin Bieber phenomena. Hindsight bias means changing your prediction after the fact – saying in October “Yeah, back in August I knew the Cardinals would win the World Series.” The problem is sometimes following the herd can
get you killed – as the lemming four rows back from the cliff edge learned, and hindsight bias can make you overconfident (because next year you bet the Cubs to win the Series and lose your money). Annuity agents also have these biases that get in the way of making the best decision 

...But stockbrokers are worse
Agents exhibited moderate herding behavior. They tend to sell the annuities and use the crediting methods that they hear other agents are using. However, a study was done of investment managers a few years ago and their herding behavior was even worse.

Top selling agents suffered the most from the Better-Than-Average (BTA) effect
The better-than-average effect is where we think we are above average in darn near everything we do. It is said that in Lake Wobegon all the children are above average, and most annuity agents think they above average agents as well. Indeed, responses indicating evidence of the BTA effect were the strongest of any question asked. And it  went up from there – the more the agents sold the higher the effect. The problem is in a normal population everyone can’t be above average, and if you think you are that can make you overconfident and screw up your decisions – hubris is not a good thing. However, maybe you are that good. If Lake Wobegon only enrolls gifted students then their children would be above the national average. Perhaps index annuity agents simply are better than other agents.

What the survey didn’t do
was support my idea that people that thought a lot would be less affected by these decision making biases. It turns out whether you like to think a lot or not think at all your decisions are still impacted by biases. One way to lessen their effect is to ask yourself...why am I following the herd...what did I really think a year ago...and even though I am great how might a lesser person make this decision.  


Preferred MOs (8/11)
Allianz hastened the pace of change in the independent distribution channel by unveiling Allianz Preferred, a more exclusive “club” where members will have access to unique products and resources. The trade-offs are high annual dues (sales volume requirements), adhering to club rules (hiring suitability officers and letting Allianz approve your marketing material) and agreeing not to belong to other clubs (no other distributor group). I believe this move is due in a large part to the creation of the Annexus Group and other annuity distribution groups Reaction from marketing organizations has been swift and loud with many upset by this decision, but it was going to happen someday.

MOs primarily compete for agents by offering exclusive products or higher commissions, and since most MOs historically had access to the same products it means many tempted better agents to join them by offering to share the MO’s piece of the pie. Carriers try to forbid the paying of higher commissions to some agents by some MOs because it throws the marketing economics out of whack, but the only real recourse the carrier has is to cancel the MO’s contract which cuts into carrier sales. If the carrier offers true product exclusivity the MO has less incentive to offer a higher commission to a star agent because the agent won’t be able to do better elsewhere. Exclusivity avoids the problem because there is less incentive to do it, and the repercussions of losing exclusivity are felt more by the MO.

Another aspect of this is the carrier can exercise tighter compliance control over the MO. Allianz will require partner MOs to hire suitability officers – suitability officers are already working in the MOs Allianz owns – and have marketing materials reviewed and approved. This is a response to the NAIC suitability model act being adopted by the states and also a recognition that the potential carrier liability when bad MO and agent conduct occurs has ratcheted up in recent years.

It’s not a question of whether the creation of distribution groups is good or bad, because it was inevitable. Last year I reported that more and more top agents were leaving large MOs to form their own “hero” MOs (where a top producer acts as a mentor to a limited number of agents). The creation of producer groups with high sales volume requirements means these small MOs will be unable to get top level contracts for some products, and may be unable to even get the annuity. These distribution groups should encourage more small MOs to align with larger ones. The new Allianz model creates opportunities for growth for both Allianz and its competitors. For every agent or MO that joins Allianz Preferred others will forswear them and do more with carriers that don’t do groups.


What Makes A Great Annuity Producer? (7/11)
Why is Jill a $5 million annuity producer while Jane is a $500,000 producer? They have similar markets, experience, education, and offer the same products, but Jill outsells Jane by 10 to 1. Is Jill simply a born salesperson or is it something else? A new study looking at over 25 years of research reports that they have found the “something else” that is the difference between great and mediocre salespeople.
Published last month in Journal of the Academy of Marketing Science are the results of an analysis of 268 studies examining the performance, personality, skills and attributes of 79,747 salespeople from 4,317 organizations. The authors found five elements that all top salespeople had in common. It also worked as a predictor of success: If an individual possesses each of these five elements they are likely to be top salespeople. What I have done is taken the elements they identified, illustrated what they mean, and then interpreted how they each relate to top annuity producers.

5 Elements Of Top Producers 

1. Possess Selling-related Knowledge     Top producers waste less time with bad prospects.
Knowing who is a receptive prospect was the most important factor in being a top producer. Top producers identified the prospects that were most likely to buy and ignored the rest. They didn’t waste time following up on the prospect that responds to follow-up calls with “I’m still thinking about it”. They didn’t waste time making presentations to prospects that don’t have the authority to buy. And they did contact prospects at the time when the prospect would be most receptive to buying.

Top producers are knowledge-brokers that have know-why, know-who, and know-how.

Top producers are perceived by prospects as knowledge-brokers in that they possess information that is unavailable to the others – due to connections, background, expertise – and they will use this information to benefit the prospect. In addition, top producers are believed to have comprehensive knowledge of products in their own field. Finally, top producers are believed to be influencers of annuity opinion. They are not merely agents, but instead viewed as having influence over annuity carriers, or, perhaps society in general through articles they’ve written or interviews they’ve given.

2. Adapt     Top producers are adaptive sellers (presumably high in Emotional Intelligence).
Top producers
match the selling strategy to the needs of the prospect. When top producers feel a fact-based presentation isn’t connecting with a prospect they will change to an analogy approach using stories of how similar people benefited from the product solution offered. Top producers are more aware of and responsive to the changing emotions expressed by the prospect.

3. Cope with Ambiguity     Top producers cope better with ambiguity.
The sales process is one of ongoing uncertainty and top producers face just as much uncertainty as everyone else. The difference is top producers have developed coping mechanisms that permit them to function is spite of the uncertainty.

4. Have Higher Cognitive Aptitude     Top producers are smart.
Top producers have above average IQs. This does not mean that one needs to be Albert Einstein to be a $10 million annuity producer, but it does mean there are no dummies in the top ranks.

5. Work Engagement (Hard Workers)     Top producers work.
Top producers are self-motivated and proactive. They tend to be protective of both their customers and colleagues and are viewed as more than a salesperson. Because of their drive, top producers tend to be leaders in other areas of their lives as well.

These are the five elements that top producers possess. It should not come as a surprise to anyone that top producers are hard workers, have a lot of knowledge about what they are selling, and have the ability to adapt their sales presentation to the needs of the situation. Although I don’t know how you teach someone to be a hard worker, training is available on increasing product and general financial knowledge, and there are courses on improving sales skills. One factor that needs more exploration is coping with ambiguity. The research does indicate that, for example, a marketing company can help reduce uncertainty if an annuity producer knows the MO is keeping them continually informed of any rate or product changes, because it will be one less thing the producer needs to worry about. Top producers also know how to cope with the uncertainty of cancelled sales calls, unforeseen competition, the unexpected objection in a sales presentation, or where the next prospect is coming from, but the study does not reveal how they do this.

All in all, an agent can change their life and work towards mastering four of the elements that create a top producer. The agent can take courses in selling techniques or find a mentor, listen to the product webinars, work harder, and even pursue noble silence through meditation. However, the fifth element cannot be changed.

The new element this study found was that top performers had above average intelligence and that if you don’t have above average intelligence you won’t be a top producer. The reality is this isn’t a barrier for most agents, because the reason many people become annuity producers is due to the fact that they already have above average intelligence and that is why selling annuities appeals to them. What the study found was that all top producers were above a certain level on the cognitive ability scale, but that once the above average level had been reached additional intelligence did not play a role in sales performance.  However, the reason why this fifth element is important becomes apparent when you look at the conclusion the researchers drew from their studies.

The Future Agent As Knowledge-Broker
In 1999 I wrote an article titled
Agent As A Search Engine that said the new phenomena of widespread internet access would result in too much information available to consumers and that this could result in information overload making the decision process even more difficult. My comment was annuity agents should tell consumers that an annuity agent acts as a filter by cutting out the unneeded data and providing a consistent source of information to the consumer. Essentially, I suggested what an agent was selling was not an annuity product, but their services as a trusted annuity information source. This new study says that is the direction that successful salespeople are taking.

The study looked at drivers of sales performance. One of their conclusions is that because this has become a knowledge-intensive economy that as time goes on salespeople will function more and more as knowledge-brokers, or to quote them “the data indicates that as we grow into a knowledge-intensive and science-based economy, salespeople will function more as knowledge brokers who transfer knowledge to customers.

The reason cognitive ability becomes so important is due to the rapidly available and changing information that must be sifted, analyzed, accepted or discarded, and then presented to the consumer in a way that shows the producer understands their needs and has an acceptable solution. Simply put, above average intelligence is needed for success, but this isn’t a problem for most annuity producers as they transition to become knowledge-brokers.

Verbeke, Dietz & Verwaal. 2011. Drivers of sales performance: a contemporary meta-analysis. Have salespeople become knowledge brokers? Journal. Academy of Marketing Science 39:407–428.


Trailing Commissions Make Sense (9/10)
When a carrier receives a dollar of premium the commission is usually paid out immediately and then recaptured over a period of years from future earnings. If you reduce today’s commission payout you have more money left on the table to buy bonds and this generates more money down the road. Paying out 6% today and 2% tomorrow means not only does the carrier have the 2% available in the future but also money earned from investing that 2%. It works even better if today’s commission can be reduced to 4% or even 1% because this puts the agent in the same financial universe as the annuityowner and the carrier, and permits the premium dollars to be invested more effectively. The result is the agent gets a larger share of the financial pie.

Say that a consumer placed $100,000 in an annuity that averaged a 5% return over the next ten years. The annuity producer has a choice of getting 6.5% today, 3.75% today and 0.5% each year based on the account value, or 1.25% today and 1.25% each year based on the account value. Which commission arrangement is the best financial deal for the agent?

The chart shows the total commission received over ten years under each method. Normally, the producer receives a check for $6500 and is done. Under the second choice a check for $3750 is received at time of sale and over 10 years the producer receives $10,353. With the 1.25% choice the producer get a check for $1250 at the sales and receives $17,758 in total commissions over the first 10 years of the annuity. 

Let’s talk about the give-up. Under the middle option the producer gets $2750 less initial commission. However, this trailing option means the producer is earning the equivalent of 18% interest each year on that $2750. Under the 1.25% choice the producer is leaving $5250 on the table today, but the effective interest rate on those deferred dollars is 26%! Okay, what if we hit the worst ten year financial patch in history and that $100,000 today is still worth $100,000 in 10 years? The 1.25% choice still produces a 20% annual return for the producer.

What about 1035s? The crossover point is year 5. If the annuity stays in force until year 5 the producer makes more money under either trailing arrangement. Let’s cut to the heart of the matter –will the annuity be around in 5 years? It is important to note that future 1035 activity will be significantly declining:

The first reason for the decline will be due to the number of annuities purchased with lifetime income benefits that encourage the consumer to keep the annuity. An annuity sold with a lifetime benefit means the annuity is supposed to stay around, and this also is why it makes sense for the producer to be compensated over time. Second, regulators have stepped up enforcement limiting unnecessary 1035 exchanges. Finally, it should be mentioned that my research indicates that consumers almost never abandon their agent if the agent stays in touch.

Would the producer rather receive $6500 today or $17000 over ten years?

Not every annuity sale should involve a trailing commission arrangement, but perhaps one in three sales should. By placing the producer alongside the consumer and the carrier in the financial equation the producer has the potential to earn much higher compensation overall and create a “commission annuity” for themselves. 

As an example, if $600,000 of sales used the 1.25% trail option in 2010 through 2013 the producer would know they’d have $30,000 of income for 2014 without further sales. Not only does it place the producer on the same side of the table as the consumer but it creates a steady income for the producer. Trailing commissions changed the securities world from a sales culture to an asset gathering culture and their income exploded because sustained high income is produced by cumulative sales, and the trail commission arrangement rewards these forward thinking producers.


Creating Not Dissatisfied Customers (8/10)
Surveys taken of customers ending an existing business relationship consistently show 65% to 85% were either satisfied or very satisfied with the old relationship (IC, January). My research shows customers don’t stay because they are satisfied, but they will leave when they are unsatisfied. The goal is not “satisfied customers” instead it is to keep them from getting mad at you.

Head Off Issues – Try to figure out what upsets people and prepare possible solutions. If renewal rates are down tell your support people what to say when the consumer or agent calls. If you get a hundred calls about confusion over part of the statement, redesign the statement.

Be Proactive – If the person that can resolve the problem is out until tomorrow don’t say “I can’t help you, call back tomorrow”. Instead tell the customer “Ms. Smith will be in at 9:30 tomorrow morning and she can help you resolve this.” Or, if you can’t mail a requested check today because the mail has already gone tell the person why you can’t and when it will be mailed.

Empower People – Does the carrier really want to lose a $1 million producer because the agent support rep isn’t authorized to spend $28 to overnight a desired brochure? Give your support people some authority. Worried someone will go overboard on spending? Set limits and monitor.

Make Sure The Web Site Works – Many consumers prefer using the web and only call when it fails. Check the site for bugs and when you get a complaint about a user problem, address it.

Try Not To Transfer The Call – Over half of disgruntled customers say what set them over the edge was being transferred to five different people and telling the same story five times. If it’s a simple question try to have support people do the internal calling while the customer is placed on hold (and told why they’re on hold).

The bottom line. Trying for exceptional service doesn’t cause customers to stay, but bad service causes them to leave. Spend your resources on keeping customers from getting angry, not making them happy.


Compliance’s job is to figure out “how” (5/10)
When I owned my broker/dealer I hired a compliance officer whose approach was to figure out how to take the noncompliant seminar, letter or ad a rep had submitted for review and make it compliant. Because of this attitude I only overrode my compliance officer twice in all those years, and only when I thought his interpretation of the rules was too literal, and on all occasions I was fully prepared to be responsible for and support my compliance officer. 

The problem with senior management at some annuity firms is they have abdicated their supervisory responsibility to the compliance department. The role of the compliance department is to advise senior management and not to make the rules. But executives sometimes seem to position the compliance director as the fall guy in case things go wrong. The result often is the compliance department becomes too cautious, understandably so.  

If senior management takes a “how can we” approach to compliance the result may well be more confrontation with regulators and justifying their decisions, but it is the job of the firm to aid their representatives in helping customers and this means helping reps find a compliant way to get the job done instead of just saying no.


Stickier Annuityowners (1/10)
Last year I worked with a carrier with the goal of reducing outgoing 1035 exchanges. Although it is too early in the process to fully gauge the impact of my suggestions, the bottom line is the amount of annuities being transferred away to other carriers has gone down. This article talks about reasons why taking a behavioral approach appears to result in fewer outgoing exchanges.

Fewer Exchanges Improve Policyowner Returns
Unless the annuityowner is gaining a needed benefit not available with their current policy, or the financial condition of the annuity carrier has declined to a point where insolvency is a real concern (and insolvency seems to be about the only reason why an insurance department will object to an exchange), transferring from one policy to another can harm the consumer financially. In modeling I did on serial exchanges (August 2009) an annuityowner beginning with a $100,000 premium that stayed with the original annuity had a cash value of $252,933 after 20 years, but only $196,769 after going through three exchanges, assuming the same financial parameters. The main reason for the difference is the acquisition cost of writing a new annuity. 

In spite of the possible cost to the consumer over half of annuity sales result from annuity money transferred from carrier A to carrier B (NAIC 6/09). One reason for exchanges is it is easier to sell an annuity to a current annuityowner because they have demonstrated they like annuities. However, the bigger reason is because the compensation system places the largest reward on the initial sale.

The reason there are so many 1035 exchanges is due to the way agents are compensated

The historic insurance compensation model was the agent built a book of policies upon which renewal commissions were earned. After a few years renewal commissions were often larger than commissions earned on new business. Persistency was the mantra, and both agent and carrier employees had a financial interest in keeping business on the books. However, the annuity world evolved so that compensation is almost always solely based on the initial sale. The reason there are so many 1035 exchanges is because the present compensation system is transaction driven and not asset driven. Carriers cause annuity transfers because neither the agent nor marketing organization are adequately rewarded for persistency. Although regulatory and market forces will dramatically decrease future 1035 exchanges (see box) there are things that can be done to reduce exchanges today by making annuityowners stickier so they are less likely to leave.


A Future Of Fewer Transfers 
Exchange activity will decrease in coming years due to three main elements.  

Regulatory Scrutiny
FINRA Notice 09-32 raises the bar to prove a VA exchange is suitable. I have talked with some broker/dealers and all said they were applying the same VA exchange criteria to fixed annuity exchanges. Also, the proposed changes to NAIC Model 275 Annuity Suitability would include putting a spotlight on any consumer that has had an annuity exchange within the preceding 3 years.

GLWBs,Riders & Vesting
All fixed annuity lifetime withdrawal benefits guarantee increases in the withdrawal amount that are not tied to the annuity cash value. After 6 or 7 years the “income account” balance could be 30%...50%...70% greater than the transferable value and thus impossible for any new product to match. New annuity/LTC combinations may require a waiting period to get the maximum benefit, meaning that leaving one annuity for another could expose the consumer to another uncovered period. Finally, although premium bonuses still generate sales, many of these new bonuses are only fully realized if the annuity remains in force. Each of these factors reduce transferability.

Installment Commissions
A few carriers have changed their compensation so agent and MOs need to wait a year or two or longer for a share of their commission. Many carriers have at various times tried to pay commissions over time instead of all upfront, but agents balked. This time it may be different because difficult capital markets and greater attention to profitability instead of sales seem to be encouraging carriers to hold the line. 

A more hostile regulatory environment, living benefits not tied to cash value and a commission structure that more closely aligns the agent’s pocketbook with the annuityowner’s will all work to reduce annuity exchanges. 

R.E.A.C.T. to Exchanges  
The annuity retention system I created concentrates on utilizing five economic behaviors to influence annuityowners not to replace their existing annuity:


Regret Aversion (I feel a sense of regret when I think of giving up my current annuity)

Endowment Effect (I place a higher value on my current annuity than what I’m being offered)

Affective (I’m not dissatisfied with my current carrier, in fact I like them)

Cognitive Anchors (I have learned there are strong, rational reasons to not move)  

Transformational Relationship (I feel I have a personal connection with my carrier)  

The R.E.A.C.T. system is not about improving policyowner satisfaction. Surveys taken of customers ending an existing business relationship consistently show 65% to 85% were either satisfied or very satisfied with the old relationship. Annuityowner stickiness is not about increasing satisfaction. It is about using economic behavior insights to lessen the chance of a customer leaving. Here is an example of how Regret Aversion  and the Endowment Effect may be used to redesign a customer statement.  

The R.E.A.C.T. Customer Statement
A typical customer annuity statement displays account information in a manner similar to this:  

Issue Date:  12/31/06 Statement Period:  12/31/08 – 12/31/09

Original Premium $100,000 Interest Earned: $20,000

Accumulated Value $120,000 Surrender Value: $113,000  

From a behavioral perspective the statement is implying the journey is over. The policyowner has finished their period and here is the “end of trip” value. Resistance to a proposed exchange is lessened because the consumer feels the next policy year begins a new segment of their trip and if they are told the new plane makes the journey better then they might switch from the current plane.  

Sometimes the statement illustrates actual and guaranteed growth. This chart shows the 3-year anniversary accumulated value and the minimum guaranteed value after surrender charges until the end of a 12-year surrender charge period. It’s technically accurate, but it will not improve retention and could even make it worse because:  

1) The growth axis is on the left so it shows growth in the past tense.  

2) The growth axis values are mathematically consistent, in that they accurately reflect the spatial relationship of the values. However, by using a scale topping out at $200,000 what the chart suggests is that the annuity is 

bad because its growth lines are near the bottom. You could change the scale so it had a lower top value of, say, $125,000 – which would place the values near the top, but then visually you are saying the annuity has already topped out on this long-term scale, so it’s time to move on. 

3) The time axis values are also mathematically consistent, in that they accurately reflect the spatial relationship of the values. However, what it says is that you are only three years into a 12 year trip. The closer we are to the beginning of the journey the more likely we are to drop out if we are shown, what looks like, a faster way to travel. If another plane says it can make up for past time and fly faster, we would be inclined to switch. Using the previous annuity values chart could encourage exchanges. If you do show actual results give them a short look focus and have the accumulated value topping out the scale. This shows the customer has made progress, but that the journey isn’t over yet. However, it may be even better to show a picture instead of a “policy illustration.”  

Picture Not Illustration
If the annuityowner feels nearer their final destination there will be an inclination to finish the trip, and this feeling may be accomplished with a picture.

This picture does three things. It shows the customer that they are moving upward, and making progress, but they are not yet at the end of their journey (the right axis). It also implies if one stays on the journey they will be rewarded. The picture makes people want to continue what they doing because it says they are in the middle of something but they can see the conclusion.  

The first chart is an illustration. The picture is not meant to be an illustration of policy values but merely showing a concept of growth. To maximize stickiness the picture needs to follow two rules:  

1) The growth values must be placed on the right axis so that growth is forward looking.  

2) The current value reflected in the picture must be at least half way to the right axis. By having the account value take up more than half of the horizontal line the consumer feels they have a lot of time invested in their relationship with you and that the finish line is not that far away.  

 

Again, the picture is not an illustration; it is a picture. It does not show a time line on the bottom and the right axis growth values are placed where they are to encourage the mind to draw an imaginary line from current to future value. It is not intended to be a literal representation of the annuity’s accumulated current or future value and one would state exactly that underneath the picture. The picture is merely a symbol showing the customer that they are well on the way of their annuity journey and that staying the course will be beneficial for them.  

Utilizing Other Behaviors  
A significant reason for the high percentage of exchanges is because the annuityowner has no personal connection with the carrier. In four years they may only have been contacted four times – when the policy was delivered and through once a year statements thereafter. The only time they may get a personal contact via a phone call or personalized letter is after they’ve notified the carrier they’re leaving. Even though I did have some success in deterring outgoing transfers by changing the script and approach that was being used by the retention team, trying to save business after it is on the way out the door is like trying to win football games using only Hail Mary passes.  

Part of the answer in decreasing outgoing transfers is to increase policyowner contacts. Ideally, a carrier representative would drop by the annuityowner’s house with cookies a few times a year and offer to mow their lawn, but that may not always be practical. At the very least they should get a call soon after the purchase from a carrier representative thanking the annuityowner for their business and giving them a human voice they can connect with if they have future questions. A newsletter that talks about more than just their annuity should be included with the annual statement. The newsletter could include the Call Center Manager’s best brownie recipe, which helps to build an Affective (emotional) connection, as well as articles on why their annuity was a good choice and why moving it might be bad, which provides Cognitive Anchors and gives them rational reasons to keep the policy in place.  

What About The Agent and IMO?  
Acting as an agent for their principal the annuity producer and IMO were compensated with a commission reflecting a surrender period that should be the minimum timeframe in which the policy remains in force. The agent should support the carrier in discouraging outgoing exchanges because they were paid to create a long-term relationship between policyowner and carrier...but that’s not the way it works.  

The reality is the carrier needs to reward agents and IMOs that keep annuities in place and punish those that don’t. This favors a trailing commission approach on individual policies, but also paying IMOs and agents persistency bonuses for maintaining blocks of business. In addition, greater carrier contact encourages annuityowners to add more money directly to their annuities, and agents and IMOs in good standing should receive the full commission from these unsolicited purchases.    

Transfers Can Be Reduced  
For the carrier last year I created letters to annuityowners, sample newsletters and phone scripts all designed using behavioral economics. However, what I think was even more effective than these materials was sitting down with the customer support reps and retention team and training them to think of the annuityowners as real people and then helping them find ways to convey the retention message in their own words. Carriers can reduce outgoing exchanges. Stickier products, lifetime riders and a trend to asset based compensation will ultimately keep more annuities in place, but using a behavioral approach can improve policy retention immediately.


Agent Choice Variables In Carrier Or Product Selection (5/09)
There are six main variables that determine which fixed/index annuity carrier or carrier products an agent sells. The first five variables roughly ranked in importance are: the distribution channel the agent is in, whether the annuity offers a believable sales story, agent compensation, carrier financial strength, and carrier service. The last variable is the affective or emotional relationship between the agent and the carrier, and it can be the most or least important selection factor. These conclusions are based on my past surveys of agents and marketing companies, and personal interviews with dozens of agents over the last decade.

Distribution Channel – Agents may be segregated into three broad categories:

Captive – these agents may only sell certain annuities of a certain carrier or carriers. Captive agents are often employees of the carrier or of a bank or broker/dealer that determines what the agents are allowed to sell. 

Semi-Captive – this is my term for a recent change in how certain agents are managed. Securities regulators (SEC, FINRA) do not regulate annuities that are not securities (fixed annuities). According to my survey over half of the fixed annuity agents also sell securities through a securities broker/dealer. The way this used to work was the securities world ignored fixed annuities and the agents could sell whichever they chose. However, over the last 3 years a growing number of broker/dealers are requiring any affiliated annuity agents to only sell fixed annuities that the broker/dealer has approved, and often to only use marketing companies that the broker/dealer has approved. The result is the ability of these agents to select carriers and products has been impeded to a lesser or greater extent depending on whether they are associated with a broker/dealer.

Independent – these agents may essentially sell any available annuity. A typical agent is contracted to a carrier through a marketing company that acts as a middleman and provides some training and marketing services, but the agent may work with an unlimited number of marketing companies. Indeed, my 2004 survey found the average agent worked with 4 marketing companies and 5 carriers at any given time. These agents select annuities based on the personal criteria they assign to the variables.

The distribution channel determines the motivation used by the carrier. If an agent is captive – or closely held semi-captive – the only sales tools often remaining are carrier support and how the agent emotionally feels about the carrier, because the sales story, compensation and financial strength may be so homogenized that the agent is indifferent. The carrier needs to determine what support is desired by the agent – problem resolution, ease of business processing, frequent pats on the back – and provide it. However, even these variables may not be controlled by some captive agents.

The semi-captive agent works within the constraints of their B/D and the available variables may be limited. Often a B/D will only permit carriers with a minimal acceptable financial rating to offer product. The sales story may even be diluted by the B/D compliance department to avoid problems and the compensation may be standardized across the board. Once again, the only sales tools often remaining are carrier support and how the agent views their emotional relationship with the carrier.

Independent agents may select almost any annuity product they wish to sell, usually through a marketing company. The marketing companies cannot generally stop an agent from offering a carrier’s products, but they can influence the agent in selecting the product, much as a grocer may influence a consumer’s selection of detergent by upon which shelf the product is placed and how much shelf space is permitted. The carrier and product choice of independent agents is based on the remaining variables.

Agent Choice Variables    
 

Agent

 

Independent

Semi-Captive

Captive

Believable Sales Story

Affective

Compensation

Carrier Financial Strength

Service & Support

 

Annuity Selected

 

Believable Sales Story – The primary agent need is a sales story the agent believes will motivate a consumer to buy. The necessary components of the story depend upon which of two annuity products is being sold. With multi-year annuities believable means an annuity yield that is at least 1% higher than a certificate of deposit with the same maturity. On index annuities it is story that allows agents to compete with stock market returns. It should be noted that the story need not necessarily be true, it simply needs to sound like it could be true. My research indicates a believable sales story is the major consideration for independent agents. I have found that an annuity with a higher financial rating or higher commission is often trumped by a product with a better sales story such as one with a higher bonus, index participation story, or more recently, higher income benefit growth.

Compensation – One common factor over time on the list of top selling index annuities is that almost all offered above average commissions. The commission need not be the highest for the product niche – altho it should be if the carrier is attempting to enter a new market – but it needs to be in line with the top selling products. The agent will accept a slightly less believable story for a greater commission in the index annuity arena, but the reverse appears to be true with multi-year  (MYG) annuities. Since MYGs are viewed as more of a commodity purchase the decision to buy often comes down almost purely to yield and an agent will accept less commission if the yield can be enhanced to close the sale. Other aspects of compensation including company trips, perks and dollars for marketing assistance have a greater impact on top selling agents. Part of this is because most of the agents need the sales commission to buy today’s bread while top producers are trying to satisfy higher needs.

Carrier Financial Strength – The financial strength of the carrier, almost always defined by the agent as the letter rating assigned by rating service A.M. Best, has a negligible to dramatic impact on determining whether an agent  chooses a carrier. In general if the carrier is rated in the top four categories “A++. A+, A, A-” the agent is relatively indifferent to the rating. A carrier rated “B+” would not generally be accepted unless this rating was viewed as a temporary stop on the way to “A”; annuity agents overwhelmingly will not do business with carriers rated “B” or below.

Carrier Service & Support – When I did a 2003 survey asking agents to grade carrier service and support the grade-point of the top carriers ranged from 2.3 to 3.3, but there was zero correlation between sales or sales growth and grade. The only carrier with a “D” saw a large decrease in sales in 2005, but I believe this was because they made their sales story less believable and not due to bad service. If two carrier products have a believable sales story, the same compensation and an A.M. Best rating of “Excellent” then service may become a factor. However, I typically find service used as an “in spite of” variable, in that the agent does business in spite of the carrier’s bad service.

Affective – With one exception agents do not get very emotional about their carrier. Allianz (formerly LifeUSA) used a transformational management approach that made agents feel they were part of a special team and they changed the annuity world. It took a start-up company with, in my opinion, so-so products and turned it into the sales leader. To this day agents are strongly affective – they either love or hate Allianz. I cannot find any other carrier that agents feel a strong emotional relationship with. As one agent told me “I love my wholesaler but for a half percent more commission I’m gone.”

There are other variables involved  in agent annuity selection ranging from innovative ability of the carrier to the number of available products to the perception of carrier ethics, but all of these are of minor importance when compared with the variables previously listed.


Who Keeps The Customer? (7/07)
An ongoing unresolved issue between company and salesperson is whose customer is it? It does not matter whether the setting is a manufacturer and the manufacturer-rep, or an insurance carrier and the agent, the salesperson believes the customer is theirs and the company thinks the customer is theirs. However, in the absence of a non-compete agreement, it is the customer that
decides where their loyalty resides. A recent study looked at the issue of customer loyalty and came to some interesting conclusions that translate in the insurance world as:

The customer is more loyal to the agent. The study found salesperson loyalty made customers more likely to buy the same product again from the salesperson, but owning a product from one company did not make the customer any more likely to be a repeat customer unless the salesperson was involved. In other words, if an agent sold the customer a Carrier A annuity and Carrier A then called the customer and attempted to bypass the agent to get another sale, Carrier A would have no better success than if Carrier B called the same customer out of the blue trying to sell them an annuity. But the customer would be more likely to purchase another annuity, regardless of the carrier, if the same agent was involved.

The agent can lose loyalty and the company can gain loyalty. Customer loyalty is for the agent to lose. Due to the interpersonal relationship created by the selling process the bond between salesperson and customer is much higher than that between company and customer. However, there are things the company can do to increase company loyalty (or the salesperson can do to screw up their own customer loyalty). The more interchangeable the salesperson looks the greater the company loyalty. If an agent uses the carrier’s slide show, the carrier’s educational materials and bases their presentation on how wonderful the carrier is, the customer is more likely to consider the salesperson as a part of the carrier and feel their relationship 

Relationship enhancing activities build loyalty for both...but. The study says the salesperson is more effective than the company in growing the customer relationship – there will be a more positive effect if the agent calls the customer to say hello than if a carrier service rep makes the call. However, if the agent isn’t making the calls, and the same rep is calling from the carrier each time, a relationship to the carrier rep builds whilst the agent relationship suffers. And if neither carrier nor agent is working to maintain the relationship any loyalty to either plummets.

If there is a split between agent and carrier both sides lose future sales, but the carrier loses more. If a carrier and agent compete for the customer’s attention for future sales the agent will win more times than the carrier, but the customer will be less likely to do business with either side in the event of a split. Instead, the customer will find a new salesperson and new company.

Keeping the customer.
The agent begins with greater customer loyalty attributed and can enhance this by appearing independent of the carrier at time of purchase, keeping in touch with the customer, and ensuring that all carrier-to-customer communications either flow through the agent or appear to be at the direction of the agent. The carrier can attempt to combat this agent loyalty by getting the agent to use only company specific materials with the customer, having a specific contact rep at the carrier stay in touch with the customer, and try to build their relationship through value enhancing techniques like newsletters and special offers to the customer. However, this will only increase loyalty to the carrier if the agent drops the ball. To the old question of “whose customer is it” the customer is answering they are the agent’s customer unless the agent breaks the bond.

Palmatier, Scheer and Steenkamp (2007); Customer Loyalty to Whom? Managing the Benefits and Risks of Salesperson-Owned Loyalty; Journal of Marketing Research; 44; pg 185-199


What Can A Carrier Control? (11/06)  
An index annuity carrier wishes to provide competitive returns for annuityowners, competitive compensation for producers, and make a profit. However, there are many factors affecting these three aims. Because certain aspects are beyond the control of the carrier the focus should be on actions the carrier can control to meet the goals and to successfully react to factors that cannot be controlled. It is important to know the difference between the controllable and the uncontrollable.

Uncontrollable
The industry has spent a lot of time worrying about what regulators have done and may do about index annuities, but the reality is the final outcome cannot be controlled by the carriers. A carrier can react to regulatory commandments, what a competitor does, or low interest rates, but the carrier cannot control NASD, the Federal Reserve Board or the competitor across town. Energies should be spent when necessary to cope when changes occur, but worrying about the uncontrollable solves nothing.

Semi-Controllable
There are elements that may be influenced by the carrier and are semi-controllable. For example, a frivolous lawsuit can be filed by anyone, but the chance of lawsuits may be lessened if the carrier appoints only agents with clean records and provides annuitybuyers with complete product disclosure at time of purchase. Or, increasing your R&D staffing won’t stop a competitor from launching a new product, but it may give you the ability to counter-launch a new annuity to regain momentum. Sometimes carriers treat the semi-controllable as uncontrollable. For example, a carrier may have a reputation for poor service and feel nothing can be done because they can’t afford to increase, say, call center staffing. But the perception of poor service may be changed to one of acceptable service if the customer is told the reason they are on hold for 90 seconds is so that more money is available for annuity interest paid. 

Controllable – PPPP
To be sustainable, the mix of annuityowner returns, agent commissions and profitability means keying in on those four factors that can be controlled, and understanding the elements within each factor.
 

Place – A carrier decides which channels of distribution to use. As  examples: Selling annuities through banks may mean fewer market conduct concerns, but a platform agent program may require greater hands-on service and additional carrier staffing. Using marketing organizations (MO) may reduce carrier staffing needs, but the savings is somewhat offset by the additional compensation paid, and the producers may have more loyalty to the MO than the carrier meaning lower future sales if a competitor’s product is offered by the MO. However, even though there are uncontrollable elements within each channel the placement of the carrier’s products to the channels is entirely controllable.     

 

Promotion – How annuities are promoted and branded are controllable by the carrier. The carrier decides whether to target consumers or  producers directly, or to let the MO make the contact. The carrier determines where and to whom the carrier’s products appear.

Product Design – Although usually influenced by competition, rates, and other uncontrollable factors the carrier has the final say in how the product is designed.

Price – This factor includes the compensation and yield paid. It is largely determined by producer commission & MO overrides paid, surrender period length, surrender period charges, depth of the minimum guarantee and any prepaid bonus interest. However, there are elements within this pricing factor that can also be controlled.

A carrier can alter the average maturity and quality of their bond portfolio to lean towards higher yield or lower risk. They can use more or less conservative pricing assumptions relating to surrenders, deaths and policy expenses. The carrier can aggregate option buying to make larger purchases at scale discounts, see if listed options many be used instead of synthetic ones, or use dynamic hedging to squeeze more yield out. Finally, the carrier may alter the renewal rate to control the mix in future years. Carriers need to focus on the controllable because these factors achieve sustainable goals, but must be alert for uncontrollable changes so that action may be taken. 


Managing Superstars (11/06)
A former managing director of a consulting firm said they tried to hire people that were smart, insecure and competitive. The same traits tend to drive top producing annuity producers.
We mere mortals may wonder how these annuity superstars could have any insecurities, especially since they seem to exude self confidence, but the psychologists say over-achievers need to be continually reassured that they are valued. 

Managers must show they value Superstars by reminding them to bask once in a while

Superstars need praise for their efforts, and the praise needs to be personal and sincere. They need to feel that you understand how hard they work and the value they bring to the company. Managers can begin to take for granted a $5 or $10 million a year annuity producer because the superstar makes it look easy. The manager needs to take time to realize the uniqueness of the superstar’s accomplishments and communicate this to the producer. A superstar also needs to be told at times that they’ve done enough for today. They need to be reminded to take time to savor the results of their efforts before they begin to excel once again.


Bawling Out Your Employee (6/06)
When something gets screwed up and you think it’s the fault of a person that reports to you, before running over and yelling and thereby damaging the employee and your blood pressure, there are steps that can be taken to correct the problem.

Determine What Went Wrong – The urgent note you got said “THEY didn’t get the check”. It could be that your employee simply forgot to mail it, but it could also be the post office screwed up and the check really is in the mail, or THEY have the check but it is sitting on the wrong desk in their office, or THEY didn’t deserve the check in the first place and are simply confused. If the check is still sitting on your employee’s desk it may have been forgotten. Or, the check may have been held up in another department and only got to your employee today, or THEY provided an incorrect address and the check was returned to sender, or you forgot you told the employee to hold on to checks that large for your personal approval. Get the facts straight before you confront the employee.

Don’t Make Attributions – The employee didn’t mail the check, and you know it wasn’t mailed just to make you look bad because you turned down the employee’s request for a day off last week. And a different employee forgot to send a check for another account last week, so obviously since all the employees are always forgetting to mail checks there’s need for a new regulation or at least a new training program on proper check mailing. Although it is possible that your workplace is suddenly infested with a horde of ill-trained, lax, revenge-seeking check-holder-on-tooers, there is probably a simpler explanation. Before you rush to judgment think about other reasons the check didn’t get mailed and maybe even ask the employee why it wasn’t mailed.

Give Quick Feedback – When the employee screws up, talk about the issue that day. Don’t wait until you have more evidence and don’t save discussing it until the annual review when neither of you will even remember why you’re still mad.

Be Specific & Be Cool – You could tell the employee “your work stinks”, or you could say “you didn’t mail that check on time and I need you to mail all checks on the same workday that the check hits your desk”. Direct your comments at the task and not at the employee. The goal is to ensure the check mailing procedure runs properly and procedures are not judgmental, emotional, or right or wrong, they are only procedures.

Mutually Identity The Problem & Create A Mutual Solution – The boss and employee should agree on what the problem is. The check didn’t get mailed because the employee thinks accounting brings the checks over too late in the day and the boss thinks it is because the employee always does their on-line shopping between 4:00 and 4:30. In any event, the mutual problem is checks late in the day aren’t getting mailed. One mutual solution is to have all checks brought over in the morning.

Summarize & Verify – The screw up is resolved when both boss and employee have created a workable solution, which could be that the employee will mail all checks that arrive on desk before noon and boss accepts this solution. The goal behind every problem is successful resolution, and this means a practical solution without any feelings hurt.


Manager Tips For Times Of Crisis (6/06)

Improve Situational Awareness – A fancy way of saying you need to be seeing the real world instead of the world you wish to see. Extend your antenna; listen for what isn’t being said by employees, competitors and customers. Be alert for changes in power relationships, hidden agendas, and attitudes. Just because your paranoid doesn’t mean they’re not out to get you.

Talk To People That Know – Tough times are bad times to take advice from the mirror. The quality of decisions will be better if you talk with folks that have expertise in your industry. Since we do consulting this is definitely self-serving, but it’s also often true. A good consultant can tell you what’s really happening and suggest what should be done (and you can always blame the consultant for unpopular decisions).

Provide More Direction – Give employees and producers more structure. Crisis tends to cause paralysis and a feeling of hopelessness. One solution is to provide specific and productive tasks: Agents aren’t calling in to get appointed? Then make outgoing calls to thank agents for their past business. New business department is a little slow? Time for catching up on all those administrative chores you’ve been putting off. Leads drying up? Drop by local small business owners and ask if their SEP plan will produce an income that they can never outlive.

Cull The Herd – A crisis means allocating resources where they’ll do the most good. Rank your employees and producers A, B or C and then spend your time coaching and working with the “A’s” and those “B’s” that might become “A’s”.

Communicate Frequently – In crisis times the imaginations of employees and producers tend to run negative and rumors grow like dandelions. Keep folks informed about what is happening and emphasize. 

A Little Rah Rah I’ve read several studies suggesting that a motivational speaker or an uplifting book will increase performance. However, the studies also say that the effect on performance is temporary, but that’s okay.  The goal is to get sufficient upward momentum to lift performance during the tough times, because you usually don’t need a pep talk when everything is great.


MOs Face Revenue Challenges (11/05)
Marketing Organizations deriving a significant portion of their revenues from index annuity sales could conceivable see their revenues fall by a third to half in coming years. The threat comes on two fronts.

NASD Impact
NASD Notice to Members 05-50 released in August essentially tells member broker/dealers “the NASD doesn’t care if almost every index annuity is ultimately ruled
not to be a security because if any of your affiliated producers are selling an index annuity that is ever ruled to be a security we will jump on you for failure to supervise”.  NASD is forcing B/Ds to get involved with index annuities and the B/Ds react in different ways.
A few B/Ds have banned their reps from selling any index annuities. Other B/Ds are “examining the situation” and doing nothing; I believe hoping that a timely SEC decision will resolve the dilemma. Still others are creating lists of acceptable products and permitting producers to continue selling the products on the approved list through their current vendors. Lastly, some B/Ds are requiring producers to submit all of their index annuity business through the B/D. If the B/D is requiring index annuity sales to run through their system the B/Ds are either not taking a piece of the commission, going to the insurance company and asking for a new piece of the commission, or putting annuity commissions on their general commission payout grid and paying producers accordingly. So, unless the B/D has banned index annuities marketing organizations are generally not feeling much of an impact at present, but that is changing.

Last year index annuities generated, in very rough numbers, $1.8 billion in agent commissions and over half a billion dollars in commission overrides. That is a lot of money for broker/dealers to leave untouched. I am hearing about broker/dealers using Notice 05-50 to justify asking for a slice of the commission pie to cover the actual (or imaginary) increased costs of their supervisory role in the sales process. Where will this money come from? At least part of it will come from the MOs. Marketing Organizations will see their commission override share reduced with a slice given to the B/D.

The other possibility is the marketing organization will get shut out of the B/D-producer loop altogether. Most of the MOs I have spoken with tell me they believe they will continue to stay in the picture because the B/D needs them for training and support. However, even if the B/D sees value in the services of MOs – and I’ve talked with several that do not – this does not mean they will see the need to continue a relationship with every MO. If I am the compliance officer for a B/D it is much easier working with and monitoring a couple of MOs rather than a dozen. I am aware of MOs that have spent the last two months meeting with the various B/Ds their producers use and making sure they are one of those that stays in the loop. The 2006 picture for Marketing Organizations, if a B/D is involved, is to lose some of their override, and they could be cut out entirely.

Will all this go away with a favorable index annuity ruling from SEC? Maybe, but unless the SEC says all index annuities are not securities, or slaps the hand of NASD for making this power grab, NASD can continue to intimidate B/Ds into supervising fixed annuity sales, and the B/Ds will want compensation for the extra work. The good news is if a MO’s field force is largely made up of producers that do not have active securities registration then the NASD issue is a nonevent. Although my survey indicates 55% of index annuity producers are affiliated with a B/D any one MO may have a much lower percentage.

Regulators
The other threat is a little more distant. A couple of states have essentially limited annuity surrender periods to ten years, and I know of a couple more states that are serious about doing the same thing.
I don’t know whether this is due to reports of annuity lawsuits “locking in customers” or news stories of “double digit commissions” or whether this is even a trend, but if it is and the annuities are limited to a maximum 10 year surrender period and a 9% surrender charge, commissions and overrides will come down. It is difficult for the insurer to pay a 9% commission, up to a 3% MO override, a 5% bonus and a competitive rate to the consumer on a ten-year chassis.

Forecast
Although both of these threats will cause revenue margins to fall it doesn’t mean all MOs will have less money. It means sales will need to increase to compensate for the lower margins, or sales of products with higher margins – cash value life insurance for example – will need to increase. However, I would not be surprised to see a handful of MOs either merge or go out of business over the next couple of years due to the squeeze.
The survivors will be those marketing organizations with B/D savvy, lean staffs and the ability to increase the incremental income margin of producer revenues.


 

 

Copyright 1998-2013 Jack Marrion, Advantage Compendium Ltd., St. Louis, MO (314) 255-6531.  All information is for illustrative purposes only, does not provide investment or tax advice. No index sponsors, promotes, or makes any representation regarding any index product. Information is from sources believed accurate but is not warranted. Advantage Compendium neither markets nor endorses any financial product.