When it comes to sales of insurance products, financial advisors surveyed for Investment Executive’s Report Card series recognize that the introduction of guaranteed-income versions of segregated funds — especially those with a guaranteed minimum withdrawal benefit — has been, by far, the biggest story of the past few years. However, the tale began to change this past year.

Although sales of seg funds have risen by almost 43% across all financial services distribution channels in the past two years — to 28% of overall sales this year from 19.6% in 2008 — things don’t look so fresh when you dig into the numbers, especially with advisors at the brokerage firms. For these advisors, not only did sales of seg funds drop in the past year, but total insurance revenue fell significantly as well. The change in the trend is partly due to how much the markets changed in the past year, but also because manufacturers have deliberately backed off in marketing the product.
Breaking down sales results, advisors in the brokerage channel completed IE’s survey for the Brokerage Report Card before the end of February, so it stands to reason that, while looking back on the previous 12 months of insurance sales from that point, they reflected on a year during which equities were more important to them and their clients — and insurance, less so.

Markets roared back from their 2008 lows in 2009. And as every product competes for the same investible dollars, a lot of cash on the sidelines would have been directed into equities. This is reflected in the numbers in the traditional brokerage channel. On average, insurance revenue dropped by 18.9% per advisor to $50,118 from $61,813 last year; this was in concert with much growth in books of business on the equities side.

As a percentage of brokers’ total product sales in 2010, insurance remained even at 2009 levels, at about 4%. If clients were getting back into equities, it was not through seg funds, as these products dropped to 31.1% of total insurance sales in 2010 from 33.3% last year.

This is not surprising, says Byren Innes, senior vice president and principal of NewLink Group Inc., a Toronto-based consultancy. He notes that although the argument for seg funds is more compelling when markets are at their highs, as clients can lock in their gains, brokers tend to favour selling equities directly during such times.

Equally relevant is that seg fund products aren’t quite as attractive as they once were. Moshe Milevsky, professor of finance at York University, notes that manufacturers have watered down the products by reducing the percentage of equities exposure that clients can obtain in their GMWB portfolios. The manufacturers have also increased the cost of the products to cover internal and regulatory reserve requirements. Overall, insurers are simply not pushing these products as much because they’re expensive to maintain in volatile markets.
@page_break@In contrast, sales of term insurance products rose to 24.2% of brokers’ total insurance business from 21.9% in 2009. The logic is that term is the cheapest option for clients with insurance needs. And, as the product’s name suggests, a relatively small premium commitment can be limited to as little as 10 years — and there’s always the option to convert to whole versions of the product later on.

In the dealer channel, insurance revenue was down slightly as a percentage of overall business, to 23.3% from 25.2%, but it was up by a sharp 11.7% in dollar terms — to an average of $64,784 from $58,022.

Some product distribution trends were also reversed among these advisors, when compared with their counterparts at the brokerage firms. Seg funds, as a percentage of insurance sales, jumped to 34.6% from 28.7% . This may reflect not only a more conservative investment approach, Innes notes, but also a thorough understanding of how the products can work within a portfolio.

Advisors with a greater inclination toward insurance, such as those with many of the dealers, may have even looked to lock in some of the equities market gains seen in 2009 for their clients.

And, again, the timing of the dealer reps’ survey might have played some part in the results. By April, when these surveys were completed, advisors may have seen that value in the equities markets was full again — and it stands to reason that guaranteed-income products might have been more popular at that time.

IE