One For All: Is Macro-Insurance the Future?

One For All: Is Macro-Insurance the Future?

by Precise Leads

June 19, 2017

One startup wants to buck the micro insurance trend and go “bigger.”

As insurtech startups increasingly divvy up the insurance marketplace into micro policies based on a fixed time period, finite event, or single asset, one entrant has decided to take a different approach. U.K.-based startup Sherpa plans to cover all personal risk based on a single underwriting process.

U.K. consumers will be able to obtain home, health, life, travel, auto, device, and pet insurance when Sherpa’s officially launches its platform later this year. Sherpa is combining innovative technologies like artificial intelligence with actuarial science to assess an individual’s unique risk profile. Sherpa then recommends coverage based on that data.

Sherpa takes into account how a person’s circumstances have evolved over time. Instead of the usual premium, policyholders pay a flat monthly membership fee, which enables coverages to be automatically updated based on any life changes.

CEO Chris Kaye says Sherpa has created “a simple, comprehensive solution for personal risk management.” At least one big names has taken notice: Sherpa last month partnered with reinsurer Gen Re. But will consumers put all of their eggs in one basket?

Is Macro Better?

Sherpa’s strategy counters the growing micro insurance trend. San Francisco-based Trov, for example, intends to launch its on-demand app later this year in the U.S. With a click, Trov users login to buy coverage for computers, smartphones, cameras, or sports equipment, setting the coverage period. Another micro insurance trailblazer is Next Insurance, which allows personal trainers to purchase coverage of up to $2 million via a chatbot.

No doubt micro insurance will prosper, especially on cloud-enabled platforms. At least one observer, however, finds the macro insurance model promoted by Sherpa intriguing and one that might someday rival its opposite business model.

Mark Breading, a partner at Strategy Meets Action in Boston, explains that the “one-policy-covers-all-risk approach” typified by macro insurance lags behind the speeding advance of micro insurance. Yet he asserts it could eventually find its place within the insurance ecosystem, especially as consumers demand innovative technological solutions to service their insurance needs.

“Macro-insurance is in its infancy and may take a long time to develop, but the concept is intriguing, and it appears that the industry is willing to begin to explore the potential,” Breading writes. “The most likely scenario is that traditional insurance lines of business will remain for a long time, supplemented by rapid growth in micro-insurance that often extends into new coverage areas, while macro-insurance begins a period of discovery and slow evolution.”

What Happens to Agents?

At this moment, Breading cautions bundling auto, home, liability, life, disability, and other risks for one person “has not yet been practical.” In that regard, Sherpa serves as a test case, and the industry will closely monitor its growth.

Sherpa’s progress has industry-wide implications; namely, does the macro insurance foretell the end of the agent? Maybe not. Although Sherpa’s model cuts out the agent, Breading envisions some macro insurance platforms using a fee-based or commissioned agent for sales.

Breading further hedges on whether your clients will immediately switch to a macro insurance platform. Obtaining comprehensive coverage without paying a commission and from a one-stop-shop, so to speak, captivates most clients, to be sure. But that means putting all their policies in the same bucket, which, Breading writes, “could be a deterrent to the macro approach for some customers.”

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How Independent Advisors Can Succeed in the Future

How Independent Advisors Can Succeed in the Future

by Precise Leads

July 17, 2017

 Will the DOL’s fiduciary rule spell the end of commission-based broker-dealers?

As the Department of Labor’s recently enacted fiduciary rule takes hold in the investment advisory industry, independent advisors are primed for a boost in business — most likely at the expense of commission-based broker-dealers. Last year, noted financial planning expert Michael Kitces foresaw this sea change in a blog post, “Reinventing The Broker-Dealer Business Model To Survive A DoL Fiduciary Future.”

As the fiduciary rule pushes advisors toward a fee-based, advice-centric model, broker-dealers that depend on commissions for securities transactions face what Kitces termed an “existential crisis.” “If the future of financial advisors is to get paid for advice (not the sale and distribution of securities products), what’s the relevance of a broker-dealer that exists primarily to facilitate the sale and distribution of securities products?” he writes.

The independent advisory channel includes registered investment advisors (RIAs), dually registered financial advisors (professionals able to do business as commission-based independent representatives as well as fee-based RIAs), and independent advisor representatives (IARs). Chip Roame, Managing Partner of Tiburon Partners, estimates between 90,000 and 100,000 independent reps and about 20,000 to 30,000 fee-based RIAs practice today.

In 2016, independent advisors handled $621.4 billion in assets, an 11% jump from the previous year. Roame expects that upswing to continue. He told InsuranceNewsNet.com RIAs and dually registered advisors are “doing extraordinarily well.”

Roame further noted assets flowing into the independent channel have outpaced those into wirehouses. Here are some tips independent advisors can employ to accelerate this momentum.

Give More than Financial Advice

 In Schwab’s 2017 Independent Advisor Outlook Study, nearly a third of advisors said following the fiduciary standard of putting the client’s best interest first would give them a competitive advantage. What’s more, 41% of advisors said offering a broad range of advice beyond investing recommendations, wealth and portfolio management tips was the key to differentiating themselves from captive advisors. Independent advisors will increasingly be asked to provide advice on tax guidance, charitable giving, and even non-financial matters such as healthcare planning.

Diversify Your Product Mix

Although the DOL rule has nudged many advisors away from commission-based products, Adam Antoniades, President of Cetera Financial Group, recommends in Investment News that advisors nevertheless offer a diverse service mix spanning both fee- and brokerage products. Having a plethora of offerings enables advisors to find the right product for each client, a tactic that becomes even more important as advisors work with multiple generations.

“With the retail investor landscape increasingly defined by smaller account sizes among millennials and a greater need for yield among baby boomer retirees, brokerage accounts that easily accommodate smaller investors and brokerage products geared at supporting income generation will remain important,” Antoniades stresses.

Use Technology to Streamline Customer Service

 The financial advisory industry, Antoniades points out, has yet to be completely taken over by robo-advisors. Clients still want the experience and knowledge of a real advisor. However, independent advisors must assimilate digital technology into their practices. Tech systems can streamline routine tasks so advisors can spend more time building client relationships and focusing on strategic business planning. Advisors apparently agree: 76% of advisors said technological advances will propel growth, according to the Schwab survey.

Nearly 80% of the advisors polled by Schwab anticipate more opportunities than challenges in the coming decade. And those advisors who act as advisors, not merely transactional or product brokers, are poised for success, Antoniades predicts. “Our future will be defined by the need for advisers to focus on financial planning and personal finance coaching to deliver a truly advice-centric experience that helps retail investors meet their life goals.”

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Millennials Might Not Own Cars, But They Want To

Millennials Might Not Own Cars, But They Want To

by Precise Leads

January 12, 2017

New research shows that millennials are more interested in auto ownership than Gen X.

The recent advent of ridesharing services like Uber and Lyft has brought new questions about the purchasing preferences of millennial consumers — and the future of auto insurance at large — to the forefront of industry debate. But according to new research from Strategic Vision, millennials were found to be just as eager (if not more eager) to own cars than their parents’ generation.

That finding clashes with recent predictions that auto sales would suffer as millennials opted for ridesharing services over car ownership. These predictions, however, overrepresented data from urban residents with no practical need for cars — a welcome revelation for auto manufacturers and insurers worried about the downfall of car ownership.

A Late Start

The pessimism surrounding millennial consumers’ inclination to purchase cars can be traced back to the financial crisis of 2008, which yielded a dire millennial unemployment rate of 13%. The 2008 recession coincided with the meltdown of the auto industry in 2009, when annual car sales in the United States plunged from a pre-recession spike of 17 million vehicles to just 10 million. Young people were (understandably) in no position to purchase vehicles, setting off a frenzy of speculation that a permanent behavioral shift was underway.

What’s more, the doomsday predictions about millennial car-buying habits were driven by misleading studies, which focused primarily on cities like San Francisco and New York where many young people have no need for cars. Because millennials are an immensely diverse and geographically disparate demographic, these findings led to wildly inaccurate market predictions.

Since the recession, auto sales have rebounded, hitting a record 17.5 million in 2015. Millennial unemployment rates aligned with this auto boom, dropping from 13% to 8% in the same time frame. According to the Associated Press, the millennial share of the new car market has jumped to 28% in the past year, with millennial consumers in the California auto market outpacing boomers for the first time. Instead of preferring Uber to car ownership, millennials in 2016 (as surveyed by Strategic Vision) rated the Nissan Juke almost 50% more positively than Uber as a service. As it turns out, young consumers aren’t opting out of car ownership — they’re just getting a later startthan their Gen X predecessors.

A Brighter Future

Millennials’ consumption habits bode well for auto insurers prepared to evolve with the ever-changing marketplace. As forward-thinking automakers continue to improve in-car technology and form partnerships with ride-hailing and car-sharing services, insurers must also consider their role in the future of a changing industry.

Spendthrift millennials are likely to shop around for the best policy available before making a purchase, and for that reason, savvy carriers and agents will need to appeal to the frugality and pragmatism of the millennial consumer when looking to close a deal. New insurance industry developments like data-driven insurance technology (telematics) and usage-based insurance planswill shape pricing and consumer offerings for years to come, and agents would be wise to capitalize on these technological advancements.

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Should Occupation and Education Factor Into Auto Insurance Rates?

Should Occupation and Education Factor Into Auto Insurance Rates?

by Precise Leads

January 13, 2017

 A New York regulator has reopened a longstanding debate: what kinds of data can actuaries use to price premiums?

According to the Wall Street Journal, the New York Department of Financial Services recently made a formal request of Allstate Corp., Geico, Liberty Mutual, and Progressive Corp. to explain why the practice of using occupation and education in pricing shouldn’t be prohibited. That question has reopened the debate about what kinds of data insurers should be able to use when pricing premiums, and what factors may result in discriminatory pricing structures.

The auto insurance industry has long considered occupation, age, gender, and education level when setting premium rates. In defense of this practice, actuaries argue that different professional fields correlate to certain personality traits (i.e. inclination to take risks) that in turn affect one’s driving ability. What’s more, they argue that income and education levels may impact the number of claims customers are likely to file.

So, are these arguments valid? And if pricing practices require reform, what is the best path forward for insurers?

Both Sides of the Story

“As long as state governments require drivers to buy insurance, they should require insurance companies to price their product based on how we drive, not who we are,” said J. Robert Hunter, the Consumer Federation of America’s Insurance Director.

Not everyone is in agreement with this egalitarian ideal, however. Alex Hageli, an official with the Trade Group Property Casualty Insurers Association of America, believes that insurers’ current pricing practices are legal and even beneficial to drivers, telling WSJ that a broad range of permissible factors “contributes to more availability of insurance for drivers” because insurers want to be able “to use accurate predictors of loss.”

Some firms have taken a middling stance on the issue in an effort to please parties on both sides of the debate. “Drivers less likely to incur losses should pay less for insurance than drivers more likely to incur losses,” a spokesman for Allstate told WSJ, and added that the firm uses education but not occupation when setting rates in New York.

An Alternative Path Forward

Some states, including Massachusetts, already limit the types of data that actuaries can utilize in pricing insurance. At this point, it’s unclear how far the Department of Financial Services will go in setting limitations on what data insurers are able to use in setting premiums in New York. But with the age-old debate back in the spotlight, insurance companies would do well to consider other ways to assess customer risk.

Auto insurers have already begun pouring major resources into the development of tools which precisely measure the driving behaviors of their policyholders. For example, both Allstate and Progressive have developed apps and other telematic devices that track how hard drivers hit the brakes.

The jury’s still out on whether consumers will gladly surrender such data and accept the premium rates that go with them. But as the industry continues to evolve and old practices are reconsidered, agile, forward-thinking insurers will find new ways to assess risk, set premiums, and satisfy customers across all demographics.

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Impact of DOL Rule Minimal for Advisors

Impact of DOL Rule Minimal for Advisors

by Precise Leads

July 28, 2017

So far, so good. But fixed indexed annuity sales have seen a drop-off.

After much debate, the Department of Labor’s fiduciary rule went into effect on June 9. In short, the rulemandates that insurance agents and financial advisors serve their clients’ best interests rather than their own, openly acknowledge any possible conflicts of interests, and disclose their compensation so that clients can judge it for themselves.

Since the rule has only been in place for a month, insurance agents and advisors have yet to realize its full impact. However, since the industry was well-aware of the rule’s eventual enforcement, insurance professionals have had time to prepare, so agents and advisors have reported little disruption.

Impact on Fixed Indexed Annuity Sales

Perhaps the product most impacted by the fiduciary rule are fixed indexed annuities (FIAs), which can be sold by non-securities-licensed independent insurance agents. Research from Wink, Inc., an annuity and life insurance analysis firm, reported that sales of FIAs plunged to $12.9 billion in Q1 of 2017, a 14% decrease from Q1 of 2016.

Wink President and CEO Sheryl J. Moore attributed the drop-off to the impending DOL fiduciary standard. “Insurance distributors have been so busy preparing for the rule that they haven’t been able to focus on marketing products," she said. “Sales show it.”

Yet other industry insiders maintain that the impact has been negligible on sales of other annuity products. Speaking at the Des Moines Insurance Conference last month, Ray Wasilewski, CEO, Life Companies, for FBL Financial Group, said annuity sales have been “flowing in” from agents selling annuities into retirement plans. “All of our products in qualified plans are DOL-ready,” he said in a report from InsuranceNewsNet.com.

Impact on Independent Insurance Agents

Independent insurance agents accounted for 57% of indexed annuity sales in Q1, making them the largest distribution channel for the product, according to Wink. In an effort to maintain sales via independent agents, several insurers have responded with a new class of fixed-rate deferred annuities with income riders, InvestmentNews.com reported.

Traditionally, income riders, which provide a lifetime income stream, are attached to variable and indexed annuities. But with the DOL’s changes, those products seemed more difficult to sell, particularly for independent insurance agents. “I see [fixed rate deferred annuities] mostly as a way to serve and continue to provide a product to that big independent agent group that has been sort of disenfranchised," Carolyn Johnson, CEO of annuities and individual life at Voya Financial, told InvestmentNews.com.

Currently, independent agents can sell fixed-rate deferred annuities under the Prohibited Transaction Exemption 84-24. Starting next year, however, agents must comply with the best interest contract exemption (BICE), which allows agents to receive sales commissions when selling indexed and variable annuities so long as they adhere to the fiduciary standard. Just as significantly, the BICE also creates a class-action right to sue.

In a brief filed in the Fifth Circuit Court of Appeals in New Orleans on July 3, the DOL defended the BICE, arguing that the rule was necessary for the sale of complex products like variable and fixed indexed annuities. Plaintiffs sought to have BICE eliminated or amended. “DOL reasonably concluded that any contraction in the market share of such products as a result of the fiduciary rule would reflect not harm to consumers but a reduction in mismatched recommendations of products to investors,” the brief stated.

Heightened Record-Keeping

The DOL fiduciary rule will further require heightened record-keeping and disclosure by agents. In order to comply with it, agents will likely experience some short-term hardship, Ron Grensteiner, President of American Equity Investment Life Insurance Company, stated in the InsuranceNewsNet.com report. But “it’s just a matter of time before they make the changes and get used to the adjustment,” he said.

For agents already acting in the best interest of their clients, the new fiduciary rule will have minimal impact. But it’s always a good idea to disclose your compensation to your clients and keep your records accurate.

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Markel to Acquire State National for $919 Million

Markel to Acquire State National for $919 Million

by Precise Leads

July 31, 2017

Markel extends its reach into the collateral insurance business with its latest acquisition.

Markel Corp.’s expansion into the insurance space continues. On July 26, the Richmond, Virginia-based financial holding company announced an agreement to purchase State National Companies, Inc. for $21 a share, or $919 million in total. The per-share price is an increase of 7% over State National’s closing ticker on the day before the announcement.

The State National deal follows Markel’s May acquisition of SureTec Financial Corp, long thought to be one of the country’s largest privately held surety companies. It also comes four years after its largest acquisition in its 87-year history, the $3.13 billion purchase of Bermuda-based reinsurance company Alterra Capital Holdings.

The deal is expected to close in the fourth quarter, once shareholder and state regulatory approvals are granted. Due to a voting agreement already in place with the Ledbetter family, the founders of State National, and CF SNC Investors, LP, 37% of State National common stock will vote in favor of the transaction, per the joint announcement.

A Diversification Play

Markel currently has five divisions in the insurance and reinsurance sectors. According to the Motley Fool, its insurance units reported a solid combined ratio of 89% in the second quarter, up from 93% a year earlier. This ratio translates to $11 of earned income for every $100 of premium written by the company.

With the acquisition of State National, Markel further extends its reach into the insurance marketplace. A specialty property and casualty insurer, the Texas-based State National operates two main business lines: collateral protection policies for automobiles and other vehicles and a Program Services unit, which provides access to the U.S. P&C market in exchange for ceding fees. Its insurance fronting business wrote $1.3 billion in gross premiums in 2016.

State National likewise views the merger as a play towards diversification. “This transaction is all about growth, not cost-cutting, and we believe that State National employees will benefit from being part of a larger, stronger, growth-oriented company with a more diversified platform,” State National’s current Chairman and CEO Terry Ledbetter said in a prepared statement.

A Thumbs Up

Insurance rating agency A.M. Best commented favorably on the acquisition, reaffirming its Long-Term Issuer Credit Rating (Long-Term ICR) of “bbb+” for Markel. The stable rating was based on A. M. Best’s calculation that Markel’s ratio of debt-to-total capital will remain constant after the State National acquisition.

In addition, A. M. Best endorsed the merger for its potential to expand Markel’s market capacity. “[It] adds to the diversity of Markel’s insurance product offerings and enhances its revenue stream through the inclusion of State National’s insurance operations and fee-based services,” the agency said in a note. “Markel currently does not have a presence in either of [State National’s] product categories, limiting any correlation between them and its current books of business.”

Both company’s stock prices soared as news of the possible merger swirled. State National’s stock rose 6%, while Markel’s climbed 14%, according to Market Watch. The Wall Street Journal reported Markel’s market cap at $14.4 billion, well above State National’s $879 million.

Markel usually incorporates managers of acquired companies into its larger operations. When it acquired SureTec, for example, Markel retained its Chairman and CEO John Knox Jr. as well as its team. As soon as the merger is finalized, State National will follow this custom and operate as a separate unit overseen by Ledbetter.

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