Redefining the Life Business.

Life insurance companies are transforming into financial-services businesses. They are offering new products and services and changing how they train the people who distribute them.

Only a generation ago, the life insurance industry was about financially protecting families from the premature deaths of their breadwinners.

No more. Now insurers are in a new game. Clients are now investors. They worry more about outliving their sayings than about dying early, and insurers are in a battle with banks, mutual funds and brokerage houses for management of the assets that clients attempt to amass. To fight that battle, insurers are revamping their product portfolios and creating new distribution channels.

In the past year, there was strong support for the life insurance industry business plan to move away from risk business to asset-management business, said Donald Greene, a name partner with the New York law firm LeBoeuf, Lamb, Greene & MacRae LLP. He predicted that traditional life and disability insurers would continue to concentrate themselves into a smaller marketplace.

In other words, the main business of life insurers today is to run money for a fee. Increasingly, insurers are even ceding the risk of life policies to life reinsurers, Greene said at an October conference in New York. "The risk business is no longer a popular one," he said. "Asset management is the way to go."

Public demand for investment products has driven the change, said Beth Morrow, a senior analyst at Ernst & Young, New York. Twenty to 30 years ago, insurers could dictate what the public would buy, but competitors began to eat into their business as market conditions changed. Insurers responded with new, market--oriented products--universal life for higher interest rates, variable annuities and variable life insurance for a booming stock market. Insurers today are enhancing those variable products to make them more attractive, and some are even offering mutual funds, banking and trust services.

Change Comes Slowly

The life industry has always been slow to adapt, and it still struggles with change, Morrow said. Life insurers still are "prisoners" to what she calls "1950s state regulation." They face disadvantages in distribution, and their products continue to be complex. Their huge bureaucratic structures tend to militate against rapid development of products that are easy to understand, and once they go to market, competitors can copy new products without bearing the costs of development.

On the distribution side, most insurers operate in a system with much fewer customer contacts than banks, stock brokers or financial planners have. On the Internet, insurers remain far behind their competitors, she added, and the industry is still "handicapped by fragmentation"--it has too many small players in a national environment.

But there are robust signs that these patterns are changing. Even MetLife Inc., one of the oldest, biggest and most traditional of old-line mutuals, is taking on a new identity as a leaner, hungrier and more market-sensitive stock company under Chairman and Chief Executive Officer Robert Benmosche.

Tearing Down the Mutual Culture

"We started a little over a year and a half ago," said Barbara Hume, vice president of MetLife's investment and income center. "Bob's objective was to take down the silos and the walls between parts of the organization."

Hume said Benmosche reorganized formerly isolated parts of the company, creating more staff interaction. She oversees the investment/income portfolio, which includes fixed and variable annuities, mutual funds, brokerage accounts, wrap accounts and all savings vehicles. Her counterpart, Mike Irvine, is in charge of the protection portfolio, which insures life, auto, home, long-term care and disability.

By consolidating products into two portfolios and building a working relationship between staff members, Benmosche has made it easier for MetLife's financial-services representatives (formerly career agents) to work more objectively with clients. "You don't have product-pushing anymore," Hume said. "Now everything is viewed according to a client's needs."

Along with this integration, MetLife has packaged a financial-needs analysis with an asset-allocation model created with Chicago-based Ibbotson Associates. Hume said the package helps its financial-services reps to tailor financial solutions for clients.

The company has developed a candidate-recruitment program to attract more qualified candidates to its career sales force. To better equip its financial-services reps, it has instituted a training program in which recruits must choose a career path by their 12th month. Career options include financial planning, estate planning, business planning, market specialization (such as physicians in New York) or product specialization (long-term-care insurance or 403(b) plans, for example).

"Our biggest problem with reps has been a lack of focus," said Bill Green, a senior vice president responsible for recruitment, selection, training and practice development. "Ninety [percent] to 95% of our reps are currently generalists, not specialists, and we have realized that it is specialists who will excel."

MetLife's new training program, the Career Advancement Road Map, is being piloted in 10 offices, Green said. It offers courses at three levels: learning, proficient and master. Each provides training development in four areas: self, business, market and client. Self-development addresses the basics. Business development teaches how to view a practice as a true business for profit. It also promotes the importance of investing money in a practice. Market development teaches how to specialize in a defined part of the marketplace, while client development addresses service and support of clients.

In addition to its career reps, MetLife distributes products through its affiliates. New England Financial has a general agency force; General American uses a network of independent producers; and Security First Group distributes through financial planners. But its career system, MetLife Financial Services, is by far its largest distribution arm.

Many Competitors

Green said the company considers stock brokers, mutual funds, banks and online brokerage companies to be its competitors, and it trains its reps accordingly. "The best way to compete is through a relationship process with clients," he said. "We have to continue to make it better and expand it."

The company's needs-based system, Financial Profiles, is modeled after a system developed by American Express. Green said American Express "has done a great job" in needs-based selling and that MetLife is gravitating toward its customer-focused model.

For high-end producers, MetLife offers customized 31-page practice evaluations that lead to a recommended plan of action for development of the practice. The company also has given Green the freedom to develop a "solutions handbook" that Green believes can double or triple a producer's profits in three or four years. "This has been a personal passion of mine that MetLife has given me the opportunity to market within the sales force," he said. "We're in the beginning stages, and 2001 is the year of implementation."

Like other insurers, MetLife has also "unbundled" its products so that customers can choose the parts they want. "Some people just want the cheapest annuity out there, so we offer a stripped-down variable annuity," Hume said. "Some want liquidity, so we offer no-load annuities. Some buy for payout features, some for the death benefit, some for living benefits. Others want an annuity packaged with long-term-care or disability riders."

Unbundling also ties into distribution channels. "Every channel focuses on a different set of customers, each of which has different product and investment needs," Hume said.

MetLife also has simplified its marketing material to make it as easy to read as possible. A booklet about financial products, "Investing Made Easy," earned the praise of the Securities and Exchange Commission. The material strives to give objective advice and does not mention MetLife products.

On the servicing and administration side, the company has worked hard to develop its Internet site and to make its automated telephone system easier to use. "We are investing quite a bit in technology so that we can put account values and statements online," Hume said.

Keeping the Brokers Happy

Hartford Life Insurance Co. and its parent, Hartford Financial Services, ripped through the 1990s with excellent sales after adopting a strategy of making it easy for stock brokers, banks and independent broker-dealers to sell Hartford's annuities and life insurance as part of their clients' overall plans. Hartford life's latest initiative is a short electronic application form that a producer can file on the Internet in minutes. A Hartford Life underwriter takes over from there by phoning the client to complete the application and initiate the underwriting, including the scheduling of a physical exam. "All the broker has to do is literally drop a ticket to begin the process," said Bob Kerzner, senior vice president of individual life operations. The producer can go to the Web site to check on the underwriting status of any case, and this year, the site will make account values available to policyholders. The program, e-AppRequest, has been in place since August.

On the product side, Hartford has ranked No. 1 in sales of second-to-die variable life insurance for the past two years "by any measure," Kerzner said. "It's an area in which we took an early position when many questioned why people would want survivorship life, and why they would want it to be equity-based," he said. (In variable products, as opposed to whole life, policyholders rather than the insurer accept the investment risks and rewards.) "We said someone at age 60 has a 20- or 30-year investment horizon. It speaks to our understanding of our producers' mindset. They are much more comfortable with equity-based solutions."

Kerzner agreed with Morrow about the life industry's slow reaction to consumer demands, but he said it doesn't relate to Hartford. In pursuing a corporate strategy of working with independent producers, the company led the industry in nonqualified individual variable-annuity sales through most of the 1990s, and it beefed up its life sales and started a line of mutual funds. Kerzner argues that the company was "ahead of the curve." Rather than trying to persuade brokers to sell products they didn't see as benefiting their clients, Hartford tailored its products and services to "fit the mindset" of the brokers.

"Observers would say Hartford revolutionized the annuity world," Kerzner said. "It was very unusual to take the approach we did seven to 10 years ago, and it resulted in a dramatic increase in the percentage of penetration of these advisers writing annuities."

Now Hartford is trying to replicate that success on the life insurance side through streamlined processes, simplified products and superior sales support. "We're trying to make life insurance look and feel more like the other products that brokers have become accustomed to showing their clients," Kerzner said.

Hartford supports brokers with a sales-support team of about 180 wholesalers, called account executives. The company supplements that support with a software program that can provide quick quotes and offer solutions to client problems. Kerzner said Hartford had redesigned its variable life confirmations and annual statements "so they have the same look and feel of annuity statements."

Asset Management, Then Annuities

As a subsidiary of Liberty Financial Cos., Boston, Keyport Life Insurance Co. can take advantage of two trends, said President and Chief Executive Officer Phil Polkinghorn. Its sister companies enable it to offer broad asset management now. Later, when the public wants to cash in its assets in some systematic and dependable way, Keyport will be ready to offer immediate variable annuities, or "payout" annuities.

"There's a definite trend among insurers without a presence in asset management to gain one," Polkinghorn said. "Liberty Financial has built an amalgamation of asset-management companies, and they allow us to play on a broader field."

Liberty Financial's subsidiaries include mutual-fund companies Stein Roe & Farnham, the Colonial Group, Newport Pacific Management, Acorn and the Crabbe Huson Group. They adhere to a variety of investment styles, and Keyport uses them in its variable annuities along with outside managers Aim, Alliance, MFS, Fidelity and Rydex. Polkinghorn said that means Keyport derives income not only from the annuity wrapper, but also from management of about half of its annuity assets.

The array of asset managers also helps Keyport's distribution force of independent banks and brokers to be "very concept-oriented" with their clients and enables them to use their own brand names, rather than the Liberty name, when marketing.

While many insurers strive to develop a brand name, Polkinghorn said helping its producers/customers brand themselves--and backing them up with educational materials and services--are ways Keyport can add value. They also position Keyport to more actively play in the transition from accumulation to distribution of assets. "When you have a large population transitioning from accumulation to income, programs to help them manage it to last a lifetime will be very important," he said.

A good part of any retirement plan should probably be an immediate variable annuity, but it should not be the entire solution, Polkinghorn said. A planner also might want to structure an allocation of mutual funds. "A lot of financial-planning techniques and software recommend that you allocate your investments based on picking a period of time to receive income and your expected return," he said. "But when you're all done, you've created your own period-certain annuity, and then what happens if you're still alive when the period runs out?"

Instead, Polkinghorn expects people will come to see the value of annuitizing for a period-certain and life, in which the periodic payments continue for a guaranteed period but also continue should the annuitant live longer than his or her life expectancy, as half will. Ninety percent of people annuitizing now choose long certain periods, but the differential in cost is small enough that he believes most annuitants in the future will choose period-certain and life.

People may come to see the value of annuitizing, but they may need to be convinced. The insurance industry needs to develop payout annuities that are more responsive to the needs of modern retirees, who are looking for income that will supplement Social Security, said John M. Fenton, a principal at Tillinghast-Towers Perrin, Atlanta, at a briefing in October in New York. The industry, however, will need to "change some attitudes" before payout annuities can grow to their potential, he said.

The public still knows little about how these annuities work and when they are appropriate, he said. They are still complex, and consumers may have difficulty understanding their differences. He said prospects also often feel that annuities take away their control over their own money. He and his colleagues recommended that insurers embark on an education campaign, reposition payout annuities in the retirement-planning process and redesign the product to provide more payout options.

In addition to annuity sales, Keyport runs a wealth-strategies group that deals with estate planning, wealth transfer and distribution planning. Those services are possible because the company can offer a broad array of financial products for many circumstances. Polkinghorn added that Keyport does not offer trust services yet, but some of its bigger distributors do with the help of the insurer.

Better Relationships With Banks

Marketing financial products through brokers, banks or institutions (as do Hartford and Keyport) is a smart way for insurers to solve their distribution problems, particularly for smaller insurers that lack a geographical presence, said Mike Abrams, vice president and managing partner at Numerof & Associates. The St. Louis-based strategic management consulting firm helps major companies align their resources to the challenges of the marketplace. Abrams said there is "real potential" for synergy between insurers and banks, but it has largely been untapped.

A couple of factors have retarded development of the relationship. One is that U.S. residents think of banks only for traditional banking transactions. Abrams said only consumer education can change that perception. In France, 70% of insurance is sold through banks, he said.

Another big piece of the problem is banks' inability to provide customers with the expertise and personal attention needed to sell more than the simplest of insurance products. Most banks lack a workable, functioning system for the referral of customers who might benefit from certain financial products, even though banks provide "an ideal environment" for financial planning, Abrams said.

Among his clients, Security Benefit Life Insurance Co., Topeka, Kan., has overcome the obstacles to bank selling, Abrams said. It also has succeeded in institutional sales with organizations such as teachers unions and professional associations.

Big Decisions Loom on Distributions

The financial-services industry has focused a great deal of attention on helping clients save for retirement through tax-qualified plans such as 401(k)s, 403(b)s and individual retirement accounts.

But as the vanguard of these investors reach age 70 1/2, when they must elect how to take minimum distributions, the industry is beginning to realize that their choices are complex and have far-reaching ramifications. What's more, the industry isn't adequately prepared to advise clients about what decisions to make.

"There's a huge misunderstanding about minimum-distribution rules," said Eric Donner, president and chief executive officer of Retirement Distribution Specialists, Metuchen, N.J. "Financial-services advisers have been blind to it."

More than $12 trillion of retirement assets resided in qualified plans and IRAs as of November, Donner estimated.

Donner worked for 15 years as a life producer in advanced estate planning and achieved the Million Dollar Round Table's "Top of the Table" status in several of those years. In October 1998, he sold his practice to form RDS, a national training and marketing company in retirement distribution planning and advanced IRA planning. Donner said institutions aren't prepared to deal with those topics internally, and his company is currently advising several major insurers, including American Express, Nationwide, Sun America, Protective Life and Guardian Life.

Plan owners need to make three basic decisions before age 70 1/2: naming a beneficiary; choosing a single-life or joint-life expectancy; and choosing whether to annually recalculate life expectancy of the owner and of the beneficiary, if the owner chose joint life.

Those decisions have major impacts on the lifetime distributions received, the transfer of wealth at death and the amount that the owner and estate will pay in taxes, Donner said.

"If they make wrong decisions, they could have to take very large distributions and pay large income taxes, despite having no need for that money," he said. "They could be forced to pay out the entire account during their lifetimes, so they have nothing left over to pass to heirs. If they didn't need the money, they could have deferred it and created an income legacy for future generations." Donner said he could develop eight different scenarios based on the basic choices.

An account owner who does no planning for what happens to an estate after death could lose more than 40% in income taxes and a total of 70% to 80% after estate taxes, Donner said. Clients need to see the impact of these decisions, but advisers-including attorneys and accountants-generally have not educated themselves in this area, Donner said.

Donner sees life insurers as the logical leaders in this area since producers are already in the business of projecting the future for the client and because of the strong role life insurance has traditionally played in estate planning. He said about 500 financial planners that have paid consulting fees to RDS are selling huge insurance contracts. "We've tied IRA planning and elections to specific structures that require either a single life policy, a second-to-die policy or both policies," he said. "It depends on whether the IRA owner wants to leave money to a spouse, children, grandchildren or a combination."

Advantages for Insurers and Advisers

Good planning also can help life insurers keep huge amounts of money under management--and the profits they generate--rather than seeing them go to the government and heirs. Through IRA custodial services, insurers should be able to manage this money for generations, Donner said.

Individual financial advisers also can benefit from retirement distribution planning and consulting by way of the fees they charge, Donner noted.

Insurers might argue that giving advice on qualified plan distributions is nothing new. "It goes on all the time, especially in a planning process that's fact-based, relationship-based and needs-based," said Bill Green, senior vice president of MetLife's field development group. "It happens at age 59 1/2 and at 70 1/2, and we ask a lot of questions in between." He added that he could speak only for MetLife and for the Equitable Life Assurance Society of the United States, where he was employed previously.

But Donner maintained that retirement distribution planning is an area that has slipped through the cracks. "We're talking about a convoluted area of the tax law," he said. "Typically, it would be interpreted by attorneys, and they lead the way."

Normally, attorneys with expertise in the Employee Retirement Income Security Act of 1974 would advise on distributions, but they haven't dealt with estate planning, Donner said. Conversely, an estate-planning lawyer doesn't know the pension rules like an ERISA attorney does. "Those are two specific specialties that stay within their own discipline," he said. "Those with a background in both have emerged as industry leaders."

Minimum-distribution rules took effect in 1987 as part of the Tax Reform Act of 1986. Since then, the tax law is still in its proposed regulation format, Donner said. The Treasury Department and the Internal Revenue Service are charged with creating the regulations. Donner said his company has posted about 80 IRS private letter rulings on its Web site, www.RDSknowledgeware.com.

A new bill would require the IRS to finalize regulations by the end of 2001, Donner said.

One of the larger sections of the tax code deals with IRA rollovers and IRAs, said Bob Kerzner, senior vice president of individual life operations at Hartford Life Insurance Co., Simsbury, Conn. "It's a confusing piece of the code, so it needs scrutiny," he said. Qualified-plan distributions have been a topic of discussion at Hartford for the past two or three years, and it's received more attention in the popular press in the past six months, Kerzner said. As a result, it's making its way onto the radar screens of clients and advisers.

Kerzner said Hartford provides its advisers with a variety of tools on the life and annuity side to wade through the complexity. In addition, the company provides attorneys in advanced underwriting to provide insight, sources and material to the brokers.

Michael Abrams, managing partner at St. Louis-based Numerof & Associates, said qualified-plan distributions represent "an enormous opportunity" for the financial industry. "Every financial institution needs to be thinking carefully about a strategy to take advantage of that," he said. "There's a very substantial segment of people who are unsophisticated in investing who will have to make decisions about money in amounts they're not used to."

People who have been unsophisticated about money their whole lives and who have become elderly will require personal attention, and that covers the bulk of the baby-boomer generation, Abrams said.