Nancy M Kenneally looks at the US variable life market

During the 1990s, the US variable life marketplace enjoyed remarkable growth while the individual life insurance marketplace stagnated. A number of factors fueled this growth, most notably the buoyant equity markets and low interest rates in the US throughout the decade. Since reaching a sales peak of $6.95bn in 2000, however, variable life sales dropped 63%, to end 2003 at just $2.58bn, according to Tillinghast's VALUE(TM) Survey.

The future of the variable life market undoubtedly hinges on a recovery of the equity markets, but even in such a marketplace, insurers' success will ultimately come down to execution.

Market and competition

Variable life emerged in the 1990s as an alternative to fixed life insurance products. Variable life products were designed to fulfill many of the same needs as traditional permanent life insurance - estate planning, executive benefit funding, business planning, retirement/accumulation and personal needs protection - but with a stronger focus on accumulation.

Attracted by hefty equity returns, the relative capital efficiency of the variable product chassis and the ability to better control existing distribution channels and tap new ones, insurance manufacturers began developing new products and selling variable life insurance policies in record numbers. The benefits of variable life to distributors were equally compelling. In an increasingly competitive financial services landscape, life insurance agents were able to offer a hybrid product that appealed to consumers accustomed to investing in mutual funds and other packaged investment products.

For these reasons, sales of variable life increased from $1.0bn in 1990 to $6.95bn in 2000, a 21% compound annual growth rate. Variable life market share (measured by premium) as a proportion of individual insurance sales increased from 7% to 37% during this ten-year period.

But since early 2001, sales of variable life have plummeted. Attractive, long-term, no-lapse guarantees available on universal life products, coupled with sustained equity market downturns and volatility, steered many distributors and consumers away from variable life.

Many career agents turned to selling low-cost term, universal life products with long-term guarantees and whole life with attractive portfolio rates.

Increased estate tax exemptions and the uncertainty of estate tax reform have also driven down sales for variable life. Although the initial ambiguity of reform appears to have abated, many agree the issue will resurface.

The level of sales decline impacted variable life insurance carriers to different degrees, depending on their product focus and diversification.

However, sales decreases have generally been universal. In 2003, all but two (smaller) variable life writers experienced drop-offs in sales, many significant.

Distribution trends

Variable life is sold through an array of retail distribution channels, supported by several intermediary approaches. The retail distribution landscape has two distinct channels, the career agency channel and independent channels.

Independent investment-oriented channels, which include wirehouses, regional firms, independent broker-dealers, insurance broker-dealers (non-career agents), banks and producer groups, form a complex distribution ecosystem.

Since these retail channels have very different levels of life insurance knowledge and orientation, insurance manufacturers serving them have experimented with a variety of wholesaling approaches.

Unlike the US mutual fund and variable annuity markets, where one dominant wholesaling model emerged, the variable life market supports at least three intermediary/wholesaling models:

(1) the product wholesaler model characteristic of the mutual fund and variable annuity markets;

(2) the Managing General Agents (MGAs), Brokerage General Agents (BGAs) and Independent Marketing Organisations (IMOs) model more traditionally used for selling fixed life insurance; and

(3) the Regional Vice Presidents (RVPs)/Regional Personal Producing General Agents (PPGAs) model, which is somewhat of a hybrid of the first two.

The product wholesaler and MGA models are the most prevalent forms of intermediary distribution, accounting for about 75% of sales through independent retail channels in 2002. The product wholesaler model is the more dominant, with almost 45% market share.

We expect both models to remain viable over the foreseeable future. In fact, many companies selling variable life through independent retail channels have chosen to go to market through multiple intermediary channels, effectively segmenting their retail channels and distributors and aligning them with either product wholesalers, MGAs or RVPs. We believe distribution firms will increasingly seek a direct relationship with the product manufacturer, so the product wholesaler model will continue to gain share over the longer term.

Investment-oriented distribution channels largely accounted for the tremendous growth in the US variable annuity market. Together, these distribution channels now account for 65% of variable annuity sales. While variable life sales have also increased through independent channels, closer analysis indicates that this has been driven more by insurance-oriented channels, such as insurance broker-dealers and producer groups, than the investment-oriented channels that helped fuel the growth of variable annuities. We estimate that approximately 11% of variable life sales come from investment-oriented channels.

Although investment-oriented channels have grown rapidly in the past several years, penetration still remains low. Today, only an estimated 5% of wirehouse and regional firm reps even sell life insurance. With a client base ideally suited for life insurance products, these channels and their customers would appear to represent fertile ground for life insurance manufacturers. Yet, the challenge is substantial. Unlike a transaction-based variable annuity sale, the life insurance sale is typically complex and involves an intrusive and time-consuming underwriting and new business process foreign to investment-oriented channels.

To tap the vast potential for life sales within these investment-oriented channels, insurers have employed two broad strategies:

- providing life-oriented specialists to assist the retail representative at the point of sale; and

- simplifying the sale through simplified product design and streamlined new business processes.

To date, any success has typically resulted from the distributor or manufacturer deploying substantial life-oriented resources at the point of sale to assist or take over the life insurance sale from the rep. However, few manufacturers or distributors have been able to build a point-of-sale system that delivers satisfactory sales relative to the required investment.

Insurers have also experimented with simplifying product designs and/or changing their new business processes to better align the life insurance sale with the sale of other investment products. The philosophy behind this approach is to mimic, to the extent possible, the 'dropping the ticket' sales process characteristic of mutual funds and annuities. A few companies have developed electronic application processes supported by call centres or fulfilment centres, insulating reps from cumbersome new business processes.

While these approaches show promise, they are largely unproven and represent attempts to develop single-carrier solutions in distribution systems that operate in a multi-carrier environment. Multi-carrier new business solutions for variable life have not yet taken hold in the market, despite the aggressive attempts of technology vendors. While it is likely that such platforms will develop, adoption will probably be slow.

Despite the perceived potential and the success achieved in some overseas markets, banks have had limited success selling individual life insurance in the US. Although the private bank channel offers some long-term potential, since other channels offer more near-term potential we expect most insurers to focus their resources elsewhere.

Future outlook

Future growth of the variable life market is uncertain. In the near term, we believe the key challenge for variable life insurers will be to recapture the 63% loss in sales from year 2000 peak levels. While the overall demand for life insurance is still present, the market is mature and growth has been modest over the last several years. Other roadblocks to the market's success could be the ongoing scrutiny resulting from mutual-fund-related scandals, unfavourable changes to the estate tax law (such as permanent repeal), significant restrictions imposed on corporate-owned life insurance, major market upsets or adverse press about improper selling practices.

Career agents and insurance-oriented independent agents will need to be convinced once again that variable life represents a superior long-term protection and accumulation vehicle. A sustained equity market recovery, coupled with less attractive fixed product alternatives, would also help in the short term.

Longer term, the critical challenge will be to return variable life to its prior growth trajectory by aggressively making inroads into investment-oriented distribution channels. With only 5% to 10% of these representatives selling variable life products, the key is to increase penetration. Unlike the insurance-oriented career and independent agents, these representatives are likely to be less reluctant to return to variable products. The systems that they have grown up in are built around these products. However, achieving sustained growth will require a fundamental redesign of the life insurance product and new business process, as well as more point-of-sale assistance.

The future of the variable life market depends on a recovery of the equity markets. Success in such a marketplace will ultimately come down to execution.

The days of realising growth just from 'being in the right place at the right time' are gone. The future winners in the marketplace will be companies that clearly articulate their strategies, capitalise on a superior understanding of business and channel economics and, most important, flawlessly execute their plans.

- Nancy M Kenneally, FSA, MAAA is a consultant with the Tillinghast business of Towers Perrin in New York. She can be reached at