Bob MacDonald on the Unprecedented Opportunity in the Annuity Industry

Bob MacDonald has had a storied career as a leading entrepreneur and executive in the financial services industry.

Some of Bob’s roles include: president and CEO of ITT Life; founder, chairman and CEO of the highly successful LifeUSA, and; CEO of Allianz Life of North America.  Bob is also a noted business author with several best-selling management books to his credit.

As a widely acknowledged thought leader and product innovator in the financial services industry, Bob is able and willing to share a wealth of experience and insights.

Annuity Digest: Is there one thing from your career that stands-out as a key driver of change and meaningful business results in the retirement income or annuity industry?

Bob MacDonald: Being able to recognize change in demographics of the customer base and being able to recognize that the needs of the customer are different than what they were in the 20th century.  The ability to discern change in consumer needs and wants is paramount.

The problem is that the industry is selling products they want to sell rather than what consumers need and want to buy.  The industry has been and continues to be tone-def to consumer needs.

You constantly hear industry executives talking about the retirement income industry and market and yet doing nothing about it. 

For instance, about 12 percent of the market consists of single premium immediate annuities (SPIA).  This is a perfect example of the industry talking about income generating products while relying on a product that was developed 100 years ago for widows and orphans.

The industry is not paying attention to longevity and morbidity trends with current product development.  Longevity trends continue to increase.  Long retirement periods increase the risk incurring the high costs associated with health and disability issues.  Overall, these issues can have an enormous impact on fixed incomes and thus standards of living of millions of retirees.

I am not seeing the insurance industry develop a product that can meet these kinds of needs.  Who is not going to have a health problem or inflation issue between 65 and 90?  Things are going to look very, very different in 20 or 30 years.

Another issue involves bequest motives.  When buying a SPIA one is able to start taking income but there is no estate to pass along to heirs.  Product development has not addressed this need effectively.

All of these issues are fundamentally related to product development.  The industry is still focused in the past.  They see the writing on the wall but are unable to respond to it.

Also, retirement income products have become commoditized and are sold on a spreadsheet approach.  This is the worst thing that could have happened in the industry.  When you are in this type of commodity business you are in a losing business and cannot survive for long period of time.  This commoditization is a result of the lack of product innovation and creativity.

There is a gaping hole in marketplace that everyone talks about yet does nothing about.  This is, in my opinion, a waste of a huge opportunity.

When I started my career, the insurance industry was preeminent in the financial services industry.  Insurance (life insurance is a great example) was the foundation of all financial services.  Insurance companies such as Prudential and MetLife dominated and were revered as icons. 

Skip to end of twentieth century and only AIG was dominant.  Now the industry has lost its preeminence and influence.  The reason is that they did not listen to the consumer.

There are analogies to be made to the American auto industry.  The auto industry fell in love with the cars they wanted to sell rather than what consumer wanted.  The result is that many of them are out of business.

Retirement income is the final opportunity for the insurance industry to regain its stature and preeminence—to once again become front-and-center as the first stop in financial services.  The insurance industry is able to offer protections and do things that are not possible for the banking and investment industries.

In my opinion, however, the industry is letting this opportunity pass by.

Annuity Digest: You clearly feel strongly about the need for change within the retirement income industry.

Bob MacDonald: It is not so much a need for change but rather a need to respond to change.

Things on the consumer side such as needs, risks, demand, desire, etc have changed so much.

However, the bulk of the retirement income industry has failed to respond to those changes with innovative and interesting products.

The industry should be growing at 3-4 time its current rate but is not because everyone is traveling in a herd and not jumping on the retirement income opportunity.

This opportunity is not rocket science—we do not need to wait for technology to develop to create new products.  It is simply a matter of putting existing things together to address this new opportunity.

How many eons ago was the wheel invented?  How many years ago did we invent luggage?  How many years did it take for us to add wheels to luggage?  It was sitting there all along for someone to put 2 + 2 together to create a great innovation.

The thing that is frustrating is that a very similar situation exists in the retirement income space and yet the insurance industry continues to cobble together existing things in an attempt to meet consumer needs.

The question to ask is what types of benefits are required to protect the consumer while they are living?

The industry has been so focused for the last 100 years on life insurance or products that protect people when they die.

Longevity trends have changed dramatically during this same time-frame.

The industry is too fixated on past success with life insurance and is losing ability to recognize change and do something about it

Annuity Digest: Where might this change come from and what might it look like?

Bob MacDonald: To be honest, the only way to implement this type of change is to provide some type of leadership.

There is a pervasive herd mentality that exists in the insurance industry.

Someone needs to step-up and say “we are going to be the income company,” and we are going to survive or fail based on that focused value proposition.

This simple act of leadership would force rest of industry to take notice and head in that direction.

The airline TWA is a classic example of industry dominance in the 1950s.  TWA, however, failed because they resisted and did not adapt to change—they were the last to move from prop to jet planes.

Somebody needs to step-up and develop these new income-oriented products where they do not exist.

I do not see this happening—I just see the same old thing.

Another analogy occurs to me through my experience leading ITT life.  Everyone in the industry saw that universal life represented fundamental change and opportunity, and yet the industry (Pru and MassMutual are examples) literally attempted to outlaw universal life in certain states.

This is the way—fighting change—that the industry has always operated.

The industry is still selling a lot of annuities but many of them are accumulation rather than income-oriented.  In addition, much of the money flowing through the industry is not new money but rather old or existing dollars that are simply re-circulating or moving from one company to another.

The industry will ultimately fail unless they are able to start attracting new money in a meaningful way.

Annuity Digest: Would you say that the industry able to directly engage the end consumer in a meaningful way?

Bob MacDonald: Absolutely.

Annuity Digest: What is required for this to take place? 

Bob MacDonald: Who will be the first to recognize that “putting wheels on luggage” is a good thing?  It is a simple analogy but this is what it is all about.

Competing on price with similar SPIA products is neither creative nor innovative.

As an example, let’s say you retire with $400,000.  Company X says they will pay you $2,000 per month for rest of your life no matter what. Company Y says they will pay you $1,850 per month for same duration, but if you become sick anytime before you die, company Y is going to increase that income level to $3,700 per month to cover the additional expenses.

Now you are selling a meaningful difference and providing value that meets a complex need.

The need is not simply income, but all of these other major risks (health, disability, inflation) that we face in retirement.

That is selling value rather than a commodity based on price.

As soon as this starts to happen, people will follow and become more innovative and creative.

It is as simple as someone stepping-up to focus on products that meet the needs of people who are living rather than the possibility of death.

Annuity Digest: Will there always be a key role for financial advisors, or will a true direct-to-consumer model (the GEICO of annuities) emerge in the retirement income industry?

Bob MacDonald: If you are going to sell commodities and the purchase is required as it is with auto insurance, then you need a direct response model or the GEICO type of company.

The cheapest price becomes the focus and comparison shopping on the Internet is fine.

If you are going to sell value, then that value proposition needs to be explained—someone to explain why one set of benefits at a given cost is better than another.

With value, someone will need to be there to explain it.

This is not to say, however, that technology is not important.

The industry could be operating through the web to make the financial advisor’s life simpler and more productive.  Sales and marketing productivity tools have enormous potential and could power a very efficient and profitable company.

Mainframe adoption is the last time the insurance industry was on the leading edge of technology.

Look at airlines, banks and investment firms.  For years we stood in line to wait for cash and our boarding passes.   Would anyone now want to go back to this?  In my mind, effective technology is when you can get customer to do your job and still think you are getting great service (think automated teller machines and airline boarding passes).

We could do the same thing in the insurance industry but have not.  Mainframe adoption is the last time the insurance industry was on the leading edge of technology.  There has been some meaningful technology adoption in the property and casualty side of the business but not as much on the life side.  The industry has many legacy systems and issues.

Annuity Digest: What is the most innovative or promising venture, development and/or person thing you are see in the industry at the moment

Bob MacDonald: Well, Allianz seems to muddle along.

No one knows what is going on with Aviva coming in and out of market.

ING is out of the market.

American Equity has potential but people are unsure about their direction.

The variable annuity market is in complete shambles because they treated their product as a commodity and started assuming risk rather than managing it.  Now they are swinging pendulum the other way with incredibly high fees and unattractive products.

I really believe that what is needed is a new player to get into marketplace and set a stage for what is to follow.  Go back to Life USA in 1987.  When we started selling annuities there was not much other than 403b-based annuities in the marketplace.  We had seminars to explain these things to the agents and overcome misperceptions and hurdles.  Then the industry sort of began to follow and annuities became the new thing.

Someone needs to now jump out there on the decumulation side which could be variable, hybrid, fully fixed, etc.

Until someone does this I do not see much potential for meaningful change.

Someone could jump into market and buy a company, so it could happen.  This would involve: a) re-energizing the distribution system which has been a bit deflated of late; b) developing new and innovative products, and; c) bringing technology into play in an intelligent manner in order to control expenses.

Annuity Digest: What are the key things to watch in 2010?

Bob MacDonald: I enjoy watching the industry but I do get frustrated.

It will be interesting to see whether or not we finally get to a point where someone will respond to the changes that have taken place.

Will someone committed to advisor system and making it work—strong and re-energized distribution.

What I would watch for is to see some action.

If I was an agent today, I would look for the company that is ready to step-out and be different.  There is so much noise and conversation in the industry but very little action.

The industry is trying to be the same in a different world.  What you need to do is be different because the world is different.

Annuity Digest: Thanks so much for your time Bob.

Key Phrases Manual: 


I'd love to see someone comment on this with some suggestions. Someone, somewhere must be working on more innovative retirement income products.

Wouldn't the hybrid long-term care/annuity product provide a good example of innovation and meeting the unmet needs that Bob describes in the article.

Also, there seem to be many examples of innovations (guaranteed living benefits come to mind) over the past 10 years that address the income needs of "the living" rather than death-related issues.

Basing criticism on SPIA as core example seems somewhat limited??

I agree with the point about living benefits and hybrid products.

I also agree with Bob MacDonald's general point about the lack of innovation in the retirement income industry.

Think of how the retirement income industry compares to other financial services sectors or even more innovative parts of the economy such as consumer electronics. Seems like no comparison over the past 10-20 years.

Anyone care to comment on start-ups that are either recently launched or in the works?

If not, why is this the case?

Seems that this is what Bob is calling for in this interview?

There are so few life and annuity insurance companies.

Isn't the total number of companies less than 20?

What would be useful are more companies offering products, more competition, and more choices for consumers.