The year that is drawing to a closejust might be remembered by benefit professionals as the most challenging one ever. Despite signs of recovery in some sectors of the economy, as 2010 ends the country remains stuck in the worst employment downturn since the Great Depression.
As employers downsized in 2009 and 2010, the impact on brokers was severe: the number of covered lives dropped, and top-line revenues took a hit. At Dallas-based Brinson Benefits, for example, the drop-off began in late 2009. Since then, Brinson's clients have laid off about 10% of their employees, estimates the firm's president, Dawn Brinson - meaning that the agency lost about 10% of their covered lives. "Even if you retain 100% of your clients, which isn't realistic, a 10% reduction takes a big toll on your book of business," she points out.
Thus, all of Brinson's new sales this year have been geared to replace what was lost through attrition of covered lives. The result: a flat year. Brinson sees better times ahead, though. "The good news is that I think employers have gotten down to their 'bare necessity' employees," she says. If all the pervasive, large-scale layoffs are behind us, she believes, "that gives us the opportunity to pull ourselves out of this flat revenue situation as we continue to write new business."
Fee for service
Like many principals around the country, Brinson is realistic about an uncertain future: "This year we adjusted to fewer covered lives; next year it looks like we're going to have to adjust to commission changes and volatility in our commission levels."
The drop-off in commission revenue will force brokers to deal with an even bigger change, Brinson believes. "I think a lot of insurance professionals in the past have resorted to giving everything away and living on the commission. This is going to force a real change in the mindset of agencies, I believe, to really focus on establishing a fair price for service delivered. In that regard, I really believe we've hurt ourselves with this idea of not wanting to talk about price. In so doing, we've never even helped our clients decide for certain what they really value."
Brinson's philosophy for many years has been to charge reasonable fees for all the services they offer, she explains - "not just benefits advisory services, not just what happens at renewal, but all these other tools and services that we make available to our clients." In 2011, she expects that benefits brokers will be focused on rounding out their business and figuring out how to charge a fair price for the services they offer.
Growth in voluntary sales
Perhaps the most positive development in 2010 has been the growth in voluntary sales. Voluntary product lines, from dental and disability to the worksite lines like critical illness, accident and permanent life, are the only product lines that have seen growth this year, points out John Penko, SVP of sales, benefit solutions, at American General Life Companies. To Penko, the reason is clear: Employers are having to take a long, hard look at benefits so they can still attract and retain a top-quality workforce.
At the same time, he notes, the employer-funded component of those benefits has decreased. "That suggest employers are making some very difficult decisions in order to continue offering benefits in an overall economic climate and in light of their own expense limitations," he says.
Brokers, anticipating significant declines in their health insurance revenue as the carriers reduce their commissions as a result of PPACA's medical loss ratio restriction, are looking at ways to diversify revenue, Penko observes, and as a result they are now more aware of and familiar with voluntary products.
Advisers can expect this growth to lead to more competition among voluntary providers in 2011, asserts Ron Agypt, VP of broker and market development at Aflac. "In my 30-plus years in the insurance business, I've never seen as much change as we have now," Agypt says. "Today we have medical carriers that continue to expand their efforts into voluntary benefits - Aetna and Humana, for example. We're seeing individual and group products coming together - almost merging into the same type of product, even though they're on two different platforms. In 2011, we think there will be even more firms getting into voluntary benefits."
Deluge of DC regulations
The first thing to understand about 2010 is that it has been "a rebuilding year" for individual investors, believes Greg Burrows, SVP, retirement and investor services, at The Principal Financial Group. "The majority of investors who stayed invested and continued to contribute to account value in effect have been able to rebuild their account value to pre-crisis levels and even beyond in some cases," Burrows says.
In the DC market, 2010 was an extremely active year on the regulatory front - featuring the issuance of rules on adviser fees and the responsibilities of plan fiduciaries. In 2011, Burrows says, "we'll see them really start to make their way into the marketplace and really start to redefine how service providers present themselves to the market." In addition, Burrows predicts regulations next year on target-date funds.
Burrows sees a consistent theme of transparency and focus on roles and responsibility. That dynamic will have an impact on how a plan provider, investment management firm or adviser goes about articulating the value they deliver. "As we as an industry go into 2011, there will be a tremendous emphasis on our part to interpret and communicate the new rules, and then implement them appropriately," says Burrows.
"One of the things we see happening is that advisers increasingly are focusing on the question, 'How do I clearly articulate the value and services I deliver to my client for the fees that I receive?'" Advisers are learning how to strengthen their value proposition, which is going to help them shape their business going forward, he says.
In 2011 and beyond, look for the issue of retirement income adequacy to gain prominence. "We're seeing a shift in the industry among consumers, advisers and plan sponsors to try to create a balance of focus - not just on wealth accumulation, but also on how much income accumulated wealth can create for an individual in retirement. We believe that's a really positive step," says Burrows. "The more that people are able to focus on income replacement, and not simply on how much they are accumulating, there will be a positive impact on people's awareness and level of preparation for retirement."
Exchanges at center stage
At first glance, 2011 might look like a relatively quiet year - a respite between the turmoil of 2010 and the launch of the state health care exchanges in 2014. Not so, warns Janet Trautwein, the National Association of Health Underwriter's CEO. "The issues that are coming up in 2014 involve items that need to be prepared for long in advance, especially the exchanges," she says.
HHS already has a whole team of people working on preparing for the exchanges, Trautwein notes. In large part the action will shift to the states next year. State legislatures will have to decide what sort of structure they will have, and then pass legislation creating the exchanges. State officials face a requirement in 2013 to notify HHS about how the exchanges will work in each state - which means they must have passed something by then. Further complicating matters, some state legislatures only meet every other year, Trautwein notes.
As a result, NAHU will be active on three fronts in 2011 - continuing to work with HHS and Treasury officials to shape regulations, circling back to Capitol Hill to work with the new Congress, and reaching out to officials in all 50 states. To cope, NAHU has added extra staff, and state chapters have hired lobbyists in each state. Says Trautwein: "We're staffed up and ready to go, but it's going to be a lot of work."
The average producer is very nervous about things like what it means to go into an exchange and what the viability is long-term, according to American General's John Penko. "As a carrier, we are continuing to stay abreast of these changes and developments, communicate to our distribution partners about how we see the current climate and what it takes to be in compliance, and try to provide them our information so they can do some planning with regard to their business operations.
"We've communicated to our broker partners that even within exchanges there is opportunity for them to navigate their clients through those exchanges."
Aflac's Agypt anticipates the potential for growth once the exchanges start up. "Major medical will become more homogenous, and we think that employers will be even more interested in supplemental coverage as a result," Agypt says.
But the situation will remain very fluid, Penko believes. "There will be changes as we go," he says. "A lot of people anticipate that there will be some major modifications to the legislation in this next Congress, but I've learned that you can't bank on that."
Action on Capitol Hill
In the wake of the midterm elections, the biggest wild card of 2011 may be the impact of a new Congress. Says NAHU's Trautwein, "In the House, they're going to want to fulfill their campaign promise and pursue repeal-and-replace legislation. But there just aren't enough votes for it to go anywhere after the House passes it. I'm hopeful that then they'll take a look at some targeted legislation, because there are some things [in PPACA] that need to be modified," such as the individual mandate, says Trautwein.
Rise of advisory services
According to Agypt, today it's even more important for brokers to step into the adviser role, which he defines as "showing clients how to integrate the whole package of benefits that are available today and how to survive today's economy." Brokers and consultants are taking a more holistic approach, as Agypt sees it, and addressing four main areas: health care reform, group products, voluntary products and education.
"Five or 10 years ago a broker could be good at one of those things and make a great living," Agypt believes. "Today, brokers have to be good at all four of those things. Frankly, those who don't understand that will probably be left by the wayside.
"That's why the larger brokerages have an advantage. We see the smaller houses competing by bringing other partners in, giving them some of the same skill sets as the larger brokerages but without the cost," Agypt says.
As far as organic growth goes, Brinson, who is United Benefit Advisors' Board chairperson, likes what she has seen this year. "We don't have final data on 2010 yet, but I'm going to speculate that many [UBA] firms are growing organically quite well," she says. "They have focused their attention in 2010 not so much on acquisition activity, but on growing their agencies organically" in an effort to offset the loss of revenue. "I also think that competition is getting fiercer," says Brinson. "All of our agencies are competing for business at a much higher level."
Looking forward to 2011, though, Brinson still foresees a "vibe of uncertainty." In addition to the potential impact of the MLR restrictions on commissions, she says, "There's a question out there about what insurance companies are doing to 'tier' agents, and whether or not the bottom producers will be terminated and let go." That may spur increased merger and acquisition activity, she believes.
And finally, Brinson says, there are "the folks who are owners in their late fifties and early sixties and who may have thought they would just continue working in this industry indefinitely. But now, they're wondering if they are willing to weather the storm created by health care reform."
Many of them are thinking that this might be the ideal time to exit the business, according to Brinson. "I suspect there are two camps," she says. "There's the camp saying, 'I don't know if I have the energy and desire to weather this storm,' and then there are other firms who are absolutely putting on their battle gear and really focusing on reinventing their business to ensure as best they can that they will survive."
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