Scenes from the index annuity price war: How the battle for market share affects you and your clientsArticle added by Joe Anzalone on November 17, 2009
Joe Anzalone

Joe Anzalone

San Diego, CA

Joined: August 21, 2010

In the history of modern business, gripping stories of legendary price wars between marquee adversaries are both common and fascinating. In the early 1990s, the "value pricing" war erupted between the airlines, eventually pulling virtually every major carrier into the fray. Collectively, the major airlines lost $4 billion combined, and the fallout from that price war was felt by airlines and passengers alike around the world. That was, as one business professor put it, "the mother of all pricing battles." 1 Similar price conflicts, skirmishes, and full-fledged battles have erupted over the years between mega-retailers (Wal-Mart vs. Amazon) and the like. While opinions may vary regarding the competitive benefits of this type of warfare, price wars, like actual wars, leave collateral damage in their wake. As a recent New Yorker piece points out:
    "The hope is that if you cut prices enough you can increase your market share, and even your profits. But this works only if your competitors won't, or can't, follow suit... From a game-theory perspective, price wars are usually negative-sum games; everyone loses... Sometimes it's rational: when a company is genuinely more efficient than its competitors, lowering prices is usually a smart move. More often, price wars are reckless gambles... many executives are obsessed with market share, even at the expense of profit, and slashing prices will often win customers in the short run. Hubris, too, plays a role: executives tend to believe that their competitors will crack first. Such price wars are like games of chicken, and typically end just as badly." 2
To be sure, there are differences among price wars. Airline tickets, DVD players, books, and other tangible items have a retail price tag. Their pricing games start with lowering the ticket price to gain market share. Index annuities, however, don't technically come with a traditional purchase price, but as we know, they are "priced" in many different ways.

Readers, as in all price wars, I would humbly propose that price wars in the index annuity space are common, often damaging, and always short-sighted. In this piece, we'll explore the tactics by which the index annuity price war has been fought. As you'll see, they are similar to what we have read about on the battlefield. Moreover, an oft-consistent pattern of attack has been deployed in the annuity marketplace that any battlefield strategist would admire.

Stage No. 1: Blitzkrieg

"All war is deception." 3

The war begins, as many have, with the quest for territory, or market share. If the annuity carrier is the general leading the battle, and the agents are the army, then the weapons in the index annuity price war are inflated caps, enticing bonuses, liquidity gimmicks, and sweetened commissions. Indeed, in terms of other index annuity features and benefits, the underlying product may be able to stand on its own, especially if it offers reasonable liquidity options and the power of annual reset. But the zeal for market share in a competitive landscape is often too great. When the blitzkrieg occurs, the product comes out with its guns blazing. Monthly or annual caps shoot up to new heights. Bonuses, depending upon the contract length, seduce still others for whom a conventional, needs-based sales process has grown tiresome. Liquidity gimmicks ("Checkbook access!") attract still more producers, because it makes the product "easier to sell: to those consumers who assume this feature allows them more access to their money (often untrue.) Finally, the carrier rolls out the big gun -- high commissions -- to further boost the morale of their troops in the field. Armed and ready, the producer army takes to the fight. Large swaths of territory are captured.

These types of "blitzkrieg" tactics are especially effective for capturing market share, because the competing "generals"-- the carrier adversaries -- are both prone to complacency and hubris, and it takes a long, long time to assemble and arm their own troops for a counterattack. In fact, when compared with the retail price war, on the index annuity battlefield the enemy assembles and fires back at a glacial pace. It may take months, even years, for the counteroffensive to begin. In recent years, carriers unseen in the annuity battle theatre have blitzed their competition with these very tactics to achieve victory.

Stage No. 2: Divide and conquer

"If you are far from the enemy, make him believe you are near." 4

When drafting its troops for battle, the carriers (generals) send their wholesalers (diplomats) into the marketplace to recruit FMO partners (allies) to help train and motivate their respective armies. Before the war begins, the generals aren't quite sure how many troops they are going to need, or how the war will turn out. So, during the early phase of Stage Two, the carriers and wholesalers cast a wide net, and form as many alliances as they can. They seem benevolent, reasonable and wise. Multiple alliances are formed before the war gets underway, and these FMOs enthusiastically train their producers (armies). Morale is high, and the battle for territory (market share) is engaged and won.

After the smoke clears, however, some allies are destined to be more important than others, especially those in which the carriers have a financial investment (colonies). These marketing organizations, seemingly independent, are in fact simply extensions of the generals' war machine, with the diplomats supplying the necessary propaganda to appease the populace. This is where "divide and conquer" comes into play. Other FMOs deemed useful during the blitzkrieg are cast aside in the aftermath as unnecessary and troublesome, and the alliances are broken. This aggressive and deceitful tactic, so typical in the theatre of war, leaves many producers (and potentially their clients) in a quandary. For all intents and purposes, they become refugees. The producer is forced to join one of the "colonies" if they want to continue to use their new weapons and service their clients' contracts purchased during the blitzkrieg.

Stage No. 3: Fallout

"There has never been a protracted war from which a country has benefitted." 5

Ah, the fallout. Inevitably, price wars produce victims. The airline price war caused billions of dollars in damage, with neither side declaring victory. The war over oil prices and demand has created one troublesome, price-fixing oligopoly (OPEC) and has been the cause of many other "hot" wars around the world.

But in the index annuity price war, don't producers and consumers ultimately benefit? After all, the tactical blitzkrieg produced a product offering that may not have been available previously, and one might argue that the result was increased sales for the producer and a more consumer friendly product. So, what's wrong with that?

Plenty. As in real war, tactics that win the battle often lose the war. Because products are designed more to capture market share rather than meet the longer term needs of the consumer, the following consequences, which we have seen in the past, are likely to ensue:
  • The sale is inappropriate because the producer was selling product features (bonus, checkbook access, rate of return, income rider) rather than true client benefits (income and liquidity that matches the client's needs).

  • Unlike a retail product that has been purchased at a set price, the "price" (or value) of an annuity contract, it can be argued, constantly changes. During the blitzkrieg, this is unclear to the consumer. When caps are lowered by the carrier and the truth becomes clear, consumers become unhappy annuity owners, needlessly discrediting a product that is great, when properly positioned.

  • Greed-driven blitzkrieg tactics bring excessive market share to the carrier, forcing them to limit capacity, cut distribution, and leave refugee FMOs and consumers in its wake.

  • Inappropriate sales engender excessive, misinformed regulatory attention. The entire industry suffers.

  • As time passes, the product appears to have been severely mispriced. Caps and/or crediting options become more restrictive in later years, or debilitating fees in the product are triggered, leaving the consumer with few options.

  • The producer is forced to leave their current FMO relationship or form others, thereby making them "captive" to a group of organizations controlled by one carrier; this is a situation they had probably hoped to avoid when they became an independent producer.
The aftermath

As soldiers in this battle, producers must remain vigilant as they evaluate their carriers. As you consider the best product solution for your client, consider the following:
  • What is the carrier's renewal history?

  • Has this index annuity carrier grown too large, too fast, in the index space?

  • Has the carrier substantially limited capacity recently?

  • Does the carrier only offer particular products through certain FMOs?

  • Has the carrier engaged in "divide and conquer" tactics, with no regard for the consequences?

  • How has the carrier weathered the recent economic downturn?
The right answers to these questions should guide you as the battle rages on. Peace!

1James Surowiecki, Priced to Go, The New Yorker, November 9, 2009, p. 31.
3Sun-Tzu, The Art of War, Wilder Publications, Radford, VA, ©2008.

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