The business economist at work: economics in an insurance marketing environment

Business Economics, Jan, 1996 by Joseph A. Gareis

Answers to this type of question can include a variety of circumstances: companies dropped the product for regulatory reasons, a few of the larger writers received downgraded financial ratings, or the job market was flat and companies could not meet their sales force recruiting targets. But as the industry has come to rely more for premium revenues from accumulation products (such as annuities) and less on pure risk business, the explanation for industry trends is increasingly found in financial markets.

As significant share of the industry's cash value life insurance products and especially annuities is linked to market rates, interest rates and/or investment fund performance. For years the markets moved one way: interest rates fell and stocks and bonds appreciated. So interest-sensitive and variable account insurance product shares followed predictable trend-lines. Since early 1994, however, markets have experienced ups and downs, and sales results have been more difficult to pin down.

Insurance products are designed to meet long term needs. Do sales for these products respond to only longer-term market trends or do shorter-term swings affect results too? How do the sales lag the markets? Market researchers in the industry know that consumers are often clueless about the specifics of the product they bought and are saying that the financial market effects are driven by agents.

Economic analysis offers a framework for describing the lag effects that seem to be at work and how short-term market performance may contribute to expectations of longer-term results. More than other disciplines, economics can answer when and how much and it can provide approaches for parsing out the underlying mechanics of market results.