currently talking to somebody in our drive up. They would like to know about homeowners insurance. Can we send them over?’ Bing! It’s done!

A single, independent agent may not adequately cover all of a large bank’s branches.

“So you can use a hotline phone to begin with. I have seen instances-this is mostly in acquisitions [the bank buying an agency]-where the entire agency moved into the bank building, just because it facilitated things moving forward.”

Larger banks can take advantage of some economies of scale. “Obviously,” Proctor said, “there are banks big enough to

have more than one location. And there has been a separate sales and service center where we’re trying to get some economies of scale by bringing [together] parts of each of the agencies that the bank is eitherjoint venturing or acquiring (but it always seems to be acquisitions). And you can do some back room work in a particular center, to save on expenses.”

Multibranch strategies Proctor then moved on to discuss multibranch strategies

for selling insurance. “So far,” Proctor indicated, “we’ve

talked about doing business with the independent agent, at a single location. Some of you may be large enough that getting involved with a single, independent agent to cover seven or ten branches spread out throughout a geographic area gives you this kind of funny feeling in the pit of your stomach that that agency can’t probably cover all of that territory. Or perhaps you have read about insurance company sales and service centers that are currently being operated by such companies as The Hartford or The Travelers. And most recently, the foremost insurance company noted for writing mobile homes throughout the country has come on-line to become involved with banks in the business.

“I ran into two others last week-two small, regional insur- ance companies-and these are direct writers. One of them is bringing an agent of that insurance company to the bank’s office, setting them down in the lobby, and going at the business. In the case of the other company, they’ll take personnel out of your bank, take them to the insurance company’s home office, train them, put them back in the bank, and then back you up by phone, fax, email, or whatever.

“So lots of things are beginning to happen,” Proctor con- cluded. “Those are just two new ones I ran into within the last two weeks. These aren’t the only two companies, by the way. I would say, probably, on a daily basis a new insurance company comes into the market wanting to do business through banks or through agents to banks.”

KEYPORT MULTIPOINT: A REAL SMOOTHIE FOR TODAY’S JUMPY MARKET

he latest wrinkle in equity-indexed annuities (EIAs) is T Keyport’s Index Multipoint product. Designed for today’s volatile stock market, the product smoothes out the negative effects of a jumpy market when computing returns.

Paul LeFevre, president of Keyport Life Insurance Com- pany (Boston, Massachusetts), compared Multipoint with another Keyport product, Key Index, to explain how Multipoint works.

Multipoint vs. high water mark “Key Index,” said LeFevre, “a product we’ve been selling

since 1995, utilizes the so-called ‘high water mark’ design. The high water mark design assumes that somebody buys the prod- uct, and it has a term of five years. So at the end of the five years, they’re guaranteed to get at least their principal back, and they will have a participation in [benefit from] the increase of the Standard &Poor (S&P) index. Now, the high water mark design

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says that we look at the increase over the first year, over the first two years, over the first three years, four years, or over the entire five years. We then take the highest one of those numbers. And that is what we use to calculate the customer’s return at the end. What that basically says is if the market goes up and then comes back down, the customer is ‘locked in’ at that higher number.

“Now, the Multipoint,” he continued, “in every other way, is exactly the same as Key Index. But instead of looking at just those five anniversary values, when we get to the end of the first year, we take the average of the first 12 months.”

The product smoothes out the negative effects of today’s volatile stock market when computing returns.

To compute that average, Keyport looks at the S&P on each monthly anniversary of the policy purchase date-what Keyport calls a “month-iversary.”

“If the policy is issued on January 15th, then we look at it on February 15th, March 15th, and so on,” said LeFevre. “So we look at those 12 values, we average them, and we use that average. Then, we get to the second year, and we use the average of the first 24 months. And we get to the third year, and we use the average of the first 36.”

Easing volatility worries So they’re compensating for short-term volatility. “Right,” LeFevre answered. “So the whole key to it is that

with this kind of crazy volatility that we’ve been having, people are more and more worried about just being there on the day when the market’s down, instead of up. And also, it sort of smoothes the ups and downs.

“Now, of course,” he admitted, “it comes out with a lower value in a constantly increasing market. The value of the average increase is going to be about half of the value of the two endpoints, if it had been going up every day. So that participation rate that’s used at the end to calculate how much of that amount they get is, give or take, around double what it would be on the other product. So it compensates for the averaging method by using a higher participation rate that has approximately or roughly the same value, on a pricing basis, or an option pricing basis, as does the other.”

A participation rate is a percentage of the increase. “Right,” LeFevre confirmed. “So for example, today, if

somebody bought the product without the averaging, for a five-year term, the participation rate would be 35 percent. And that’s guaranteed for the whole five-year term. And if they bought the Multipoint, their participation rate, which is guaranteed for the whole term, would be 65 percent. But if

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there’s no volatility, and they both move along smoothly, they pretty much get you to the same place. But under certain scenarios, with a lot of volatility, Multipoint returns are higher. ”

What protection is there against decreases that occur? “This high water mark locks in the first year’s increase,”

LeFevre told us, “be it average or point to point. And then, if the market goes down after that, you get to keep that, and you don’t lose it.”

That’s important, because with the Dow Jones average as high as it has been over the past few months, even a small percentage change looks like a huge amount because it involves a larger number of points.

“Oh, sure,” LeFevre agreed. “It’s basically a different approach. We’re selling both products. And whatever the rep is more comfortable with, and the customer is more comfortable with, will be the one that they choose. But I would say the Multipoint is a tad more conservative in its approach.”

Do the products have two different sales rates? “It’s too early to tell,” LeFevre offered. “We’ve just been

out with the Multipoint about a month. We’ve gotten agreement from 15 banks, and we’re training. So it’s much too early to tell. We’ve had some sales. We’ve sold, I’d say, about $2 million worth of premium. But it’s still in the introductory stage.”

Is there anything else like it on the market? “There are not too many high water mark companies,”

LeFevre pointed out. “We were the pioneer. That’s the approach that we took. There are a few others, but they’re not real big. Other companies that have used some of the other designs have used averaging. Some of the point-to-point companies have used averaging at the end of the term. Some of the ratchet companies are using averaging during the annual terms. Some are using daily averaging, some are using monthly averaging. So the concept of averaging is not new.

“I would say that we’re the only high water mark averag- ing company,” he offered. “And the concept of averaging isn’t new in the options market either because there are the Asian options, which are based on averaging, which are publicly traded-and there are the European options, that are based on point to point. So that concept of averaging has been around in the S&P options market for a while. But the fact that those kind of options exist make the hedging and the concept easier to explain to customers.”

What’s the customer’s minimum investment amount? “Five thousand dollars,” LeFevre said. “And it’s a single

premium product. It doesn’t allow for additional premiums.”

A bank-like product So the customer invests the $5,000 up front and he’s bought

the product-which makes it sound more like a bank product, which obviously is the whole idea behind it.

“Yes,” LeFevre agreed. “Equity indexed annuities have

been sold in the independent agent market, and in the bank market, and to a lesser degree in the stockbroker market. But it’s catching on slowly in some of the banks. Eighty percent of the equity indexed annuities last year were sold in the independent agent channel, so it has really caught on more there. But it’s catching on in the banks.

“And it will take two things for it to catch on more,” he explained. “One is a realization that might hit us soon, that the S&P just doesn’t go up 20 percent to 30 percent year after year! And combine that with the pricing benefit that will come if the market settles down, and volatility comes down, and the price of options comes down-because what you’ll get is the combination of a situation where people get a little bit more worried about their exposure to equities and they’d like to perhaps keep the exposure, but have a little protection. Then, if the volatility and the price of options settle down, the participation rates-which for us on the regular product is about 35 percent now-would get up into the rates we saw in 1996, which were up in the 80 percent and 75 percent range- which is a much more palatable purchase for a customer. And the reps are a lot more comfortable with it.”

If the market’s volatility and the price of options settle down, EIA participation rates could climb back up to 75percent or 80percent. That would make EIAs a lot more attractive to customers.

Those confusing calculations But customers can be confused by the many different ways

EIAs calculate returns. Does Keyport make an extra effort to be sure the customer understands how this product calculates returns?

“I know that I can be confused by it,”LeFevre joked. “There are so many variations. And I would say, in general, the variation doesn’t get to the customer. The confused people are the people who sell it. And that’s where the major challenge is.”

What steps have they taken to try to remedy that? “Our sales material is pretty specific,” LeFevre asserted.

“There is some general stuff about what the product does. But we use pictures. We use examples to show that if the S&P does certain things, this is how it works. We use examples where the market goes up and down, to show how the ‘lock in’ happens. We try to be very careful. We also use, at the point of sale, and as part of the sale process, what I’ll call a disclosure statement. It’s a benefit summary that we have the rep go through with the customer. And then the customer and the agent actually sign it. It’s just a one-page form in tripli- cate. But it goes over, and makes sure that the person under-

stands the liquidity aspects, makes sure that they understand what S&P growth is. It has, in boldface, the definition of S&P growth, the definition of the average and how it’s calculated, the definition of participation rate, and how it works.

“And then, there’s another issue that’s complicated on our product, which I’ll just mention. The product is designed to give the person the result at the end of five years. But we dealt with the scenario of what happens if they surrender or jump out before the end the five years through something called a vesting schedule.”

LeFevre illustrated how the vesting schedule works. “1’11 just give you an example,” he said. “If the S&P goes

up, let’s say, 10 percent in the first year, and if the participa- tion rate is 35 percent, the customer has earned 3.5 percent that year. He can’t get that 3.5 percent until the end of five years. But if he leaves after the end of the first year, we give him 20 percent of it. And then, the same thing happens at the end of the second year; if he leaves then, we give him 40 percent. So it goes 20 percent, 40 percent, 60 percent, 80 percent, 90 percent. And that’s another thing that’s very carefully disclosed, because the liquidity is very important.

“We try to sell the product to someone with a five-year horizon. We try to encourage them to buy it for at least the five years. Of course, we want them to buy it for longer than that. What we do is we guarantee at the end of the five years that they can renew it for another five years, and we will tell them what the participation rate is at that point. It will be based on current prices.”

Returning the principal Keyport guarantees approximately 100 percent return of

principal at the end of the term. But is that inflation adjusted? “No,” LeFevre said. “It’s driven by something called the

Non-Forfeiture Law. In order for the product to comply with these state laws, we start out with 90 percent of the premium, and accumulate it at 3 percent. At the end of five years, it comes out so that on $100, the guarantee is something like $104-point-something.”

So it accumulates at 3 percent per year. “And that’s 90 percent of premium,” said LeFevre. “That’s

sort of the net premium after cost. And that’s the way the Non- Forfeiture Law works. When we developed the product, I said, ‘Wouldn’t it be great if we could index it to inflation?’ And the people that are hedging this thing almost threw me out the window! It’s something that would have to be hedged, and the more bells and whistles you put on it, the lower the participation rate gets. So it’s something that we look at.

“But we’re hoping over a five-year period or longer that the equity participation is what’s giving you inflation hedge. We could hook it to inflation. But the cost of that hedge would take away from the cost of the product, and reduce the participation rate. You don’t get something for nothing.”

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