SCALING ANNUTITIES.

The benefits of size in variable-annuity manufacturing begin to accrue when a company crosses the threshold of about $1 billion in sales and $5 billion in assets. So why aren't the largest players winning a bigger share of the market?

Given the slow rate of growth in most life insurance product lines, the fast-growing variable-annuity business continues to attract new entrants to the marketplace. Variable-annuity sales grew from $20 billion in 1991 to an estimated $115 billion in 1999, and based on Tillinghast-Towers Perrin's latest VALUE survey, about 80 carriers are offering several hundred variable-annuity products. Although the number of entrants is slowing, the market remains highly competitive.

In their quest for profitable growth, annuity carriers frequently want to know what level of sales and assets are needed to realize the benefits of scale. Based on two Tillinghast surveys and recent consulting experience, two types of scale emerge as contributors to competitive advantage in the marketplace. The first is distribution scale, which is the relationship between sales volume and the cost of wholesale distribution. The other is manufacturing scale, the relationship between in-force contracts (or assets under management) and the cost of product manufacturing and maintenance.

Fewer than half of the players in the variable-annuity market have the necessary manufacturing or distribution scale to produce reasonable returns in the long run.

As the market has matured, three distinct tiers of players have emerged, each with their own issues and challenges:

* Independent market leaders such as American Skandia Life Assurance, Hartford Life Inc. and Nationwide Financial Services are focused on maintaining or expanding market share in the independent distributor channel and leveraging their annuity franchise into related product lines, like mutual funds and variable life.

* Career producer companies such as American Express Financial Advisors, New York Life Insurance Co., Guardian Life Insurance Company of America and Massachusetts Mutual Life Insurance Co. are focused on protecting or expanding market share within their career …