Category Archives: Annuities

Success in a Competitive World Depends on being Creative–not Complicated

True creativity is the art of developing a simple solution for a complex problem.

The life insurance industry has been gifted with its most expansive and lucrative marketing potential since the invention of death. This opportunity is to provide products that solve the most vexing and complex problem faced by over 60 million aging baby-boomers: How to survive life. The reward for solving this consumer need is hard to exaggerate. Yet the life insurance industry is threatening to waste away its good fortune by falling prey to confusing creativity with complexity in a way that raises obfuscation to an art form.

Simple is a Simple Does

The luggage industry offers a good example off this intellectual tomfoolery. For decades, luggage manufacturers competed for market-share by concentrating on the esthetics of the product. They confused creativity with complexity by focusing on an endless variety of styles, straps, colors, fabrics, inside pockets, tie-downs, and other petty add-ons of questionable merit.

All the while, travelers lugged, dragged and pushed their luggage around the airports of the world to the point of frustration and exhaustion. Then someone got the idea to add small wheels and telescoping handles to luggage. This was an simple solution to a complex problem, and the rest is history. Americans need a solution to their “surviving life” issues just as elegantly simple.

Surviving Life Can be Simple, Too

The challenges associated with solving the “survive life” issue are complex and well-established and admittedly more profound than suitcases on wheels. People are living longer in retirement — decades rather than years. At the same time, corporate pension plans have been eviscerated or eliminated altogether while local, state and federal governments lack the resources to meet existing pension promises, let alone make new ones. Against this backdrop are fears that Social Security benefits will be reduced or even that the system itself will “run out of money.”

And if this were not enough, the challenge for consumers to prepare for retirement has been made more difficult because while individuals have been encouraged to systematically accumulate assets, the anticipated income from corporate pensions or government benefits seemed to eliminate the need to learn how to effectively manage the de-accumulation of those assets in the form of income.

The rewards for finding a creative solution to the income need are immense: It offers the major players in the financial services industry – banks, investment firms or insurance companies – the potential to dominate the multi-trillion dollar financial services industry. And all that needs to be done to capture this opportunity is to create understandable, value-added products that provides income to maintain an acceptable standard of living in retirement and cannot be outlived.

There is no question that the challenge to develop products that provide income that cannot be outlived is complex: How long will the individual live? What will investment returns and interest rates be in the future, especially when the future now means not years, but perhaps decades. What will be the impact of inflation? How will the longevity and/or investment risk be assumed or shared? This is where the life insurance industry can shine.

Who but the Life Insurance Industry is Better Prepared?

In reality, the complexity of the “survive life” challenge plays directly into the strengths of the life insurance industry as neatly as wheels on luggage. No other industry has the extensive, long-term experience dealing with life-expectancy, financial guarantees, long-term liabilities and managing long-duration investments. In addition, unlike banks and investment firms, the life insurance industry has well-tested and proven products – annuities – that are fundamentally designed to solve income needs. Annuities are simple products that can solve complex problems. The annuity is designed to allow an individual to accumulate funds, on a tax-deferred basis, for later payout as income; either for a specific period or for life. When kept to this simple premise, annuities are products the consumer can understand, recognize their inherent value and be motivated to purchase.

When an individual faces the prospect of retirement, the most pressing issue is: How much income will I have and will it last as long as I live? Nothing is more important than solving this concern and if that was all that was offered, it would be enough. Only the life insurance industry has the experience and proven capability to provide a concrete guaranteed answer to these specific concerns. Other retirement concerns pale by comparison, but the life insurance industry also has the advantage when it comes to meeting secondary retirement questions such as: How can I protect against inflation? What happens if I get sick? When I die, will there be something left over for my wife or family?

The advantages the life insurance industry holds in the retirement market are good things, but unfortunately they seem to also be a curse. The vast potential rewards for managing the assets of those in retirement and converting them into income has not gone unrecognized by banks and investment firms. As a result, banks and investment firms are developing and selling all types of schemes designed to mimic an annuity’s ability to guarantee lifetime income. Worse, when banks or investment firms offer such products, they must take risks they are unlikely to understand and have no successful experience managing these risks. (We all saw what happened early in this century when banks and investment firms assumed risks they did not understand and could not manage.)

The actions of banks and investment firms actually boost the opportunity for insurance companies, except for one thing:

The life insurance industry seems hell-bent on squandering this opportunity in an effort to prove that complexity is the asylum of a confused mind.

Believing that that success can be found in competition against banks and investment firms, rather than responding to the wants and needs of the consumer, insurance companies are now trying to develop products that mimic those of banks and investment firms. This is the antithesis of what insurance companies should be doing. Instead of playing to their own strengths, insurance companies are playing to the strengths of banks and investment firms.

This battle for the retirement market has led insurance companies to develop products that even under the most charitable description would be called complicated, complex, convoluted, confusing and byzantine in nature. Not only are these products mindboggling for the consumer to understand, they are so complex that the vast majority of agents commissioned who sell them have about as much chance of explaining them properly as they would explaining nuclear fusion to a third-grader. Companies are forced to spend more time explaining the process and procedures of the product to the agents, than the benefit and value. (If there is one!)

And, that’s not the worst of it. Uppermost in the mind of most consumers today is guarantee over uncertainty and security over risk. When it comes to guarantees and security, the life insurance industry has a pristine reputation that it is putting on the line with these products. Yet, when terms such as “contingent deferred annuity,” “hybrid income annuities,” “guaranteed lifetime withdrawal benefit” enter the vernacular of annuity discussion, not only does complexity become the main ingredient of the product, but unknown crucial issues such as the risk profile, pricing adequacy, disclosure transparency, policy reserving and ultimate capital requirements all come into play in a way that culd significantly increase risk, for both the company and the consumer. It’s bad enough when neither the agent nor consumer can understand the product, but when you add to the equation the possibility that the company may not fully understand what it is selling, then you have a recipe for potential disaster.

And the Moral of the Story …

The opportunity to meet the “survive life” needs of retiring Americans presents the life insurance industry with potential to once again dominate the financial services industry. The life insurance industry has the reputation, experience, products and distribution system that is unmatched by banks and investment firms.

Meeting the need for retirement income that may span decades is a complex problem, but the solution need not be. Seeming to fear competition from banks and investment firms, more than the opportunity to meet the needs of the consumer, the life insurance industry is surrendering its strengths of guarantees and security for complexity and uncertainty. If the life insurance industry wants to prevail in the retirement market it must understand what it does best and leverage that advantage against banks and investment firms, rather than trying to mimic them.

The life insurance industry should start by recognizing that true creativity is the art of developing simple solutions to complex problems. If the life insurance industry can adopt this philosophy it has the experience and resources to develop “creative” products that safely and securely provide income while mitigating risk, for the companies and the consumer. These products can be transparent in a way that can be explained and understood and offer a recognizable value that will allow consumers to “survive life.” It may seem complex, but it is simple.



Defending the Future of Independent Marketing Organizations: Part Two

The future for IMOs is bright, but only if they are willing to step up and control it

Last week’s blog suggesting that IMOs have it in their power the choice to “live free or die,” created quite a stir. The general reaction seemed to be: The idea of IMOs buying an insurance company future seems like a great idea, but could it really be done?

Probably the most telling comment came from one IMO who said, “I like this idea, but I am concerned about what my company would do [to me] if they discovered that I was involved.” If that does not capsulate the current intimidating environment, nothing will. Many wondered, “This seems like a simple solution, but if it is so good: why hasn’t it already been done?” The answer to that question is that too often there is a tendency to believe that the solution to a complex problem can be found in complicated answers, when in reality the solution is simple; it just has to be recognized.


For example, it is believed that the wheel was invented in the late Neolithic period, around 3500 BC. The idea for luggage was invented shortly after women determined that they needed 10 pairs of shoes for a three-day trip. Ever since then, travelers have lugged and dragged their luggage around – straining tempers, backs and arms. Believe it or not, it was not until 1989 that a guy named Bob Plath came up with the idea of mating wheels with luggage. And, as they say, “the rest is history.” This was the ultimate simple idea that was right in front of everyone for centuries, but no one recognized it.

A Good Offense is the Best Defense

There is no doubt that defending against the efforts of the companies to reduce the options and independence of the IMOs is a difficult task. Companies seem to hold all the leverage and have only one interest at heart– the interests of the company. Worse, those who work  for companies owned by foreign powers have scant gumption to challenge the bureaucratic corporate line because they have become little more than timid toadies, perched precariously on the lily pads of their next paycheck.

To push back  against company actions, a number of IMOs have banded together is a loose affiliation attempting to gain leverage when dealing with the companies. There is even a movement among some IMOs to consider litigation against these companies. Unfortunately these approaches seem destined to fail. Aside from the fact that it is futile to negotiate with the devil, these approaches are too fractured and complicated; they address neither the heart of the problem nor the simple solution needed to level the playing field with the companies.

To understand the solution, it is important to understand the problem. The insurance business is divided into three parts: manufacturing, distribution and service to the distribution system and policyholder. The insurance companies already control two of the parts – manufacturing and service – and they now seek to control the final distribution piece. The path for IMOs to protect their control of distribution is not to fight the companies on their terms, but to diminish the strength of the companies, which is in manufacturing. If the IMOs can gain access and control of manufacturing the product, they will nullify the leverage used by companies in an effort to contain and control distribution.

Another factor the IMOs should take into account as they consider becoming involved in the manufacturing process is this: Just how much backing and service are the companies providing to the IMOs today? Aside from commissions, do the companies offer financial assistance to help fund growth? Are the companies doing anything to assist and protect in the recruiting and retention of agents? Sure, they have meetings with PowerPoint presentations that tediously explain product details, but are companies doing anything positive to assist the IMOs in teaching the agents to prospect, present and close? If the IMOs are hard-pressed to identify value being provided by the companies, they have another reason to question why they put up with the shenanigans of the companies.

The path for IMO control of their future and enhanced value of their organizations is to take actions that give them options and reduce their dependence on a single company. The way to do that is to turn the tables on the companies and take control of the manufacturing piece of the insurance equation. The crucial question is: How can that be accomplished?

Mighty Oaks from Acorns Grow

To start, a group of leading IMOs needs to unite with the common purpose of protecting their future. These IMOs should  demonstrate their seriousness by agreeing to put some “skin in the game” by investing a portion of their own capital as part of an acquisition of a company. It does not have to be a huge amount of capital, but enough to demonstrate to investment companies that the IMOs are committed to the venture. Once the group has been assembled and an appropriate amount of capital pledged, the group should identify an experienced, credible core group of management that would manage the acquired company.

When these two steps have been completed, investment bankers could be retained and they in turn would put the group in front of private equity firms that have experience or interest in investing in the life insurance and annuity business. Once the investment firms have been brought on board, the process of identifying a target can begin.

With the power of distribution held by the IMOs, there is no need for huge amounts of capital to acquire a large company. (The IMOs will quickly make it large!). The best guess is that an acquisition of a company in the $50 to $100 million range would meet the initial needs of the IMO. (The irony here is that for the investment firms, the larger the acquisition the better.) Once the company has been acquired and the IMO management team in place, product development, support services and administration can be quickly developed.

This process may seem complicated and time-consuming, but it would not be. With the control and power of distribution that IMOs offer to the investment firms, they will find that this is just as simple and easy as attaching wheels to luggage, with the same revolutionary results.

And the Moral of the Story …

Many go through life frustrated with the lack of control they have over their future. They feel trapped and constrained when their future is held hostage to the whims and actions of others. Even most of those who rise to the heights of the corporate world often lack control over their future. Real power is the power to control one’s future. It does not assure future success but it does assure a future in which success can be attained.

Due to their proven ability to recruit, train and motivate individuals to sell insurance products, IMOs are in a unique position to control their future. Intimidated by this power, some insurance companies are attempting to denude the IMO by limiting their options and creating a dependence on the company.

The good news is that the IMOs have the power to get “mad as hell and not take it anymore!” The bad news is that if the IMOs meekly allow the companies to succeed if their efforts to control the future of IMOs, then that is the future they will deservedly reap. Unlike others, IMOs have the power to control their future and how they respond will determine if they live free or die.

Insurance Companies and Regulators Working in Concert Prove Greed Always Trumps Reason

Insurance companies and regulators are in bed again, but it is the consumer who could get screwed

In a recent front-page article in The New York Times headlined, “Seeking Business, States Loosen Insurance Rules,” writers Mary Walsh and Louise Story effectively brought to light the dark actions of insurance regulators and companies that could lead to financial turmoil in the insurance industry even greater than that experienced in the Great Recession of 2008 and 2009.

The Times article revealed that states – desperate for revenues – are allowing insurance companies to establish “captive subsidiary companies.” With the promise of lighter regulation and less stringent requirements for reserves needed to cover potential losses, these states are allowing (encouraging) the insurance companies to transfer huge risks off the books of the primary company – making them appear more profitable and less risky – and allowing the companies to shield their true financial strength from scrutiny. If that high-risk accounting  strategy seems faintly reminiscent of Enron’s ill-fated “Raptor” and “LJM2” subsidiaries, it should.

As the Times exposé pointed out, “This has given rise to concern that a shadow insurance industry is emerging, with less regulation and more leverage than policyholders know, raising the possibility that in the future, insurance companies might find themselves without enough money to pay claims.” Some of the companies taking advantage of this “look-the-other-way, see-no-evil” type of regulations are the very same companies – MetLife, Hartford Financial, Swiss Re, Aetna and AIG – that found themselves in a precarious financial position or needed government help to survive the last time around.

This collusion among some state regulators and insurance companies is the classic “I scratch your back, you scratch mine” type of mentality that mocks the very concept of state regulation of insurance companies. The states receive a needed boost in revenues based on premium taxes collected on business moved into the state. In exchange insurance companies are allowed to operate in the shadowy world of financial wizardry and tricks. Unfortunately, the ones who could end up paying the price for this abdication of regulatory responsibility and financial chicanery will be those who look to insurance companies to protect them against risk. (That is, if we don’t have another government bailout.)

How Insurance Companies (should) Make Money

Insurance is all about risk, but not the type of risk that most people think. There is the general assumption that insurance companies are in business to assume the risks of others, i.e. dying, being injured, experiencing a fire, but that is an incorrect assumption. Insurance companies are in the business of managing not assuming the risks of others. Insurance companies manage risk by pooling those who face a risk, i.e. getting sick, together in a single group and charging a fee (premium) from each member of the group. These collected premiums are held by the company in a reserve to pay for the costs of those who actually experience a loss.

So, it is not the insurance company that takes the risk. Instead, savvy insurers use their expertise to spread the risk among a large group, so that those at risk of loss share that risk with others. For this service the insurance company earns a fee. If the insurance company manages the risk efficiently and effectively, then the fees collected become their profit.

As we have seen in the past, well-run insurance companies can turn these fees for managing the risks of others into billions of dollars of profit; creating huge financial institutions. However, when insurance companies are poorly run or when greed enters the picture, the risk is that these companies will assume the actual risk and ultimately fail. The result will be real losses for shareholders and those who contracted with the company (policyholders) to effectively manage their risk of loss.

A good, but certainly not the only example of this type of scenario is the American International Group (AIG). For decades AIG was a well-run company that efficiently managed a multiplicity of risks worldwide. For its efforts, AIG earned billions of dollars in profits and became one of the largest and most respected financial institutions in the world. Then greed set in causing AIG to change its business model and violate the most basic precept of insurance by starting to assume, rather than manage risk. Instead of spreading the risk of “credit default” or the risk of mortgage failures, AIG assumed the risks inherent in these activities. In short order this great giant of a company AIG was teetering on the cliff of bankruptcy—only to be saved by a $100 billion dollar lifeline from American taxpayers who wound up owning 80 percent of the company.

A similar bailout occurred when the management of Hartford Financial – seeking to increase sales and bonuses – began to assume the investment risk for customers who had purchased variable annuities from the company. By promising to cover investment loses within the policies, Hartford lost hundreds of millions of dollars. Only a $2.5 billion charitable investment by Allianz SE and $3.4 billion in government TARP funds saved the company from bankruptcy.

The Fatal Flaw of Permissive Regulation

Insurance companies begin to fail when they begin to assume, rather than manage risk. And the most effective counterbalance we have to protecting ourselves from insurance companies that forget that simple formula is effective regulation.

The purpose of state regulation is to protect the consumer by preventing companies from taking risky and stupid actions, which they seem to have a proclivity to do. One of the primary functions of insurance regulators is to make sure the companies are safely putting aside enough of the collected premiums (called reserves) to pay claims when losses occur. (From the standpoint of the company, the smaller the reserves required to be established, the higher the profits; at least in the short term. Of course, in the long term, to the degree that these reserves are insufficient to pay the claims when they arise, the company will fail.)

For the past decade, as insurance products have become more complex and the financial structure of insurance companies more obscure and convoluted, state regulators have been criticized for lacking the resources and expertise to effectively protect the consumer and determine the financial integrity of insurance companies. Consumer groups have sought to rectify this weakness by proposing federal regulation of insurance companies, but strong lobbying by the National Association of Insurance Commissioners and many of the companies has blocked the proposal.

Now, with states attempting to increase revenue by promising even less regulation of reserves and financial overview for companies that move large blocks of risk into their state via captive companies, the very concept of regulation – not to mention protecting the consumer (most of whom are not in the state accepting the business) – is made a mockery.

This attitude and approach is something that we can expect from the greed of insurance company executives, but for state regulators to get in bed with the insurance companies and sacrifice their responsibilities on the altar of short-term revenues, boarders on criminal. But, what else is new?

And the Moral of the Story …

Insurance companies are in the business of managing not assuming risk. When they stick to their knitting, it is an easy business and they can make enough money to keep most potentates happy. But when enough is not enough and the insurance companies begin to stray from what their business should be, it is the responsibility of regulators to keep them on the straight and narrow.

However, when the line between risk and regulation is blurred or even erased as is happening in the current environment of loosened insurance rules, then a new risk emerges—one is destined to repeat rather than learn from the mistakes of the past.