Category Archives: Life Insurance Industry

For The Life Insurance Industry, Growth Does Matter

To survive – not to mention prosper – the life insurance industry must go back to the future

The life insurance industry has been called a lot of things, but one thing it has not been called recently is “a growth industry.” It has not always been that way. There was a time, not so long ago, when the life insurance industry was a growing, vibrant, influential player, not just in financial services, but in the whole of American economic life.

Unfortunately this is no longer the case. It may be a painful truth to admit, but until it is acknowledged, the industry’s inexorable decline will continue because there will be no urgency to reverse the trend.

There are those who will dispute this conclusion that the life insurance industry is in decline and base their argument on a litany of increasing sales figures. But a closer examination will reveal that large portions of these insurance“sales” are nothing more than a regurgitation of assets already under industry management. If the “sales” that are the result of simply shifting assets from one company to another were deducted from the total, it would offer a more accurate, but not very pretty picture of real sales.

This is not growth – it is financial cannibalization. Like a modern-day Donner Party, lost, trapped and desperate, the life insurance companies have turned to eating each other in an effort to survive. Some may make it, but this is certainly not a path to healthy industry growth.

Your Whole Life is Still a Mistake

Product is another problem. The sales of individual life insurance – once the bellwether of growth for the industry – are, at best, lackluster. More and more the only type of life insurance that sells is cheap term insurance. Yet life insurance companies continue to dress-up and prop-up whole life insurance in much the same way Norman Bates did his dead mother in the movie Psycho, pretending it is still alive.

Get over it. Whole life insurance may have worked well in the last century, but only because people died young and there were few financial options available for most people. (It also sold well because the insurance industry had invested in and created a highly-trained, dedicated distribution system of agents who had been taught how to use fear as a motivator for sales.)

The once-vaunted distribution structure of the insurance industry lies in shambles today—a victim of indifference, disinterest and neglect as the companies ceased to invest in the system. In turn, this has sent most companies on a frantic scavenger hunt, grasping for any and all sources of business, while failing to offer the least bit of commitment or loyalty to any of them. When it comes to its distribution system, the life insurance industry is like the farmer who constantly tills the soil reaping all he can, but never replenishes the nutrients and then wonders why the harvest gets smaller and smaller. As a result of the insurance industry’s failure to invest in distribution for the future, today it relies on renting rather than owning the distribution system and that can be a precursor for a very uncertain future.

Bad, but not the Least of the Problems for the Industry

This ambivalence toward investing for the future and the resultant lack of growth potential makes it all but impossible for the insurance industry to attract talented individuals. No longer is a career in life insurance – especially in sales – considered a viable option for all but failed bankers. There was a time when life insurance ofered an attractive career. Insurance companies actively and successfully recruited for “career agents” on college campuses, but no longer. The inability to attract talented “new blood” into the industry means that the sale of life insurance products that were once the primary focus of a well-trained force of agents has become a part-time pastime for some or simply an adjunct for those selling other financial products.

The Writing is on the Wall

The signs of decline in the industry are painfully evident. The river of organically created capital that once allowed companies to float new business and invest in the future of the company has virtually gone dry. FinancialServicesCompanies, starved for capital, have either withdrawn from the market or have prostrated themselves before the “money merchants” of Wall Street who are tromping through the industry landscape, picking at the bones of the dead and shooting the wounded. For the most part, these financial companies – none of whom are insurance organizations – swooping in to buy weakened insurance companies are doing so to bleed them dry for short-term gains, not to invest in the long-term development and future of these companies. This activity does nothing but reduce the capacity for the insurance industry as a whole to grow, further dimming the future.

Admittedly, it is difficult to focus on investing for the future while slouching at your desk bleeding to death, but doing just that is the only real option for survival. The sad irony is that the lack of industry growth is not for want of opportunity, but from a failure to invest in the future of the opportunity. For almost a century the life insurance was a “growth industry,” and as such it was able to chalk up remarkable levels of sustained growth; all because it continued to invest in the future.

Much of that investment was in the distribution system that became the fuel for industry growth. But once the industry came to view building for the future as a cost rather than an investment, the path turned to decline. Soon the objective for companies became trying to survive today, rather than seeking growth for tomorrow. The life insurance industry has the opportunity to once again come to be seen as a growth industry, but not until or unless it gets back to doing with it did so well, and that is investing in its future.

Investing For Future Growth

If the life insurance industry wants to invest in the future to become a growth industry again, a good start would be to focus on two simple efforts:

  • Decide to beat the competition, not join them.
  • Use technology to create new career opportunities in life insurance that will attract new talent.

The life insurance industry has been feeding off the assets of its own companies, when it should have been raiding the assets of banks and investment companies. Banks and investment firms should be viewed as enemies, not partners. Life insurance companies have tried to cozy up and be buddy-buddy with banks and investment firms because – lacking their own effective distribution system – they need to rent the distribution system of these competitors. How stupid is that? Would you partner up with a partner who has no interest in your interest? Would you partner with a partner whose only interest was to use you to further their interest? Only the desperate would answer those questions in the affirmative.

The life insurance industry did remarkably well playing to consumer’s fears of economic calamity if they died young. They can now use the technology2consumer’s fear of not having enough money if they live to sell products that meet that need. There is an old – but still valid – saw in the life insurance industry: Consumers are more concerned with the return of their money than they are with the return on their money. In today’s world could be added: Consumers are more concerned with a guarantee of income, than with what that income will be. The life insurance industry should play to this fear and develop products designed to raid the assets of banks and investment firms. The attitude should be, “They are the enemy (blank) ‘em!

Rather than using technology to circumvent the agent distribution system, the life insurance industry should use it to invigorate the system. There are all sorts of technology available to the insurance industry that could be used to create an attractive, profitable, long-term career in life insurance selling. Systems can be developed that could attract new blood to the industry and start a whole new growth wave. Technology can be used to prospect and qualify leads, make a presentation and educate – not just about product – but actually teach sales skills. The only drawback to adopting this technology is that it requires an investment today for a return in the future. That is something the life insurance industry was willing to do for over a century – and it did it well. But investing for growth in the future is not something the life insurance industry is willing to do today, so it may not have a future.

And the Moral of the Story …

There are parallels between the oil and life insurance industry. The oil industry must make a big investment upfront in order to have future growth and profit. Land has to be leased, test-wells drilled and then the purchase of heavy equipment to extract the oil once discovered; all require heavy investment. Once the oil begins to flow, so too do the profits for the oil company, but unless the oil company continues to invest in finding future oil, its old wells will eventually peter out and so will the company.

The life insurance industry also must make a big investment upfront in order to have future growth and profit. There is the need to invest in products that meet modern needs and compete directly against the products of banks and investment firms. It is expensive to invest in a distribution system that will extract the sales that will turn into growth and profit. The life insurance industry has made these investments in the past and benefited mightily. But that investment has slowed to a trickle and like the oil company that fails to invest in new sources of oil, the future for the life insurance industry may also peter out.



The Future For The Life Insurance Industry Is Simple

The path to success in a competitive market full of twists and turns is to identify the simple things to do and simply, do them.

Looking back on almost 50 years in the life insurance industry, the most striking observation is how the products and process have gone from simple to complicated. Back in the day, agents bounded out of the office in search of those folks who were worried about what would happen to their family or business, “if something happened to them.” The paradigm was neat, clean and simple: Consumers were most concerned about the economic cost of dying young and there was no shortage of insurance companies ready to offer a product to meet that need.

In fact, hundreds of insurance companies vied to capitalize on this need, and the market appeared to be saturated with competition. But because banks and investment firms were prohibited by federal law (Glass-Steagall Act of 1933) from competing in the insurance industry, the truth is that Insurance_Stabilitythe industry was, in fact, competing only with itself. This meant that the insurance companies were free to offer virtually the same products. And they did. The agents selling the products may have competed fiercely against each another, but the companies were in reality competing with – not against – each other to divide up the business.

This situation created a symmetry of simplicity that functioned well for the companies, consumers and agents. Once the agent had worked with the customer to identify, quantify and accept the financial need, the solution was simple. There were only two options: Buy either whole life or term insurance. And since all companies offered basically the same products, “shopping around” for best values was as meaningful as shopping around for a best quart of milk.

The insurance landscape was so harmonious, in fact, that the environment was devoid of product confusion and consternation for both agents and consumers. There were no class-action lawsuits claiming deception, no company departments dedicated to determining suitability or the requirement for Biblically-long disclosure statements. There didn’t have to be, because the products were simple, easy to explain and understand, and targeted to meet a specific need.

Changing Times have changed the Basic Insurance Equation

Certainly the times, consumer needs and their options have changed dramatically in the past half-century, and that has forced the industry to change as well. For individuals, extended longevity has reduced the concern for the economic cost of dying too soon, but it has increased the worry about the economic cost of living too long. At the same time, the competitive ground rules for the insurance industry have changed. No longer do insurance companies have the field to themselves to simply contend with each other for the business; now they have to compete against banks and investment firms that are now free to offer products designed to meet the same consumer needs.

One upshot of this new environment is that the life insurance industry has forfeited what had been its strength and superiority in the market: the ability to offer simple solutions to complicated problems. And yet, although consumer needs may have changed over the years, they are still just as simple. But instead of fretting about what will happen when they die, the consumer is now concerned about what will happen if they live.

Unfortunately, instead of playing to its strength, the insurance industry has fallen into the trap of developing products designed to meet what the competition is doing, rather than what the consumer needs, wants and can understand. Instead of being the competition, insurance companies are following the competition by developing products that seek to mimic those offered by banks and investment firms. And even worse, insurance companies are putting themselves at the mercy of the banks and investment companies by coming to them to distribute the products. This is never a winning proposition.

Products once intended to respond to a basic need are now structured in an effort to meet every need. The byzantine products now being offered by insurance companies are akin to selling a battery-powered Swiss Army knife to someone who simply wants to butter his bread. This leads to complexity, confusion, dissatisfaction and delusion for both those selling and buying the products. One company recently introduced a new product described as, “An indexed annuity equipped with a stacking roll-up feature plus interest credits and bonuses with the goal to maximize the death benefit.” How simple is that for an agent to explain and for a consumer to understand?

The company that introduced the aforementioned product is attempting to touch all the bases by including elements of an annuity, variable annuity and life insurance all in one policy, only to end up convolution and confusion.

But they are not alone. The variations of products offered by insurance companies have now become so prolific, complex and complicated it is doubtful that even the chief marketing officer could list and explain all of them from memory. It is telling to note that in the past, agent-training focused on teaching agents how to prospect, identify the need and close the sale; today’s training tends to be nothing more than a long, PowerPoint presentation trying to explain what the product is and how it works; leaving little time to teach agents the right way to sell it.

Certainly the changed consumer needs and increased competition from banks and investment firms call for product innovation on the part of insurance companies, but real innovation makes things simpler, not more complex. All too often insurance companies seem to have confused product innovation with complexity. The truth is that products developed to meet every need end up meeting no one’s need.

Is it any wonder that the muddled approach to product development employed by insurance companies has led to confusion and frustration for both agents and consumers? Why should the industry be surprised that agents bungle the sales process and consumers are, at the very least confused, and most often dissatisfied?

Simple is as Simple does

At the risk of repetitiveness, the dominant financial concern of the consumer today is: Will I have enough income at retirement and will it last as long as I live? Just as the life insurance industry was best positioned 50 years ago to protect people in the event of death, so too, it is best positioned to protect those who live. For the industry to take advantage of this opportunity, however, it has to return to the idea doing simple things and SSI_1_business_desksimply doing them; developing simple solutions to complicated problems.

Admittedly, simplicity is the best, but hardest thing to do, and yet the effort is worth it. Remember, true innovation is not defined as inventing new things – that is creativity – but by making things simpler to do. Putting wheels on luggage was a great innovation, because it solved a need and was so simple.

The truth is that the companies and the agents are both more enamored with the complicated and confusing “bells and whistles” added to the products than is the consumer. These “special features” serve only to confound the customer who, deep down, is only anxious for their money to be safe and that they can count on the income for as long as they live. A focus on the “unique features” of the product, rather than the solution it can provide, runs the risk of the consumer feeling they have been bamboozled. And then the problems really start.

The consumer can and will adjust their standard of living to the amount of income received, but what the consumer can’t adjust to is having their income expire before they do. It is this attitude and economic fear on the part of the consumer that gives the life insurance industry an advantage; but only if the industry offers a simple solution to this complicated problem.

Looking for Real Answers

Is it still possible to develop an innovative product that is targeted to meet the income needs of the consumer and yet be simple to understand and sell? To answer that question, think about Social Security. When it comes to income needs, Social Security is probably the simplest product one could imagine: You put in money till you retire and then you receive money till you die. The product offers few options, no hedging, indexing or “stacking roll-up” features. A simple solution to a complicated problem.

Sure, people are required to “buy” Social Security, but in every survey taken, over 80 percent of the respondents say they are happy with the program. Social Security may not provide all the income people need, but you don’t see recipients rebel against Social Security although they do mutiny against any attempt to take it away. The life insurance industry could develop and market safe, simple products the consumer and agents can understand; that simply meets the needs of the consumer. That would be real innovation.

The great opportunity for the life insurance industry is the same as it was 50 years ago – to meet the long-term financial needs of the consumer. The more simplicity the industry can bring to the process, the more successful it will be.

And the Moral of the Story …

In a changing and competitive world, it is a widely held belief that complicated problems require complicated solutions, but that is not true. Success comes with simplicity. Successful people and companies attack complicated problems with simple solutions.

The appearance of complexity in a process is often the result of a simple failure to understand the real objective. The first step to making what is complicated simple is to focus on the desired result and then work back to identify the simple actions needed to accomplish the goal and simply do them.

The life insurance industry created a grand record of success by developing products that offered a simple solution to a complicated problem. The industry began to forfeit this success when it lost focus on the changed needs of the consumer and began to offer complicated solutions for a simple problem. The life insurance industry must understand that its path to a successful future is simple.


The Curse Of Longevity Is The Cost To Enjoy It

Are Longevity Insurance Policies a Smart Buy? Maybe Someday, But Not Now

It used to be that our grandparents worried about what would happen to their kids if they died too soon. Nowadays, our kids worry about what will happen to them, if we live too long.

Extended longevity is both a blessing and a curse. The blessings are well known and innumerable. But we are also cursed with extra time to fear death and more time to worry about our added longevity stripping us of the cash required to comfortably support those “bonus” years. In short, most folks are Longevitynow more concerned about the cost of living too long, than they are about the cost of dying too soon.

A New Opportunity is Waiting

The life insurance industry achieved exceptional success and became comfortable offering products that protected against the cost of dying too soon. But it has taken the industry several decades and a number of fits and failures to (grudgingly) recognize and accept this fundamental change in consumer needs.

Despite the admonitions of some within the industry, the idea of accepting – even acknowledging – change has not been easy for the life insurance industry. Historically accustomed as it was to selling the products it wanted to sell versus products the consumer sought to buy, the life insurance industry’s initial response to the threats posed by this change was a call to “get back to the basics.” The problem for the life insurance industry was that the basics had changed and clinging to the past simply exacerbated the problems.

The Writing on the Wall was not in Invisible Ink

It’s not like the life insurance industry was not warned. As long as three decades ago, the signs of change – for those who were open to seeing them – were clearly evident. Life expectancy at the start of the 20th century was a mere 42 years; by the end of the century it had dramatically increased to age 74; with predictions that it would soon extend well into the 80s.

These remarkable statistics and a number of other factors signaled the need for change, but it was this extension of longevity that led the consumer to conclude that the fundamental products offered by the life insurance industry had become outmoded.

The life insurance industry has finally been dragged kicking and screaming into the future, but because of its intransigent allegiance to the past, it may be too late to recover what it has lost. Now that the life insurance industry has accepted the premise that it must change – if it is to survive – and offer products that protect against the cost of longevity, it is struggling with just how to do so.

Many believe that the business of insurance companies is to take risks, but that is not the case. (At least that’s not the approach for those companies that survive.) The path to success in the insurance industry is not to assume the risk of loss, but to manage the risk of loss faced by others. In order to do this, the insurance company must fully understand all aspects of the risk, so it can be managed.

The life insurance industry has more than 150 years of experience designing products that cover the costs of dying. This experience enables the industry to comfortably manage the risk of dying, without assuming much risk. Given any group of insureds, the life insurance industry can forecast – with virtual prescient certainty – when and how many in that group will die during any given period of time.

On the other hand, the life insurance industry has only a smidgeon of experience understanding the risks inherent in what could be called the “longevity market”:  offering income products that meet the costs of living. An insurance company can use life expectancy tables to determine when people will die, but it has no experience projecting how many individuals in a group will live beyond – and for how long – the moving target of life expectancy.

This means the insurance company is, in effect, making a guess (taking a risk) as to how many insureds will live longer than expected and what the duration of those claims – life income – will be. In addition, interest rates have a dramatic effect on the amount and cost of income benefits. And since interest rates, another moving target, cannot be predicted for even the next year, it is a significant risk for insurance companies to try to project interest rates over decades.

The Unwelcome Upshot of All This

Faced with this dual conundrum, the prudent insurance company will tend to develop products for the “longevity market” that are loaded with hedges, protections and benefits for the company, but not so many for the consumer. This is to be expected, because insurance companies do not (and should not) assume risks they don’t understand or can’t manage. As a result, the tactic taken by insurance companies in the design of these first-generation longevity products is to transfer as much risk as possible to the insured. And this will continue to be the approach until the industry gains experience and confidence in the management of those risks. In the meantime, it’s buyer beware.

The concept and objective of these longevity policies is fine, but they are so loaded with protections for the insurance company, they don’t yet offer good value for the consumer and should be avoided. It’s not that these products are bad, it’s that they are not as good as they could or will be and the cost benefit for the consumer is not well balanced.

These products are the insurance industry’s first response to meet the concerns an individual may have that they will “outlive” their assets and income. They may have enough money to get to age 75, but what if they live to 95? The basic structure of “longevity insurance” is for the Retirementpurchaser to deposit a lump-sum amount with the insurance company, with the understanding that no benefits will be paid unless and until a person lives to a predetermined age. For example, a 55-year-old deposits $50,000 with the insurance company to buy a longevity policy. The policy would pay no benefits whatsoever until age 85. At that time, the company would begin to pay about $50,000 a year, for as long as the insured lived.

This type of policy certainly solves the “longevity problem,” but it comes at a very high price with few options for the insured. For one thing, once the deposit is paid to the insurance company, it belongs to the insurance company and may never be returned. The insured gives up all control and access to the money and if they change their mind or have an emergency need for cash, they are out of luck.

That means an individual age 55 could deposit $50,000 or more with an insurance company and if they don’t live to age 85, they lose all the money deposited. The only chance they have to get their money back is to live. Even then, if the insured does live to 85, and dies a year or two later, the funds are lost. In fact, insurance companies anticipate that so many of those who buy the policy will not live to collect any benefits they count on using these forfeited funds to pay those who do live. (In fairness, some companies do offer the insured options that would, under certain circumstances, allow for a return of this premium, but the costs are so prohibitive they virtually eliminate the basic value of these policies.)

There are other problems with the policy as well. For one thing, benefits are set and guaranteed at the time the policy is purchased. With current interest rates at such low levels, this may be the worst time to buy a policy that locks in current rates for, what could be, 30 years or more. Any increase in investment rates between now and when benefit payments commence (if they ever do) would benefit the company, not the policyholder. Another concern for the policyholder could be inflation. A guarantee of $50,000 a year income may seem good today, but what will its value in purchasing power be in 30 years?

There is another issue a potential purchaser of these longevity policies should consider. It is what investors call the “credit risk.” When buyers deposit their funds with the insurance company, they are taking the credit risk that the company will be around in 30 years and will be able to meet its obligations. This is a relatively low risk decision, but if the insurance company mismanages the investments backing these policies, if more people live than anticipated live to receive benefits and those receiving income live longer than planned, the insurance company could be squeezed to meet its promises.

So what is someone who is concerned about the economic costs of living too long to do?

Well truth be told, these “longevity insurance” policies are not all that revolutionary and are not worth the cost or the risk the insured must assume in order to receive benefits. In effect, the core of these policies is a single premium deferred annuity. In a single premium deferred annuity the insured makes a single deposit of funds, allows those funds to accumulate over time and then, at a later date, can elect to receive an income for as long as they live. The risk the insured is taking by purchasing this type of policy is that it is impossible to know exactly what the income will be when they elect to receive it.

What makes the longevity policy unique is that the insurance company will guarantee what that income will be. That’s great. But the costs applied by the insurance company to receive this benefit are just not worth it. The insured must give up the right to get their funds refunded if their needs change. If they need cash for unexpected purchases or emergencies, they must find it elsewhere. If they die before receiving any benefits, their family receives nothing. They have only one chance to receive income and that is they must hang on until they reach 85 and if they die a month before or a month after income starts, that’s the end of the income stream. All these costs and limitations outweigh the value of the insurance company’s guarantee as to what the income will be at age 85.

In the Meantime, Here’s the Smart Choice

Until the insurance companies gain the experience and desire to develop improved iterations of longevity insurance, the consumer is better served by purchasing a traditional single premium deferred annuity. This keeps all the options on the side of the consumer, while still offering a guaranteed income to cover the cost of longevity. The only risk for the consumer has is not knowing exactly what that income will be when they elect it, but that risk is slight and is a fair exchange for the high costs of current longevity insurance policies. This is the best way, at least for now, to enjoy your longevity, for as long as it lasts.