It is not nice to say, “I told you so,” but it sure is fun.
In November, 2008 I posted a blog on this web site titled “Insurance Industry a Guarantee for Trouble.” You can read the entire blog, but here are its highlights:
• Some of the most venerable companies of the insurance industry have been sucked into the maelstrom of the financial crisis.
• Highly respected icons of the insurance industry such as Hartford, Prudential and Met Life are seen scrambling for capital and watching their stocks being hammered into oblivion.
• The Hartford took in $2.5 billion from Allianz SE, but it was not enough…The need for additional capital, the battered stock value and the panic restructuring to qualify for bailout funds means that even the management of these companies recognize that under current conditions they are incapable of meeting the promises and guarantees they have made to policyholders…
The thesis and critical charge of the blog was this: Management of companies such as The Hartford lost sight of the very principles of insurance – understanding and managing risk – and as a result they were in danger of destroying their companies and harming the total industry. It was pointed out … “The offer of an inviolate guarantee became a sacred bond between the insurance company and its policyholder that encouraged generations of Americans to trust and rely on the insurance industry to be a bulwark of strength and security when crisis emerged.”
The blog put the spotlight directly on annuity policies and argued that …
“There are indications that decreased regulation, the pressure of competition, the allure of short-term profit and the optimism of a seemingly never-ending economic boom have caused the management of some companies to lose sight of the principle of the guarantee and take actions that has put the promise at risk. If the promise of the guarantee fails, the insurance industry and all those associated with it will lose what is most valued – the confidence of the customer – and may never recover.”
Well, give the management of The Hartford some credit. They apparently have been listening and are attempting to take remedial action.
In the January 13, 2009 issue of The Wall Street Journal, The headline read, “Hartford Aims to Take Risk Out of Annuities.” The article pointed out that annuities counted for more than a fifth of Hartford’s net income, “But last year they proved a liability as investors worried about what it would cost Hartford and other life insurers to make good on these commitments to customers …” Ramani Ayer, chief executive of Hartford was quoted as saying, “The game’s going to change.” The article indicated that Mr. Ayer had directed a team of top aides to “de-risk” its annuities. The article further quoted Mr. Ayer as telling the team that it can’t do its work “soon enough.” (Is this where I can say, “I told you so?)
The Journal article suggested, “Hartford’s efforts are being watched in the industry, which has bet big on selling these (annuity) products. Kenneth Mungan of the actuarial consulting firm Milliman Inc., was cited as suggesting more substantial change lies ahead because “the status quo is simply unsustainable.”
And the moral of the story …
The Hartford has intelligent, honest and experienced insurance executives who simply got caught up in the whirlpool of peer group pressure, short term objectives, higher stock prices and the quest to award themselves larger bonuses. They ignored the voice of experience and were lured by the siren song of short term gain. They were not the only insurance executives to follow this path, but that is no excuse. The penalty for this lapse of “doing what you know to be the right thing,” was to damage the reputation and almost destroy a company that has been a pillar of the insurance industry for almost 200 years.
Let’s hope that executives of other companies can learn this lesson—before it is too late. I told you so’s may be fun, but “I learned my lessons” are even better.