Truth be told, the life insurance industry is racing pell-mell toward the past
For the life insurance industry, innovation is defined as seeking creative ways to disguise its problems and invent the past. The more the industry clings to this mindset the more it lags behind and comes closer to being the past.
Think about it; the life insurance industry continues to offer basically the same products it has for over a century, the products are sold in much the same manner as they were when the Wright brothers were at Kitty Hawk and dealings with the customer have changed little since the invention of the typewriter.
At least give the insurance industry credit for being consistent. It lags behind all other segments of the financial services industry in all areas: product relevancy, relationship with distribution, ease of interaction with the customer and use of strategic technology to improve productivity and reduce costs. In addition, the failure of the life insurance industry to embrace a changed world exposes it to increased regulatory and enterprise risk management issues. These attitudes and issues portend severe challenges for life insurance companies to achieve both top and bottom line growth, now and in the future.
The Traces of Cowardice are Everywhere
There are clear signs of the pusillanimous actions taken by the tremulous leaders of the life insurance industry in order to mask the true status of the industry and that allow them to procrastinate on taking necessary steps to make the industry relevant in the future.
For starters, there is a dirty little secret that confirms the life insurance industry is already feeling the impact of its neurotic desire to remain insulated from reality and mired in its past glory.
This secret is that there is little new money flowing into the coffers of life insurance companies.
While some companies continue to report increased sales – especially with annuities – the reality is that the vast majority of these sales are simply a “recycling “of existing premiums from one company to another.
Instead of attracting new money, existing annuity assets are consistently and systematically being “churned” from one company to another and then another. Like an elaborate corporate shell game, existing annuity assets are simply being moved from one shell to another, giving the illusion—but not the reality – of new sales. This system enables companies to report “increased sales” and allows agents to earn new commissions, but it is certainly not healthy growth and masks the real problems within the industry. (This is not to mention the harm that may be inflicted on consumers who become nothing more than pawns in this charade.)
Even with these shenanigans (or maybe because of them), industry-wide annuity sales are struggling. According to Beacon Research and the Insured Retirement Institute, total sales of annuities dropped 14 percent in the fourth quarter of 2010 and declined a staggering 31 percent for the entire year. And, because these tracking firms use only company-reported sales figures, the reports do not give an accurate picture of real sales.
The more realistic (and frightening) way to look at sales would be to determine “net new annuity premium.” Net new sales can be calculated by using the following formula:
Net new sales = premiums collected minus premiums transferred in from other companies minus premiums transferred out to other companies.
This formula produces a much more accurate picture of how much – if at all – a company and the industry is growing by attracting new money, versus simply recycling existing assets. Of course you will never see the companies or industry ever using this formula because it would paint a picture so bleak that they themselves don’t even want to know.
In order to facilitate this pretense of “new sales” the products are more often designed – not to break new ground or enhance long-term value – but to provide incentive to move annuity assets from one company to another. As a result, the products become more complicated for agents to explain and more difficult for consumers to understand.
The Insurance Industry is Shrinking
Another telltale sign of a troubled future for the life insurance industry is the contraction that has taken place within the industry. Fifty years ago there were literally hundreds of life insurance companies actively and aggressively offering products. Twenty years ago there were scores of companies seeking a place in the annuity marketplace. Today, there may be less than 10 companies with a significant presence in the annuity market. Natural contraction in any industry is a sign of ill-health, not vitality. If an industry is growing by offering innovative and valued products it will naturally attract increased competition hoping to participate in future growth. Just the opposite is happening in the life insurance industry.
The life insurance industry achieved its greatest growth and success when it was willing to invest heavily in its future; the future of any industry is tied to the strength and vitality of the distribution system for its products. Twenty-five years ago the life insurance industry ceased making any meaningful investment in its distribution system. Today the industry is paying the price for this short-term thinking by seeing few new people enter the distribution system and those who do lack fundamental training in prospecting, identifying a need, presenting a solution and closing a sale; all the talents needed in order to attract new money into the industry.
In an attempt to compensate for this deficiency, the industry has implemented a short cut to sales. To make up for the dearth of fundamental training in real salesmanship, many agents are taught to be little more than “bird dogs.” They are trained only in the technicalities of a product that is designed specifically to move assets from one company to another, rather than adding new assets to the pool. In today’s world, the distribution objective is the quantity, not the quality of agents. No longer do companies see the benefit of building the best-trained agent force that is capable of attracting new assets. Instead, the new business model calls for having the most agents who are only taught to “bird-dog” for opportunities to move existing assets. Those companies with the most “bird dogs” may crow about their current “sales success,” but in the long run it will be a pyrrhic victory.
BTW, There is Something Called the Internet
Another deficiency that condemns the life insurance industry to remain mired in the past is its inability or unwillingness to invest in the use of strategic technology. Banks and investment firms are light-years ahead of the insurance industry in adopting interactive technology to simplify and improve customer service, enhance support of distribution, increase productivity and reduce costs.
Technology exists today that would allow life insurance companies to create a “virtual home office.” By using available technology such as the Internet, social networking, online forums, iPads and interactive networking, companies could create an environment that would significantly enhance the services and support available to customers and the distribution system; not to mention increased productivity, improved credibility and reduced costs for the companies. While companies give lip service to technology, they doggedly cling to the “legacy systems” of the past. This attitude is clearly out of step with the experiences, needs and wants of the modern consumer who is becoming more and more accustomed to and expecting to do business online. This is but one more example of the life insurance industry being more committed to the past than the future.
And the Moral of the Story …
This is not the same old world of life insurance industry glory and selling the same old story simply will not sell. No matter how many dirty little tricks or secrets the industry may embrace in an effort to mask the reality of the industry’s health, they will ultimately fail. Only when the industry openly acknowledges its problems, recognizes it is out of step with the needs and wants of the consumer and takes aggressive actions to innovate products, build the quality of its distribution system and embrace modern technology will it have any chance to remain relevant in the future. Unfortunately, while most dream about the future, the life insurance industry continues to dream about the past.