The commoditization of its products has put the life insurance industry in a race to the bottom.
The life insurance industry is inexorably shifting – both its products and distribution – from a traditional value-oriented system to a commoditized, price-sensitive business model. If this process continues, the life insurance industry and its companies will be reduced to nothing more than an appendage of the overall financial services industry. And this is the urgent message I will be delivering at NAFA’s Insurance Marketing Advisory Committee’s annual symposium when it meets (Oct. 19-21) in Boca Raton, Fla. The IMO Summit is the largest gathering of insurance marketing organization principals and executives in the industry and they, too, need to hear this warning.
A “commodity” is a product for which there is a demand, but one that is sought without qualitative distinction as to the benefits and the provider; price and convenience, not value becomes the driver of sales. Operating in a commodity business environment pushes the product provider into a relentless reduction in costs, benefits and service; combined with the need for increased efficiency in accessing the commodity product. This is all designed to win the race to the lowest price, even at the expense of profits and long term-viability.
Frustrated by stagnant growth, cowered by the competitive intrusions of banks and investment firms and compelled to seek short-term gains, the leaders of the life insurance industry seem willing to surrender the very strength of the industry to the ill-perceived simplicities of product commoditization. This is a race to the bottom that can only be won by losing. The value of life is always reduced when it is cheapened.
The pressure to survive in a commoditized industry triggers an inevitable consolidation that puts more and more market control in the hands of fewer and fewer, causing the loss of innovation, real competition and the further degradation of service. This amalgamation of product providers ultimately causes the consumer to suffer a double-whammy in the form of even less value and increasing prices; with no guarantee of enhanced profits or the ultimate viability of the industry. Indeed, growth and profitability most often becomes even more volatile in a commoditized industry.
Commoditization is Nothing New and Never a Worthy Goal
The airlines are the archetypal example of an industry that has suffered through all the consequences of moving from a service, value-oriented approach to one offering product based on price. In the process, the airlines have been buffeted by the turbulence and painful pangs of consolidation, bankruptcy and illusive profits; along with loss of customer respect and loyalty. The airline industry is lucky and may be able to survive – if ever so tenuously – in this type of environment because it does offer a product that is needed and in demand. But for the customer, airline travel has gone from being an enjoyable experience to the exasperation of inconvenience, pitiful service and actually increasing prices. (Yet another example of being careful what you wish for!)
However, the life insurance industry may not be as lucky as the airline industry, because it has one noteworthy disadvantage if it is to function in a commodity environment; that being it does not offer a demand product. Life insurance and annuities have always been products that are sold not sought and have been based on the value of life, not the price of life.
There is another problem for the life insurance industry if it operates with a commodity mentality. Life Insurance and annuities have always been a long term proposition – for both the companies and the consumer. Both the profits and the benefits of the products sold were designed to emerge over a lifetime. This is the antithesis of a commodity product that is intended to be offered, purchased and used in an incident in time; the commodity sale is over and done with, with the results quickly delivered and known. Life insurance and annuities do not work that way and to sell them in that fashion is a disaster in the making for both the company and the consumer.
There is abundant evidence that the life insurance industry has begun to commoditize its business model.
More and more the products offered – especially term insurance and annuities – are developed to meet a “spread-sheet” mentality. Even the largest and most traditional companies have begun to develop products and lend their credibility to a widening array of television and Internet sales efforts. These sales are based on price, not value because value does not spread-sheet well.
If an industry is focused on reducing cost so as to base sales on price rather than value, there are no margins or need to invest in a distribution system schooled in explaining and selling value. (Note that the airline industry reduced costs by virtually eliminating – first by reducing fees and ultimately by eradicating them altogether – the travel agent; sending the customer online to spread-sheet the cost of tickets.) Consistent with this approach, the insurance industry has systematically reduced its investment – recruiting and training – in the agent distribution system. At the same time, the insurance companies have begun a process of reducing commissions to agents (and especially those paid to independent marketing companies) that if continued will ultimately reduce operating margins for agents and marketing companies to the point of extinction. (Companies will loudly proclaim that they do invest in agent training, but a close examination of this “training” will reveal that it revolves around “product technicalities” and navigating regulatory and suitability requirements; not in learning how to identify and deliver value in the sales process.)
With fewer and fewer companies competing in the market, there is no doubt that consolidation has taken firm hold in the life insurance and annuity industry. This situation lessens the motivation to innovate, freezes out competition (other than by price alone which is prohibitive for all but the largest companies) and this, in turn, reduces options for both the consumer and the distribution system. When consolidation occurs, as it has in the life insurance industry, products lose differentiation across the market and the creativity needed to survive in a diffused market is lost. The DNA evidence of this happening is found when the new products being introduced are little more than copies of products offered by other companies, with differentiation based only on price (sometimes reflected as a higher bonus or interest rate) or a new “bell or whistle” added. Indeed, in such an environment the margins needed in order to deliver value are lost and there is no choice but for the products to be marketed as a commodity.
The tragic irony in the commoditization of life insurance and annuity products is that not only will the consumer and the distribution system be losers, but by trying to sell products intended to be long term and value-oriented as a commodity, the industry itself will be the ultimate loser.
But this does not have to be the death of life. The need for the value-oriented benefits and long-term financial security that can be provided only by life insurance and annuities is more obvious now more than ever, and the consumer is still willing to pay the price to get it. It is the life insurance industry that has clouded its vision and reduced its time-frame for profits that has caused the industry to go awry. Clinging too long to the products it wants to sell and failing to respond with products the consumer is willing to buy has lured the industry into the deceiving illusion that price and price alone is the solution to their challenges. It is a false promise for which the life insurance industry will pay a high price.
And the Moral of the story …
If the life insurance industry is to retain a dominant role in the financial services sector, it is appropriate – dare say essential – for the industry to refocus on delivering long-term value at a fair price. But, the effort will be futile unless and until it is based upon creating new products that offer the best value for living well, rather than the cheapest price for dying.
The life insurance industry is alone in its ability to develop financial products that can protect and enhance the full life cycle of financial challenges that confront every individual. In simple terms, based upon today’s consumer needs and interests, if the industry wants to stimulate real growth and fuel long-term profitability, it must sell value, not price. The history of the life insurance industry is a clear demonstration that “value sells.” Yes, value is a long term proposition, but isn’t that the essence of the life insurance industry itself? If the life insurance industry can remain true to the value oriented, long-term essence of its products, it will once again lead the parade to the top, rather than be mired in a race to the bottom.