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.