The life insurance industry is beset with issues, problems, poor management actions and challenges that have set the industry adrift in a downward spiral without a clear strategic vision of what needs to be done to assure a relevant future. I have addressed these issues in past blogs; the most recent being on the 151A EIA annuity fiasco. My objective has been to stimulate debate and discussion, with the hope that leaders will emerge to solve these problems. At the same time, I received a number of comments suggesting, “If you know so much, just what would you do about these problems?”
That’s a fair question. Unfortunately, having been away from active participation in the industry for several years now, I do not have the current knowledge or expertise to properly offer a solution. (This proves the point that it is always easier to criticize than to correct.) However, I have been given access to a draft of a recently completed comprehensive study on the future of the life insurance industry. This study was funded by the internationally renowned Gander Institute of Gander, Newfoundland. The Gander Institute is a think-tank that was formed early this decade to address international commercial issues.* To conduct the study of the insurance industry, the Institute brought together in Geneva some of the world’s most prominent insurance thinkers and innovators, so naturally it was a small group.
The report is still confidential and won’t be released until June 7, which is International Insurance Day, but I can offer some highlights based on a reading of the report’s preliminary findings.
The Gander Insurance Report is divided into four categories:
• Insurance company and culture
• Processing and systems
• Markets and distribution
Insurance Company and Culture
The report will suggest that it will probably be an existing but smaller company that will emerge to pick up the pieces of the current turmoil and become an industry leader. The study confirms that many of the established companies, i.e. AIG, Hartford, MetLife, Phoenix, ING, Allianz and others, have had their brand image and growth potential severely damaged by poor investments, management mistakes and lack of strategic vision. This brand damage not only has had a negative impact on industry credibility with the media and consumer, but also with the agent distribution system. The report suggests that it is highly unlikely that this brand image or credibility will be restored; at least any time this century.
In addition, the Gander Report will highlight the negative impact that the bureaucratic management mentality existing in many of today’s insurance companies has had on the morale and work efforts of company employees. The report cites the lack of respect, communication, empowerment and incentive for employees to feel a part of the organization’s effort as the reason why many employees feel no connection with the company they work for, causing a decline in service, both to the policyholder and the distribution system.
The study suggested that if a smaller company will take a heterodox approach to industry issues, it will actually have an advantage over the larger companies. This will be the case so long as the management is able to instill an entrepreneurial culture that will tie the employees to and reward them for the success of the company. This could take many forms, including the potential of actual ownership, but most likely it will be based upon empowering the employees to feel they are involved and important to the success of the company; respected and recognized for their contributions and rewarded for their efforts that add value to the company. The Gander researchers discovered that these cultural attributes are viewed as “unnecessary and soft” by many of the larger companies and given scant attention by bureaucratic managers. However, the Gander Report will argue that a true entrepreneurial culture may be the “secret weapon” the smaller company will have in competing against the bigs.
Processing and Systems
A large part of the Gander Report will be devoted to the future processing and systems issues of the insurance industry. The report makes the case that the insurance industry lags far behind virtually every other industry in the application of technology for efficient, low-cost processing of its business. As a result, the cost of processing business continues to increase as the productivity and efficiency of the company declines. The huge legacy systems that have been jury-rigged in Rube Goldberg fashion over the years is now a huge work effort and financial roadblock to the implementation of modern processing technology by the larger companies.
The Gander Report demonstrates that technology is now available for a company to achieve the long sought dream of paperless processing. Using this technology a company could process all of its activity, including agent licensing, proposal presentation, application completion and submission, policy issue and service, all via web sites and the Internet. In effect, this company would become a “virtual company” with an address on the Internet rather than a street corner. The Gander Report will suggest that with such virtual processing the company will benefit from almost infinite productivity and low costs of operation that will allow the company to be extremely competitive from a product and service standpoint.
Markets and Distribution
Some of the most controversial conclusions of the Gander Report involve the future markets and distribution system of the life insurance industry. The report argues that, for all intents and purposes, the pure life insurance segment of the industry is all but dead.
When life insurance – particularly permanent whole life – was in its heyday people were dying young, group life insurance at work was rare and there were few other options for the consumer to save and accumulate money. All that has now changed as longevity has been extended by decades, illnesses that once meant certain death have been conquered, group life insurance coverage is virtually universal and the options available to accumulate funds for emergencies or retirement are prolific. While cheap term life insurance – sold mostly on a direct basis via the Internet – will fill a niche in the industry, life insurance is no longer a product upon which a company can be built or prosper.
Many believe that the pure insurance agent distribution system is in the twilight of its existence. They argue that the advent of the certified financial planner and the thousands of registered representatives of broker dealers is rapidly crowding out the individual who specializes in insurance products only. With one significant caveat, the Gander Report will argue that the current economic and financial turmoil has created a new opportunity for the professional insurance agent. The supporting logic for this conclusion is that at no time since the Great Depression has the consumer been more concerned with the safety and security of their financial affairs. The consumer is now much more concerned about the return of their principal than the return on that principal. This environment plays directly to the strengths of insurance companies that offer safe and secure financial products and the professional agent who is best equipped to explain and sell them.
The one caveat raised by those who wrote the Gander Report is that if insurance companies are unable or unwilling to develop modern, creative and innovative products that are both safe and secure, then the opportunity will not only be missed, but the very future of the industry may be at risk.
The Gander Report will argue that the best potential for growth and profitability is for insurance companies to focus almost exclusively on products designed to encourage the accumulation of long-term funds and the conversion of existing funds and assets into income. These products will be pure insurance products as opposed to investments. In fact, the Gander Report suggests recent problems with variable annuities – high fees, lack of transparency and irresponsible promises of performance – may even spell the end of this product. Ironically, while life insurance may be offered as an incidental benefit of some products, future industry leading companies may not even offer life insurance as a stand-alone product.
In the product portion of the Gander Report there is an intriguing suggested that the “indexing” of annuity products – an issue that has seemed so cataclysmic to the industry – will, in the future, be viewed as only a passing fancy.
The Gander Report will leave it up to individual companies to design and develop the new products that will be needed in the accumulation and income markets, but it does offer some broad outlines.
The report suggests the accumulation products will come under the umbrella of “fixed annuities,” but the structure will be significantly different from today’s products. For example, the traditional “surrender charge” that has become infamously confusing and problematic for both the company and the consumer will be eliminated altogether. The policyholder will be assured that anytime they desire to surrender the policy, they will be guaranteed the full return of their funds, plus a minimum amount of interest. Because the annuity is an inherently long-term product, those who buy and keep the product long term will receive a higher return on the funds than those who surrender earlier. In addition, there may also be increased incentive to convert the accumulation annuity into an income product.
When it comes to income products, Gander’s 12-member panel suggested that an entirely new concept in income annuities be developed. These income products would not only guarantee an income for life, but be structured in such a way as to adjust this income to the impact of time and inflation. Inherent within the product will be a guarantee that under no circumstances will the income paid out by the annuity total less than the amount paid in. The product will guarantee that should the policyholder become sick or disabled the income can be increased to help offset the increase in expenses. In the event of an emergency need for cash, the product will allow the withdrawal of specific amounts by adjusting future income. Perhaps the most attractive feature of these new income products would be a guarantee that when the individual receiving the income dies, then the entire amount initially paid into the product will be returned to the estate or beneficiaries.
And the moral of the story …
In the final analysis, the Gander Report is optimistic as to the potential for the life insurance industry to grow and prosper in the future. It suggests that the current crisis and turmoil in the financial markets has underscored the ultimate advantage of insurance companies to offer safe and secure financial products that encourage individuals to accumulate funds for later payout as income.
However, the report is pessimistic that existing companies are positioned to take advantage of this opportunity. Based on a number of comments by those participating in the study, this conclusion is reached based on the irresponsible actions of company management that has damaged the very brand image of the industry and the uninspired, visionless, bureaucratic management in the industry today. In short, the report suggests the industry lacks forward thinking, visionary entrepreneurial leaders who are capable of breaking with the past. In conclusion, the Gander Report suggests this is a great time for a new type of company to emerge, led by new leaders who are capable of taking advantage of new times.
*The World Health Organization of the United Nations awarded the Gander Institute scores of millions of dollars for their 1999 discovery that a dollop of Gander geese gander placed on the tip of the tongue provides immunity to the Avian flu.