To survive – not to mention prosper – the life insurance industry must go back to the future
The life insurance industry has been called a lot of things, but one thing it has not been called recently is “a growth industry.” It has not always been that way. There was a time, not so long ago, when the life insurance industry was a growing, vibrant, influential player, not just in financial services, but in the whole of American economic life.
Unfortunately this is no longer the case. It may be a painful truth to admit, but until it is acknowledged, the industry’s inexorable decline will continue because there will be no urgency to reverse the trend.
There are those who will dispute this conclusion that the life insurance industry is in decline and base their argument on a litany of increasing sales figures. But a closer examination will reveal that large portions of these “sales” are nothing more than a regurgitation of assets already under industry management. If the “sales” that are the result of simply shifting assets from one company to another were deducted from the total, it would offer a more accurate, but not very pretty picture of real sales.
This is not growth – it is financial cannibalization. Like a modern-day Donner Party, lost, trapped and desperate, the life insurance companies have turned to eating each other in an effort to survive. Some may make it, but this is certainly not a path to healthy industry growth.
Your Whole Life is Still a Mistake
Product is another problem. The sales of individual life insurance – once the bellwether of growth for the industry – are, at best, lackluster. More and more the only type of life insurance that sells is cheap term insurance. Yet life insurance companies continue to dress-up and prop-up whole life insurance in much the same way Norman Bates did his dead mother in the movie Psycho, pretending it is still alive.
Get over it. Whole life insurance may have worked well in the last century, but only because people died young and there were few financial options available for most people. (It also sold well because the insurance industry had invested in and created a highly-trained, dedicated distribution system of agents who had been taught how to use fear as a motivator for sales.)
The once-vaunted distribution structure of the insurance industry lies in shambles today—a victim of indifference, disinterest and neglect as the companies ceased to invest in the system. In turn, this has sent most companies on a frantic scavenger hunt, grasping for any and all sources of business, while failing to offer the least bit of commitment or loyalty to any of them. When it comes to its distribution system, the life insurance industry is like the farmer who constantly tills the soil reaping all he can, but never replenishes the nutrients and then wonders why the harvest gets smaller and smaller. As a result of the insurance industry’s failure to invest in distribution for the future, today it relies on renting rather than owning the distribution system and that can be a precursor for a very uncertain future.
Bad, but not the Least of the Problems for the Industry
This ambivalence toward investing for the future and the resultant lack of growth potential makes it all but impossible for the insurance industry to attract talented individuals. No longer is a career in life insurance – especially in sales – considered a viable option for all but failed bankers. There was a time when life insurance ofered an attractive career. Insurance companies actively and successfully recruited for “career agents” on college campuses, but no longer. The inability to attract talented “new blood” into the industry means that the sale of life insurance products that were once the primary focus of a well-trained force of agents has become a part-time pastime for some or simply an adjunct for those selling other financial products.
The Writing is on the Wall
The signs of decline in the industry are painfully evident. The river of organically created capital that once allowed companies to float new business and invest in the future of the company has virtually gone dry. Companies, starved for capital, have either withdrawn from the market or have prostrated themselves before the “money merchants” of Wall Street who are tromping through the industry landscape, picking at the bones of the dead and shooting the wounded. For the most part, these financial companies – none of whom are insurance organizations – swooping in to buy weakened insurance companies are doing so to bleed them dry for short-term gains, not to invest in the long-term development and future of these companies. This activity does nothing but reduce the capacity for the insurance industry as a whole to grow, further dimming the future.
Admittedly, it is difficult to focus on investing for the future while slouching at your desk bleeding to death, but doing just that is the only real option for survival. The sad irony is that the lack of industry growth is not for want of opportunity, but from a failure to invest in the future of the opportunity. For almost a century the life insurance was a “growth industry,” and as such it was able to chalk up remarkable levels of sustained growth; all because it continued to invest in the future.
Much of that investment was in the distribution system that became the fuel for industry growth. But once the industry came to view building for the future as a cost rather than an investment, the path turned to decline. Soon the objective for companies became trying to survive today, rather than seeking growth for tomorrow. The life insurance industry has the opportunity to once again come to be seen as a growth industry, but not until or unless it gets back to doing with it did so well, and that is investing in its future.
Investing For Future Growth
If the life insurance industry wants to invest in the future to become a growth industry again, a good start would be to focus on two simple efforts:
- Decide to beat the competition, not join them.
- Use technology to create new career opportunities in life insurance that will attract new talent.
The life insurance industry has been feeding off the assets of its own companies, when it should have been raiding the assets of banks and investment companies. Banks and investment firms should be viewed as enemies, not partners. Life insurance companies have tried to cozy up and be buddy-buddy with banks and investment firms because – lacking their own effective distribution system – they need to rent the distribution system of these competitors. How stupid is that? Would you partner up with a partner who has no interest in your interest? Would you partner with a partner whose only interest was to use you to further their interest? Only the desperate would answer those questions in the affirmative.
The life insurance industry did remarkably well playing to consumer’s fears of economic calamity if they died young. They can now use the consumer’s fear of not having enough money if they live to sell products that meet that need. There is an old – but still valid – saw in the life insurance industry: Consumers are more concerned with the return of their money than they are with the return on their money. In today’s world could be added: Consumers are more concerned with a guarantee of income, than with what that income will be. The life insurance industry should play to this fear and develop products designed to raid the assets of banks and investment firms. The attitude should be, “They are the enemy (blank) ‘em!
Rather than using technology to circumvent the agent distribution system, the life insurance industry should use it to invigorate the system. There are all sorts of technology available to the insurance industry that could be used to create an attractive, profitable, long-term career in life insurance selling. Systems can be developed that could attract new blood to the industry and start a whole new growth wave. Technology can be used to prospect and qualify leads, make a presentation and educate – not just about product – but actually teach sales skills. The only drawback to adopting this technology is that it requires an investment today for a return in the future. That is something the life insurance industry was willing to do for over a century – and it did it well. But investing for growth in the future is not something the life insurance industry is willing to do today, so it may not have a future.
And the Moral of the Story …
There are parallels between the oil and life insurance industry. The oil industry must make a big investment upfront in order to have future growth and profit. Land has to be leased, test-wells drilled and then the purchase of heavy equipment to extract the oil once discovered; all require heavy investment. Once the oil begins to flow, so too do the profits for the oil company, but unless the oil company continues to invest in finding future oil, its old wells will eventually peter out and so will the company.
The life insurance industry also must make a big investment upfront in order to have future growth and profit. There is the need to invest in products that meet modern needs and compete directly against the products of banks and investment firms. It is expensive to invest in a distribution system that will extract the sales that will turn into growth and profit. The life insurance industry has made these investments in the past and benefited mightily. But that investment has slowed to a trickle and like the oil company that fails to invest in new sources of oil, the future for the life insurance industry may also peter out.