The future of the insurance industry has more sides than a mutated polygon. On the one hand, the changing social and economic structure of the U.S. has created the most significant opportunity for the insurance industry since the Industrial Revolution. On the other hand, a failure on the part of industry leaders to recognize and respond to these changes will create the possibility that the industry will be relegated to the backwaters of financial services. Unfortunately, current trends suggest the insurance industry is more likely to become irrelevant rather than a leader in the future of financial services.
Less than 50 years ago life insurance companies were the dominant institutions in the financial community and exerted significant impact on the US economy. The consumer viewed life insurance as almost a necessary purchase and this translated into the growth and power of the industry. Great companies such as Prudential, Metropolitan, John Hancock, Northwestern Mutual and The Equitable were not only leaders in the insurance industry, but the dominant financial institutions in America.
Today these same companies and many more have become either irrelevant, extinct or owned by a foreign enterprise. The truth is that the life insurance industry has botched the value of the franchise, respect and influence it once enjoyed and has butchered its response to the opportunity of change.
At least the life insurance industry has been consistent in its actions. It has made a royal mess of every opportunity and challenge. There are three areas in particular where the life insurance industry has forfeited its leadership in financial services: 1) Product, 2) Distribution and 3) Technology.
The Insurance Product
The life insurance industry seems to view any change as a threat and this attitude is best exemplified when it comes to product. In the early 1980s as the creaks and cracks of old age showed up in the industry standard bearer whole life insurance, in the form of a decline in sales, the industry fought tooth and nail to delay and resist new products.
Whole life had been a great product (and highly profitable) when the consumer was primarily concerned with the cost of death. However, as the cost of living too long evolved as the chief concern of the consumer, the life insurance industry spent more time and effort attempting to defend and sell a dying death product than in recognizing the change and new opportunity.
When Universal Life (itself a rather primitive evolution of whole life) was introduced, the initial reaction of the life insurance industry was to resist the change by disparaging the product and attempting to have it outlawed. This action had the effect of damaging the credibility of the insurance industry and in allowing competitors pass the insurance industry by in the eyes of the consumer.
When other bank and investment products became more attractive to the consumer, further decreasing the sales of insurance products, the insurance industry took the tact of trying to mimic these products rather than adopting viable alternatives. Competition is created by being better and different, not by being the same. As the insurance industry has learned from regulatory and legal actions painfully being encountered today, trying to position and market insurance products (especially annuities) as “investment” products may have some short-term benefits but can be very destructive over the long term.
The life insurance industry has one more chance regain supremacy (or even competitiveness) in product offering. If the industry misses this opportunity it and its products will soon be relegated to an afterthought in financial services.
Everyone recognizes, and at least gives lip service, to meeting the consumer need for products that will provide retirement living benefits for as long as they live.
Ironically, with its unique ability to offer guarantees, the life insurance industry is best positioned to take the lead in this multi-trillion dollar market.
The insurance industry has the wherewithal to develop unique, innovative and attractive income-producing products not available to banks or investment firms. Yet the insurance industry has shown little inclination to use these advantages to develop such products. Instead we have seen a continuation of the philosophy of mimic and tinkering with existing product rather than revolutionizing.
Distribution in Chaos
Distribution is another sad story for the insurance industry. After investing scores of millions and most of the 20th century in a successful effort to build one of the most powerful and effective distribution systems in any industry, it took less than a decade for the industry to destroy it. As the sale of high margin insurance products such as whole life began to decline, the need to reduce expenses became the preferred response. Unfortunately, the captive agent distribution system, with its high fixed costs, became an easy target.
In very short order, agents who had been tied exclusively to one company were sent packing to become “independent.” Companies consciously (and foolishly) forfeited contact and control over the agent for a sugar-fix of reduced fixed costs.
While this had some short-term benefits for the companies, as the relationship with the agent became weaker, ironically the ultimate costs to produce business actually increased. And, this is not just a cost in dollars. There was an unseen cost in the form of fewer qualified individuals entering the insurance industry and in the training and supervision these new agents received. With the remnants of the career agent system now reaching retirement age there are very few qualified and well-trained agents ready to take their place. As a result, life insurance companies no longer have a cohesive distribution system they can count on to sell their products.
To fill this vacuum the access and control of distribution is shifting to investment firms and even banks. (See FINRA rule 05-50 and proposed SEC rule 151a.) What the insurance industry failed to comprehend is that if you do not control your distribution then you do not control your future.
If, as many insurance companies have, the industry responds to this distribution challenge by attempting to enter into “marketing arrangements” (essentially renting distribution) with those who now control access to distribution then they simply accelerate the decline of the insurance industry as a power in the financial services industry. There is no power in being dependent on others to distribute your product.
Clearly it is not practical for insurance companies to return to the traditional captive agent system, but there are constructive actions that can be implemented to turn the situation around. One step the companies could take (but, don’t hold your breath!) is to develop products and services that are needed and demanded by both the consumer and the distribution systems.
The point is simple. Rather than going hat-in-hand to those who control access to distribution and begging them to make the products available, insurance companies need to develop innovative, value-oriented products that will cause those in control of distribution to come to the companies and ask to be able to sell the products.
The final challenge to the insurance industry is in the area of technology. If there is one industry that could benefit from the advances in the technology known as e-commerce, it is the life insurance industry. Yet seemingly stuck in a time-warp mentality of paper-pushing, no industry lags more in the application of this process.
Twenty years ago, investment firms almost imploded under the strain and cost of back-office paper processing. The brick and mortar model of banks became so expensive the industry almost failed. In response, investment firms and banks embraced the onrushing technology of e-commerce. Today the investment community uses e-commerce to process a quantum leap in transactions faster, more efficiently and at less cost than ever before. The banking industry is not far behind. Most bank processing is performed efficiently by use of direct deposit, ATMs and the Internet.
Despite the model of e-commerce efficiency offered by banks and investment firms, the life insurance companies still cling to the outmoded model of paper pushing with resulting inefficiency and increased costs. The industry response has been to cut costs via budget reductions, layoffs and outsourcing, but this is a futile effort. In the end, this approach destroys value. The answer for the insurance industry would be to fully and quickly embrace e-commerce. A successful application of e-commerce would improve service, enhance efficiency and reduce costs, while significantly improving the image of the insurance industry.
There is technology available today that would enable insurance companies to contact, license, contract and train agents. The system could communicate, inform and assist consumers. E-commerce could facilitate product proposals, applications, underwriting and policy issue – all efficiently online via the Internet. This could be accomplished today resulting in better service for consumers and the distribution system, all at lower costs. The technology is present to do so and it seems the only thing lacking is the willingness and commitment of the life insurance companies to do so.
And in the end …
There is clearly an opportunity for the life insurance industry to assume its rightful place at the table of financial services. In fact, the life insurance industry has the opportunity to regain its former leadership position in financial services. To do so the industry must both recognize and respond to challenges in product, distribution and technology. How it does so will determine the future of the industry. However, for an industry that views change as a disease the prognosis is bleak.