Tag Archives: insurance

More Disturbing News For The Life Insurance Industry

 MetLife building in New York, October 8, 2008. REUTERS/Lucas Jackson)

MetLife building in New York, October 8, 2008. REUTERS/Lucas Jackson)

Last month, MetLife made the bombshell announcement that it will exit from the life insurance business. The company indicated it will shed its life insurance and annuity business by forming a separate company and then selling stock in the new company via an IPO; in essence selling its life insurance business to stockholders. (Most likely because MetLife knew no other company would buy it.)

For those of us in the insurance industry, this is one of those, “you’ve got to be kidding me” moments. Could you have ever imagined reading that MetLife, the very pillar of the life insurance industry, would announce that it is getting out of the business? This is akin to the New York Yankees announcing they are going to get out of the baseball business.  

MetLife CEO Steven Kandarian justified the decision by blaming federal regulators for imposing the “too big to fail” tag on MetLife. The MetLife grievance is that these federal regulations would require the company to increase – to unreasonably high levels – the reserve capital it holds to support its life insurance business. (Of note, there are those in the financial and regulatory community – including the Insurance Department in New York – who have suggested that MetLife has been “playing games” in reporting its life insurance reserves.)

Blaming federal regulations for MetLife’s decision to exit the life insurance business is at best a half-truth. The new federal regulations for reserves may have been what triggered the decision, but they are being used more as a smokescreen and an excuse for doing what the company has wanted to do for a long time. MetLife acknowledged that even if the company were to prevail in its lawsuit against the federal government over its designation as too big to fail, it would still exit the life insurance business.

There is an unspoken but simple truth underlying MetLife’s decision: Life insurance and annuities are no longer “core” to the future of MetLife. It may surprise some in the insurance industry, but the retail life and annuity business now represent only about 20 percent of MetLife’s operating earnings, and it has been declining. MetLife reported that in the third quarter of 2015, operating earnings from life insurance and annuities declined by 33 percent from the previous year and growth had slowed to just 2 percent, compared to 12 percent the previous year.

Reaction by the Financial Community

When MetLife announced its decision to exit the life and annuity business, the financial community did a happy-dance. MetLife stock jumped 10 percent, right off the bat. The Wall Street Journal suggested that MetLife’s action will put pressure on the industry’s biggest companies such as Prudential and AIG to follow suit and exit from the life and annuity business. The Journal mused that MetLife’s action could trigger “a broader shake-up of the insurance industry’s biggest companies.”

The MetLife Decision in Perspective

It is difficult to argue with the MetLife CEO’s decision to exit the life insurance industry. He should be given credit for recognizing the realities of the industry now and for taking action to meet them. For a number of reasons, there has been, in effect, a “polar reversal” in the fundamentals of the life insurance industry. An industry that operated for 150 years selling products based on guarantees producing long-term value and long-term profits, has become an industry driven by fear of guarantees, short-term profits and commodity pricing. A business model predicated on long-term value and steady returns simply cannot function effectively (if at all) in a frenetic short-term world.

There is a simple factor at work here: It is expensive, in terms of capital required, to guarantee meeting the liabilities for mortality (death benefits) or longevity (income in retirement) that either may not emerge for decades or (even worse) be unpredictable. It is the cost – capital held in reserve – to provide these long-term guarantees that MetLife has decided it is not worth paying.

Driving this dynamic is the reality that many of the larger companies in the industry such as MetLife, Prudential and AIG are now public companies judged on the basis of their performance in the next calendar quarter, not the next quarter century. In this short-term world, the financial community views capital that is held in reserve against future liabilities as “dead capital,” and that is judged to be a liability in and of itself. This modern reality is at the core of MetLife’s decision not to invest its precious capital in new life insurance business.

It is of note that MetLife is not divesting its large block of in force (called a “closed block”) life insurance and annuities. This business has already had capital invested in it and is throwing off consistent profits. What MetLife is saying is, “We don’t want to invest our capital in new, long-term life and annuity policies, because we are being pressured by the financial markets to deliver short-term returns on our invested capital; returns not available from life insurance and annuities.”  

There is a cruel irony in this situation: When the life insurance industry was singularly focused on guaranteed long-term products sold on the basis of value, it was awash in capital. The profits from this type of business created more capital than the industry could invest. In 1987, when I started LifeUSA as a new life insurance company, no less than seven very large companies fought over the right to provide the capital needed to write our new business. These companies literally paid us to take their capital, so they could participate in the long-term life insurance and annuity business LifeUSA was writing.

It was only after the companies began to shift away from guarantees and long-term value, toward a focus on commodity-type products designed to generate short-term profits that their capital base began to evaporate. By looking short-term for its return on capital, the life insurance industry moved from being a capital creator to a capital eater. As a result, the life insurance industry has now become dependent on sources of capital such as the stock market and private equity funds, that demand higher returns than life insurance is designed to produce, and these returns are expected to be delivered over the short-term. Faced with this pressure, MetLife felt its only option was to get out of the life insurance business.

MetLife could take this action because life insurance is no longer a core business of the company; in fact, this action will theoretically allow the company to increase short-term profits. The real question is: What is going to happen to those companies for which the sale of life insurance and annuities is their core business? What options will they have? What cost will they have to pay just to stay in business; if they can?

MetLife’s action is not an outlier, but only the first concrete example of the long-term damage that can be inflicted on the industry when companies abandon long-term thinking for short-term results and returns. Unfortunately, the real losers will be the insurance industry itself and consumers who need, seek and are willing to pay for guaranteed long-term protection and value.  

The Future of the Life Insurance Industry – If There is One!

The Aging Life Insurance Industry May be Suffering From a Serious Mental Disorder — And It Doesn’t Even Know It

Although medical science has achieved much progress in combating most of mankind’s dreaded diseases, there is one debilitating malady that remains immune to cure, and that is Alzheimer’s disease. Unfortunately, once this fearsome disease takes hold, there is no known cure and the victim is condemned to a long, slow decline and inexorable demise.

More than 25 million people worldwide suffer from Alzheimer’s. Probably the most insidious aspect of Alzheimer’s is that those afflicted seem to be “normal” and show no outward physical signs of the illness. And yet, when observed closely, it is obvious that they are losing or have lost many of the faculties necessary for a vibrant and meaningful life.

With no intent to take the disease lightly or be disrespectful of its victims, a close observation of the American life insurance industry could lead one to wonder if the industry isn’t in the advanced stages of it own version of Alzheimer’s disease. There are a number of “warning signs” that signal the onset of  Alzheimer’s. At the very least, the life insurance industry is exhibiting many of the symptoms – in an institutional form – of this dreaded and debilitating affliction.

From Outward Vigor to Inner Decay

The life insurance industry certainly has a history of vibrancy and success. In fact, the industry has compiled an almost unmatched record of achievement. By accumulating and investing large pools of capital, the life insurance industry became a critical driver of American economic growth in the 20th century. Life insurance – the product used to accumulate the capital – served the important dual purpose of protecting families and businesses against the “economic cost of dying.” For this contribution, the life insurance industry was rewarded with high levels of respect, influence and financial success. In fact, life insurance companies became the most trusted and stable of all financial institutions in the country.

But now something is changing. Outwardly the companies seem to operate and offer the same products as they have for decades, but a closer look will reveal that the industry is not what it was. It is a subtle change and it may not be fair to say that the life insurance industry – and its companies – have become irrelevant, but even the staunchest champions of the industry would have to acknowledge that growth has virtually evaporated; while the respect, influence and power of the industry has been seriously eroded.

The life insurance industry and its leaders seem to have some recognition of the issues, but like the patient suffering from Alzheimer’s, they appear to be incapable of understanding what is really going on around them or taking action to reverse the process. This is one of the reasons why Alzheimer’s is such a cruel and deceitful disease. It is not the person plagued with the disease who recognizes it, but rather the friends and family who first see the symptoms of it in the form of a reduced ability to function effectively in the world.

Understanding the symptoms of Alzheimer’s and measuring them against the attitudes and actions of the life insurance industry leads one to the unfortunate, but unmistakable conclusion that the industry suffers from many of the clear indicators of Alzheimer’s. Symptoms such as:

Memory loss that disrupts the daily functions of life

The companies that collectively form the life insurance industry seem to have a memory loss when it comes to what made them strong and successful. The industry gained the confidence of its customers by responding to their specific needs. When those needs changed, i.e. more concerned about the cost of living than dying, the industry continued to cling tenaciously to the old methods and products.

The industry seems to have no recollection that it gained the confidence of the consumer by selling products they needed to buy, rather than products the companies wanted to sell.

And this is no “senior moment;” no temporary loss of acuity. The industry exhibits no memory of the fact that its growth and success was achieved due to the effort and talent of a well-trained and dedicated sales force of agents. For some strange reason that can only be considered a symptom of Alzheimer’s, the industry set about to eviscerate and destroy the agent distribution system like a patient in denial who attacks those closest who want to help. At first, the agents were switched to “independent status” and that worked well at first, but now many companies dependent on the independent agent system are taking irrational actions (a sure sign of Alzheimer’s) to devastate even this system.

Challenges in planning or solving problems

Over 25 years ago, sales of the industry’s core product – life insurance – began to wane. For years the industry did not even recognize the problem. The companies continued blithely along, seeming content within their own world. There was no recognition that the world around them had changed.

When the problem with life sales become so obvious that even the companies had to recognize it, their actions showed that their planning and problem solving abilities had greatly diminished. Confused as to what was happening, their solution was to plan to do what they had always been doing and to lash out at the agents for not selling more of the product. This is exactly the way a person suffering from Alzheimer’s will react to problem solving.

Decreased or poor judgment

The life insurance industry has presented too many examples of this symptom of Alzheimer’s to mention, but a few should prove the point.

Many insurance company executives seem to have become dedicated to making mendacity a science and this makes reasoning with them totally futile. This is a clear sign of diminished mental capacity and a cause of poor judgment.

For example, a couple of years ago one large company, finding itself short on capital, literally came out of the blue to terminate the contracts of virtually every one of their agents. A rational person has to ask, “What were these guys thinking?” The answer of course is that they weren’t. It may not be fair to blame the executives, because something obviously decreased their capacity to make sound judgments.

Another company has made so many conflicting, confusing and convoluted decisions regarding its distribution system that neither the company nor the agents have any idea what the company wants or where it is going. Obviously suffering from a malady that causes decreased or poor judgment, the company can’t decide if it wants to work with independent or captive distribution or maybe even the broker-dealer network. Despite these conflicting actions, the company has gone so far as to threaten to withhold product from those producers who do not promise total fidelity to the company, while the company promises no fidelity to the distribution system. This is a clear the sign of a decrease in the ability to show good judgment.

Confusion with time and place

Even a cursory review of the actions of insurance company executives will demonstrate that they are confused with time and place. They remind one of On Golden Pond’s Normal Thayer who can’t find his way home after an afternoon of blueberry picking. For these executives it is like today is yesterday and there is no concept of tomorrow. A sure sign of diminished capacity. Insurance companies act as though they are still the power to be reckoned with as they were in years gone by. The management of insurance companies acts as though both the consumer and the distribution system should be beholden to them. That they have the right to act as they deem best – for the company.

For example, last year a company determined that a block of business it had written was not as profitable as they had wanted. (In reality, in order to sell the product, the company promised more than it could deliver.) To correct this situation, the company went directly to policyholders – circumventing the agents – and attempted to induce them to exchange the existing product for an inferior one. While some might say this is a simple sign of arrogance, a more charitable view would be that the executives of this company were afflicted with a disease that caused them to confuse time and place.

And the Moral of the Story . . .

What makes this situation even more pitiful is that while there is no known cure for those who actually suffer from Alzheimer’s, there is a cure available for what ails the insurance industry. The problem is that the insurance industry executives are so overwhelmed by the symptoms of their malaise that they are incapable of recognizing the problem, let alone accepting the cure.

If this continues – and it probably will – the life insurance industry will be condemned to the loneliness of its own mind in a long, slow decline that will leave the industry more and more irrelevant and consigned to the backwaters of financial services. This does not have to be, but sometimes it is the way it is.

Insurance Executives Prove Stupid is as Stupid Does

The Question is Why Do They Keep On Proving It?

There is a well established mantra in the insurance industry that says, “Any change is a threat!” This attitude is to be taken seriously by any self-respecting insurance executive and is, in fact, lesson number one Bob MacDonald on Insurance for individuals who are taking “Insurance Executive 101” classes. In the insurance industry, change is to be resisted the way a politician shuns candor. Of course, there is good reason for this rule. Most insurance executives are not smart enough to be able to deal with change, so they should do everything they can to ignore or avoid it. (Politicians shun candor in order to get elected and re-elected.)

It’s that kind of behavior that has convinced most people that insurance executives tend to be only smart enough to be, well, insurance executives. For that reason most business schools segregate graduates into three groups. The top 50 percent are directed into a variety of options, the third quartile is encouraged to go into banking and those in the bottom of the class are pushed toward insurance management. (Class members caught cheating are encouraged to become lawyers.)

You think I am kidding about this? Well, think about this. AIG, just a few years ago the largest insurance company in the world, became bankrupt and had to be bailed out by the government when the executives of the company made the decision to provide insurance to gamblers, i.e. Wall Street high-flyers. The insurance offered by AIG guaranteed to make up for any losses the gamblers might incur; no matter how risky their gambles might be.

Can’t you just see all those Wall Street guys sitting around their favorite drinking hole, guffawing and mocking these insurance guys for their stupidity? All the while, the AIG executives were patting themselves on the back and thinking about the bonuses they would get for selling so much “insurance.”

Of course, the insurance executives of AIG were not alone. The executives of Hartford Insurance and those of a number of other companies came up with this great idea to offer insurance that would guarantee to the purchasers of variable annuities that the value of the product would never be lower than the highest value of the policy. (How smart do you have to be to come up with an idea like that?) No matter how low the investments backing the policy might fall, the insurance company would guarantee to pay out what their highest value had been. Like AIG, Hartford and many of the other companies had to be bailed out by the government to prevent insolvency.

Would you have made deals like these? If not, then sorry but you don’t qualify to be an insurance company executive.

Everyone was upset when the banks were bailed out because, “They were too big to fail.” What people didn’t notice was that insurance companies were bailed out because, “They were too stupid to fail.”

But, getting back to change. The insurance industry executives clearly demonstrated their reticence to change – even if it’s to their benefit – during the recent debate over health care reform.

The insurance industry marshaled their forces and spent over $30 million dollars attempting to defeat the recently passed health care reform. The industry spread stories about “death panels,” rationed coverage, loss of choice and higher costs if the reform passed.

This action is consistent with the history of the insurance industry in its efforts to resist change. Fearful that Social Security would eliminate the need for private insurance, the industry fought its enactment tooth and nail, only to discover that Social Security was actually a boon for the insurance industry. Thirty years ago the insurance industry lobbied heavily against major pension reform legislation, only to discover that the new pension laws ended up creating twice as much business for the insurance industry.

Now, despite the efforts of the insurance industry, the health care reform has passed. The insurance industry is bemoaning this horrible legislation and how it will be so bad for them. However, despite the claims of President Obama that the health care reform will “put a check on the insurance industry,” the fact is that this latest change will actually be another profitable opportunity for the industry.

Consider these factors.

The health care reform did not adopt a “single payer” type program. Contrary to the prevailing viewpoint, this new plan is not a “government bureaucratic boondoggle,” but a private industry boondoggle. The legislation mandates that those who do not have health care must purchase it. With no “public option” to create competition, this means that the insurance industry is presented with the potential of 20 million new customers. Most employers are now required to make health care available to their employees. In both of these cases the government will provide either direct payments or tax incentives to help pay for the coverage.

What could be better for the insurance industry than for the government to require that people buy their product and provide either part or all of the funds to pay for it?

A lot was made of the provision to eliminate “pre-existing conditions” as a reason to decline insurance coverage. But it is not like the insurance industry is going to be stuck with these difficult risks. Special state “assigned risk” pools are to be created (much like poor risk auto drivers) to provide coverage for those with pre-existing medical problems. This approach, while providing coverage to those who can’t get it from insurance companies, also serves to make it easier for insurance companies to increase their profits.

So, once again, these insurance company executives prove that stupid is that stupid does.

And the Moral of the Story …

Maybe sometimes it’s smart to be stupid.

You don’t think the insurance company executives are smart enough to employ the “Br’er Rabbit” style of politics do you? You remember when the fox caught the rabbit and while holding the rabbit up by his ears, fell for the pleading of the rabbit to do anything to him, “except to thrown him into the briar patch.” Of course, the briar patch was where he lived and wanted to be.

In this case we have the government catching the “Br’er Insurance Industry” failing to provide effective health coverage to all Americans. The insurance industry is made the bad guy in the health care debate and battered from pillar to post, by all sides. Surely this will be the end of the road for the health care insurance industry. The insurance industry screams the evils of the reform and begs for its failure, knowing all along they will turn out to be the big winners if the reform passes.

Are the insurance industry executives smart enough to know that if they favor a reform plan that it will fail? Are they smart enough to understand that only if they oppose a plan that will actually help them will it stand a chance of passing?

Can they be that smart? Nah … It just proves what I said all along: Stupid is as stupid does!