Tag Archives: insurance industry

For The Life Insurance Industry, Growth Does Matter

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 insurance“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. FinancialServicesCompanies, 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 technology2consumer’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.



Life Insurance Industry Hiding Dirty Little Secret to Mask Real Problems

Truth be told, the life insurance industry is racing pell-mell toward the past

For the life insurance industry, innovation is defined as seeking creative ways to disguise its problems and invent the past. The more the industry clings to this mindset the more it lags behind and comes closer to being the past.

Think about it; the life insurance industry continues to offer basically the same products it has for over a century, the products are sold in much the same manner as they were when the Wright brothers were at Kitty Hawk and dealings with the customer have changed little since the invention of the typewriter.

At least give the insurance industry credit for being consistent. It lags behind all other segments of the financial services industry in all areas: product relevancy, relationship with distribution, ease of interaction with the customer and use of strategic technology to improve productivity and reduce costs. In addition, the failure of the life insurance industry to embrace a changed world exposes it to increased regulatory and enterprise risk management issues. These attitudes and issues portend severe challenges for life insurance companies to achieve both top and bottom line growth, now and in the future.

The Traces of Cowardice are Everywhere

There are clear signs of the pusillanimous actions taken by the tremulous leaders of the life insurance industry in order to mask the true status of the industry and that allow them to procrastinate on taking necessary steps to make the industry relevant in the future.

For starters, there is a dirty little secret that confirms the life insurance industry is already feeling the impact of its neurotic desire to remain insulated from reality and mired in its past glory.

This secret is that there is little new money flowing into the coffers of life insurance companies.

While some companies continue to report increased sales – especially with annuities – the reality is that the vast majority of these sales are simply a “recycling “of existing premiums from one company to another.

Instead of attracting new money, existing annuity assets are consistently and systematically being “churned” from one company to another and then another. Like an elaborate corporate shell game, existing annuity assets are simply being moved from one shell to another, giving the illusion—but not the reality – of new sales. This system enables companies to report “increased sales” and allows agents to earn new commissions, but it is certainly not healthy growth and masks the real problems within the industry. (This is not to mention the harm that may be inflicted on consumers who become nothing more than pawns in this charade.)

Even with these shenanigans (or maybe because of them), industry-wide annuity sales are struggling. According to Beacon Research and the Insured Retirement Institute, total sales of annuities dropped 14 percent in the fourth quarter of 2010 and declined a staggering 31 percent for the entire year. And, because these tracking firms use only company-reported sales figures, the reports do not give an accurate picture of real sales.

The more realistic (and frightening) way to look at sales would be to determine “net new annuity premium.” Net new sales can be calculated by using the following formula:

Net new sales = premiums collected minus premiums transferred in from other companies minus premiums transferred out to other companies.

This formula produces a much more accurate picture of how much – if at all – a company and the industry is growing by attracting new money, versus simply recycling existing assets. Of course you will never see the companies or industry ever using this formula because it would paint a picture so bleak that they themselves don’t even want to know.

In order to facilitate this pretense of “new sales” the products are more often designed – not to break new ground or enhance long-term value – but to provide incentive to move annuity assets from one company to another. As a result, the products become more complicated for agents to explain and more difficult for consumers to understand.

The Insurance Industry is Shrinking

Another telltale sign of a troubled future for the life insurance industry is the contraction that has taken place within the industry. Fifty years ago there were literally hundreds of life insurance companies actively and aggressively offering products. Twenty years ago there were scores of companies seeking a place in the annuity marketplace. Today, there may be less than 10 companies with a significant presence in the annuity market. Natural contraction in any industry is a sign of ill-health, not vitality. If an industry is growing by offering innovative and valued products it will naturally attract increased competition hoping to participate in future growth. Just the opposite is happening in the life insurance industry.

The life insurance industry achieved its greatest growth and success when it was willing to invest heavily in its future; the future of any industry is tied to the strength and vitality of the distribution system for its products. Twenty-five years ago the life insurance industry ceased making any meaningful investment in its distribution system. Today the industry is paying the price for this short-term thinking by seeing few new people enter the distribution system and those who do lack fundamental training in prospecting, identifying a need, presenting a solution and closing a sale; all the talents needed in order to attract new money into the industry.

In an attempt to compensate for this deficiency, the industry has implemented a short cut to sales. To make up for the dearth of fundamental training in real salesmanship, many agents are taught to be little more than “bird dogs.” They are trained only in the technicalities of a product that is designed specifically to move assets from one company to another, rather than adding new assets to the pool. In today’s world, the distribution objective is the quantity, not the quality of agents. No longer do companies see the benefit of building the best-trained agent force that is capable of attracting new assets. Instead, the new business model calls for having the most agents who are only taught to “bird-dog” for opportunities to move existing assets. Those companies with the most “bird dogs” may crow about their current “sales success,” but in the long run it will be a pyrrhic victory.

BTW, There is Something Called the Internet

Another deficiency that condemns the life insurance industry to remain mired in the past is its inability or unwillingness to invest in the use of strategic technology. Banks and investment firms are light-years ahead of the insurance industry in adopting interactive technology to simplify and improve customer service, enhance support of distribution, increase productivity and reduce costs.

Technology exists today that would allow life insurance companies to create a “virtual home office.” By using available technology such as the Internet, social networking, online forums, iPads and interactive networking, companies could create an environment that would significantly enhance the services and support available to customers and the distribution system; not to mention increased productivity, improved credibility and reduced costs for the companies. While companies give lip service to technology, they doggedly cling to the “legacy systems” of the past. This attitude is clearly out of step with the experiences, needs and wants of the modern consumer who is becoming more and more accustomed to and expecting to do business online. This is but one more example of the life insurance industry being more committed to the past than the future.

And the Moral of the Story …

This is not the same old world of life insurance industry glory and selling the same old story simply will not sell. No matter how many dirty little tricks or secrets the industry may embrace in an effort to mask the reality of the industry’s health, they will ultimately fail. Only when the industry openly acknowledges its problems, recognizes it is out of step with the needs and wants of the consumer and takes aggressive actions to innovate products, build the quality of its distribution system and embrace modern technology will it have any chance to remain relevant in the future. Unfortunately, while most dream about the future, the life insurance industry continues to dream about the past.

Insurance Companies Eating Their Young to Save Their Skin

Insurance companies and the executives who run them have often demonstrated a predilection to take actions that are totally contrary to their own best interests, but what they are doing now is the ultimate in self-destructive stupidity.

Put simply, insurance companies seem determined to do all they can to eliminate any semblance of integrity, cohesiveness and coherency in the agent distribution system. If allowed to continue unabated, this will result in the destruction of any resemblance to an organized distribution system and ultimately the very existence of the insurance company itself will be in doubt.

First, a Little History

Life insurance and annuities are products that must be sold; they are not bought. Because of this, the success and survival of an insurance company is totally dependent on its access to, or control over, an effective agent distribution system. For more than a century, insurance companies invested in and benefited from a system of “captive agents.” In exchange for company support and training, agents were contractually required to write business for only one company. In the life insurance and annuity industry there was, for the most part, no concept of an “independent agent.”

This system created distribution stability for the insurance companies and – in effect – allowed the companies to collude together to control agent compensation and career options. Since all companies were selling basically the same products and paying the same commissions, there was little incentive for agents to move from company to company. This captive agent system of distribution worked so well for so long that the companies decided, paradoxically, to destroy it

Insurance companies were for decades the “top dogs” in the financial services industry. Life insurance was considered a virtual necessity and there were few financial or investment options available to the average consumer from banks or investment firms. Then, in the latter part of the 20th century, when the needs of the consumer began to evolve and banks and investment firms began to compete directly against the insurance companies by offering a wide variety of financial options, the success of the life insurance industry began to wane.

From the self-serving and simple-minded perspective of insurance company executives, the culprit causing the decline in industry growth and success was not their own failure to perceive and respond to change, but rather was the fault of the agent “for not selling more policies.” Their solution was just as simple-minded: expenses would be reduced and profits increased if only the companies eliminated the costs and responsibility for building, managing and controlling the captive agent system which they saw as troublesome and inefficient anyway. Almost overnight agents found themselves identified as “independent.” This meant that the agent was free to represent any insurance company and the companies would only have a cost if an agent sold a policy.

Phase II: Enter the IMO

For the past 25 years this system has actually worked quite well for both the companies and the agents. But now, desperate for new business at virtually any cost, companies are allowing or even encouraging actions that could result in the total disintegration of the independent agent system; with no viable alternative.

Understand that if the companies were not going invest in the recruitment, training and supervision of agents someone had to take up the slack. This responsibility ultimately fell to a new type of organization in the industry – the independent marketing organization (IMO). Soon, a cadre of very talented entrepreneurial individuals recognized the opportunity created when insurance companies abdicated control and management of agents. In response to the opportunity, these individuals created organizations (IMOs) designed to recruit, manage and motivate the agents and “give them a home.”

The insurance companies had previously been willing to invest the capital needed to build a distribution system only because the system made the agents “captive” to the company; this created an opportunity for a return on their investment. As they say, “What is good for the goat must be good for the turtle.” Meaning that if the IMO was now going to assume the costs associated with building an agent distribution system, then they must have some assurances that they will have the potential for profit and a return on their investment.

This presented a unique challenge to the companies and the IMOs because the agents were now independent and not contractually tied to either the company or the IMO. They were potentially free to move from company to company and IMO to IMO seeking what they perceived as the “best deal.” If this problem was not solved, it would lead to chaos within the system. The solution turned out to be relatively simple.

Most of the companies employing a strategy of working with IMO’s to build their distribution system implemented two critical policies:

  1. Agents contracted under one IMO were not allowed to move to another IMO representing the same company, without the acquiescence of the first IMO and
  2. The compensation system had to be consistent across the board, from the IMO down to the agent. In short, there could be no “national overrides” and no special deals, because for the IMOs to assume the responsibility of the agent system, they and the agents had to know that everyone had the same deal.

These two policies enabled the IMO and independent agent system to work effectively and efficiently. The IMOs could feel comfortable investing in the recruiting, training and supervising of agents. The IMOs knew they had a potential for a return on their investment, because the agents could not capriciously move from one IMO to another representing the same company since there was no real incentive to do so because the compensation levels at each IMO were identical.

As simple as the solution was, it required integrity and steadfastness on the part of the company in support of the IMO. (It required integrity on the part of the IMO as well.) So long as the integrity of the insurance company executives held firm and committed to these principles, the distribution system would maintain structure and discipline. And it was a win-win-win deal for everyone: the insurance companies, the IMOs and the agents.

The Times, They Are A-Changin’

But times have changed. Over the past few years insurance company executives who lack integrity, do not understand the nuances of the IMO system or are more interested in short-term results than long-term stability, have allowed or even encouraged the decay and elimination of these basic principles.

Today, agents are given virtual free rein to move from IMO to IMO and with little or no discipline regarding compensation levels. Agents can be enticed to move lured solely by higher commissions. In effect, the IMO and independent agent system has become a Wild West, lawless, free-for-all that can lead to disastrous results for all concerned; the companies, IMOs, agents and even the consumer.

The dolts running the insurance companies don’t seem to have enough sense or integrity to recognize the problem. They see their companies paying the same amount of field compensation as always and have little concern as to how it is disbursed. They are more concerned with today than tomorrow and are blind to the fact that their complicity in this free-for-all could lead to the destruction of the very distribution system they depend upon for their own survival.

With the IMOs forced to compete for or keep agents based only on the commission level they are willing to pay, they see their profit margins narrow or even disappear. When they know an agent can easily move from one IMO to another and there is little chance for them to receive a return on their investment, there is disincentive to recruit which is matched by a reduction in capital available to properly train and support the agent. (This problem is compounded when previously independent marketing organizations are now owned or controlled by a company. These “captive” marketing organizations compete directly with independent organizations and with company backing have the ability to offer even higher compensation.)

If this laissez-faire approach to the independent agent distribution system is allowed to continue, it will ultimately lead to the elimination of the IMO and the destruction of the system itself. The irony here is that unless the insurance companies are willing to bring integrity and stability back into the independent agent system, they will end up dealing directly with the agents at a cost that is greater than that of a captive system, with few of its benefits.

And the Moral of the Story …

Life insurance and annuities are products that still need to be sold by a real person. This means that individuals must be recruited, trained, motivated and properly supervised to sell these products. Successful distribution of insurance products calls for investment, structure, discipline and consistency in the system. Twenty-five years ago companies decided they did not want to continue to incur the cost and investment required to build, control and manage such a system. Instead, they allowed independent marketing organizations to assume that role. At first, the new system was structured to protect the investment made by the IMO and to assure the potential for a return on that investment.

Now those protections for the IMO are being dismantled. If the company is unwilling to assume the responsibility for the investment in and management of the agent distribution system and the IMOs can no longer afford to – who will?

If there is no answer there will be no future.

(This is a reprint of a blog posted earlier)