By Steven A. Morelli
CHICAGO – While the East Coast braced for a hurricane on Monday, LIMRA’s CEO sounded the alarm about a different but also historic disturbance whirling toward the insurance industry.
While acknowleging the impact of Hurricane Sandy, and expressing concern for those in its path, Robert Kerzner delivered his dire warnings about another storm effecting the insurance industry during his annual address to hundreds of insurance company executives. Many of those concerns during the opening general session spoke right to agents.
Carriers are exiting markets in droves and in many cases leaving the country altogether. Companies are dropping entire lines of business, particularly in variable annuities and long-term care. The largest of the companies are looking to Latin America, Europe and Asia for business.The disruptions are unprecedented in their scope, Kerzner said: “This has never happened before on this scale.”
Many forces are feeding the storm, but Kerzner focused on two fronts in particular, demographics and regulation (with an assist by persistently low interest rates). Although demographics play a part in sunnier days, regulation is pretty much all dreary, all the time, in Kerzner’s estimation.
Regulatory changes are having a profound impact on companies with some of the pressure on capital requirements coming from harmonizing with international practices. Just the accounting standards alone are staggering for companies. Ireland, for example, faced a tenfold increase in data points required by adopting Solvency II standards.
“There are regulatory issues being debated now across the globe that could have cataclysmic effects on our business,” Kerzner said.
The United States is eyeing another piece of European financial fashion that would change how insurance is sold and could mothball the classic American insurance agent. That is the fee-based sales model, which more countries are requiring – and banning commissions. In 2013, three additional countries, the UK, the Netherlands and Australia, will ban commissions, Kerzner said. Some Asian nations are considering commission restrictions.
“Regulators believe producers paid on commission have a bias and an inherent lack of objectivity and that a fee-based system eliminates the problem,” Kerzner said.
But those restrictions might have the opposite effect and eliminate advice for many clients and reduce business. Although Europeans and Americans say in surveys that they would like a flat fee rather than a salesperson being paid a commission. But ask them what they would be willing to pay and that’s where it all falls flat because consumers don’t want to pay very much, about $100, far less than fee-based advisors usually charge.
As regulators struggle to shape a fiduciary standard, Kerzner cautioned against developing one that ends up working against consumers. If they do not, or cannot, pay for fee-based advice and commission-based advisors are not available, Americans will not get the financial protection they need.
“We must not let regulators and legislators pass well-intentioned legislation that makes it more difficult for middle class people to get basic advice,” he said.
Research shows why consumers need guidance to truly understand the consequences of their actions and to make the right decisions, Kerzner said.
“Behavioral economics tells us there are many things people believe they need, but it takes what one researcher calls a visceral reaction to get them to act,” he said. “Life agents and financial planners who meet with clients provide the guidance and tell the stories that trigger the visceral reaction.”
And it is not just regulators who don’t seem to get this. Some companies also seem to be missing that point.
“Some big names in financial services are spending a lot of money on TV ads trying to convince consumers they don’t need advice,” Kerzner continued. “They can do all their planning and investing online by themselves. However, the more you study the research on how consumers make financial decisions, the more you understand why there is a need for advisors.”
He pointed out that the dynamic is the same with investments. Clients without advisors jumped out of equities when the market was down but those with advisors stuck with it until stock values rose, while do-it-yourselfers lost out on the recovery.
Impact on Guarantees
Capital requirements are tightening at the same time companies are struggling with stubbornly low interest rates, reducing carriers’ ability to replenish, let alone build, reserves. Something has to give and that something is often the very thing that has driven growth in life insurance and annuity products – guarantees.
Guarantees have been the bedrock of the industry’s promise to consumers and the solid base that supported growth in the worst financial crisis in decades. But with the pressures that Kerzner outlined, combined with persistently low interest rates, will not allow companies to sustain guarantees.
“There won’t be 30-year guarantees on term,” Kerzner said. “A UL with guarantees may become something that is displayed at the Smithsonian.”
Went a Little “Dark”
Having placed the industry on the metaphorical ledge (and that was without The Fiscal Cliff), he then talked it down. “While we may be on the edge of the precipice,” Kerzner said, “what we do now can alter the outcome.”
Some of the promising trends: demographics, market opportunity and cross marketing.
Demographics are shifting in favor of what the insurance industry has to offer. “With 10,000 boomers turning 65 each day, and the total number of retirees growing to 65 million by 2025, there is a real need for accumulation and de- accumulation products,” Kerzner said.
And it’s not just the boomers -- “Generations X and Y are reaching the point where they will be great prospects for life insurance. And 56 percent of Gen Xers believe they need more life insurance.”
Market opportunity is growing for smaller companies filling in where the larger companies are pulling out.
“We are seeing this now in the annuity market as new and smaller players are entering,” Kerzner said. “Annuities represent 40 percent of the assets of life companies and will remain an important line of business. In an era where the risk of living too long is now greater than dying too soon, annuities are not going away. People want what annuities offer – protection from running out of money.”
Annuity growth has been built on guarantees. The next wave has to come from somewhere else, from rethinking how annuities are marketed, Kerzner said. Rather than focusing on accumulation, the message could be more about lifetime security, particularly as employers dial down their defined benefit programs.
Tht message is already catching on with single premium immediate annuities (SPIAs).
“Post downturn, we saw views about SPIAS change with people more willing to give up control of assets to trade for lifetime income,” Kerzner said. “Even with record low annuity rates in 2011, SPIA premium grew 7 percent. … People no longer think about retirement as just a pile of money. They are more concerned about getting a check in the mailbox every month.”
Cross marketing is another area of opportunity illustrated by a couple of recent examples:
-- MetLife has a deal to sell life insurance at Walmart, where Humana is already selling health coverage.
-- Liberty Mutual is partnering with some life insurance companies that are referring property and casualty prospects to them.
“Historically unthinkable models like this will continue to emerge as companies look for ways to ways to cross-sell and generate fee income by leveraging their customer base,” Kerzner said.
But the future belongs to those who know how to plumb data, Kerzner said. The industry has mountains of numbers -- there might be better ways of finding the gold in those hills.
“How can we use information like this to target prospects for our producers and help them be better prepared for sales calls?” Kerzner asked. “Data is king. We need to better leverage it.”
Once data finds the right prospect for the right producer, it still comes down to the story. Kerzner said the insurance industry has a good one to tell and should learn how to tell it well. “One thing we need to do immediately is tell our story better by delivering positive messages about our industry to consumers, legislators, regulators and even our own employees.”
Steven A. Morelli is editor-in-chief for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers, magazines and insurance periodicals. He was also vice president of communications for an insurance agents’ association. Steve can be reached at [email protected].
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