Your Ally In The Insurance Buying And Servicing Process – Part 2 - Insurance

Professional salespeople also have changed. They have found that insurance companies they considered bastions of stability were not immune to financial problems. They have had to deal with client panic as the press launched a media blitz on any com­pany that was downgraded by the rating services. Those were difficult times for you and for the agents. And yet it was just those difficult times that caused a profound change in thought about how to deal with life insurance company products. As you read this book, you will find that my opinions are far more polarized today than they were in the past. More than ever before, I believe quality in an insurance product is related to policy owner control. The greater your control over your insurance product, the happier you will be.

It is important to identify those companies and salespeople who will survive and prosper within the environment just described. Will it be the bigger companies because of their capital base and diversity? If one product is legislated out of existence, larger firms normally switch emphasis to another line or to the latest product legislated into existence. The smaller companies, many of which come into being because they recognize a niche market opened by legislative change, are exposed to a higher degree of risk. Either the successful niche company will leverage its success into a more diverse product line, allowing it to grow, pros­per, and handle the change, or it will face acquisition at best, and bankruptcy at worst. The consumer must face the fact that dealing with a niche company carries with it me potential for company failure.

Many of the new life insurance products are securities, and this has changed the life insurance selection process. We now are looking for the company that, in its capacity as a provider of security products, has the best due diligence (thorough product ex­amination and screening) and the best investment and product management people within its organization. Once found, the consumer then can seek out a professional, registered company representative.

Professional salespeople constantly make demands on insurance companies. They demand quality products, superior due dil­igence, and sponsors that will stand behind the products and serv­ices they offer. Salespeople seek companies that will come to their defense when, as a result of a product failure, they become subject to lawsuits. In turn, the companies require that salespeople not sell products of competing companies and not be "dually licensed," so to speak. Companies demand loyalty. As a result, the consumer may find fewer salespeople willing to search the marketplace and act as brokers for more than one company's products. This frequently limits the consumer to the offering of the chosen company.

How do you deal with this world? The proactive consumer first will select a quality company by asking, "Will the company be there keeping its promises year in and year out for the rest of my life?" "Does the company have the products I need, and will it service them in the way I want them serviced?"

The next choice involves the intermediary—the agent/ broker, or financial planner Never before have you needed an up-to-date, well-educated professional intermediary more than you do today to deal with the life insurance products of today. If that person has not read this book, you will probably know more about the new variable products than he or she does after you complete the book.

Your Ally In The Insurance Buying And Servicing Process – Part 1 - Insurance

People selling insurance products also face their own unique set of problems. Looking to their companies for leadership can be a dis­appointing and frustrating experience as the companies vacillate in their commitment to adapt to a consumer-oriented economy and culture. Tune and time again companies that agreed to throw money into client financial-planning services neglected to also throw in the necessary talent. Instead, the money went to attractive offices and greater overhead, failing to provide a profit center be­cause of the lack of ability and support of those occupying the offices. The typical company then terminated another "pilot" and a vice president someplace said, "See, I told you financial-planning services would be unprofitable." A step backward was taken from the idea of providing the customer base with usable, understandable information on which to base financial decisions. And the company went back to machine-gunning the public with "new and improved" products.*

You have been inundated with information. The Internet is your best friend and your worst enemy. Most of us as consumers are road kill on the information highway because the information is so voluminous, disjointed, and contradictory. We all need a traf­fic cop to direct us to the usable and credible information and to help us adapt that information to our personal situation. The life insurance industry has discovered that what you, the consumer, want and need is a trusted financial advisor to work with toward your financial security. Yes, you're right. The buzzwords of the day are financial planner and financial advisor, but do not let that turn you into a skeptic, in my 36 years as a participant, educator, and observer in this business, more than 90 percent of the people that you perceive as trying to sell you something are trying to do the best job they can for you. After all, your financial success is their financial success. What is wonderful is that in the year 2000, the major companies are helping and encouraging these people to become better qualified to help you. The companies are training them in financial planning, and they are not only telling them, but mandating, that their first loyalty and obligation is to you, the client. That does not mean that you can become complacent. You still must interview your intermediary extensively. But it does mean that the corporate mantra has changed. It used to be "Get out and sell something!" It is now "Was what you sold suitable for this particular client's personal situation?" This is a sea change for the companies. Most of you have been working with caring, pro­fessional salespeople for years. The people with whom you have worked were compensated by commissions but understood that your best interests were in their best interest. The sea change in attitude is not with the people with whom you deal. It is with their employers. In the past, the employers turned a blind eye to the shyster, the rogue salesperson who took advantage of people. Indeed, very often these unscrupulous salespeople were showered with accolades as long as they sold huge quantities of life insurance. Employers today know that this is no longer an acceptable practice. They know that the class-action suits brought against companies as a result of unethical sales practices are far too ex­pensive to fight. Today every effort is made to support only ethical sales practices. Salespeople must prove to the compliance officers of their company that they have done their best for you. Rogue salespeople are eliminated as soon as the company identifies them. Does this mean that you, the consumer, can be less vigilant? No, you still need to continue to deal with your trusted professionals, to keep those long-term relationships, and to work by referrals when new advisors are needed. It does mean that if you are ever mistreated, you have far greater support and assistance in ad­dressing your complaint. It is a better world for you than it was in the past.

Consumer Knowledge, Attitudes, and Habits - insurance

The very existence of financial planning is an example of consum­erism in action. The consumer demands an understanding of how and when? his or her money is to be invested. The regulators de­mand that the consumer receive complete disclosure Heretofore, placing money in a whole life insurance policy was like putting it in a black box. The money went in, mysteriously did whatever it did, and neither the policy owner nor the salesperson had usable information regarding return and expenses. Black-box money management is unsatisfactory to today's consumer.

It is important to have a picture of what has been going on behind the scenes in the last few years to understand why many insurance companies are stumbling as they try to cope with change. They are being asked to both increase returns and reduce expenses. They are being asked to become more flexible to provide more consumer information and new products, and to do this all in an environment of economic and regulatory instability. Fur­thermore, the companies are managed by people who perceive the need to change at different times and in different ways from one another. We have seen major companies start to adapt and then suddenly pull back as political forces within the company change and as new people with new views take over the decision-making positions. The good news today is that market forces have taken over. More and more companies are stressing the fact to their agents, brokers, salespeople, or advisors that the first loyalty must be to you, the consumer. All sales must be "suitable." and the salesperson must be able to prove that suitability to company-trained compliance officers. Indeed many salespeople have signed documents acknowledging that they have a "fiduciary" relation­ship with you, the client This means that the salespeople must put your interests ahead of their own, must disclose to you all their business relationships, must disclose any conflicts of interest they might have, and must respect the confidentiality of your rec­ords and financial information. Clients who have reason to doubt that they have been treated in accordance with these very strict standards have a great deal of assistance and support in pressing their complaints. It is wise for today's consumer to seek out in­termediaries who recognize this fiduciary relationship with their clients.

Technology - insurance

The fifth wave impacting the insurance industry is technology. Without modem technology, we could not manage, manufacture, monitor, and service the products offered today. The technological requirements of today's products have had a unique impact of their own. While tremendous capital investment is required to implement change, the expenditures for hardware, software, and education don't guarantee success. Proper identification of the problem, together with the right technology, software, and people, often appears to be a matter of luck. The unlucky find that they have spent substantial sums of money developing systems to han­dle yesterday's problems. The large, well-capitalized company has an advantage over the smaller one in coping in a world in which a system tends to be obsolete by the time it is operational. Sub­stantial capital is required to stay current.

These tremendous costs are being incurred in a cost-conscious world that demands instant communication and total disclosure. This results in pressure on companies to reduce ex­penses and to increase their competitive positions and efficiency. Companies and salespeople are now required to master the tech­nology necessary to manage the information that supports all their products and to provide you with "usable-on-demand" informa­tion. The Internet is here. The capability to provide you with in­formation on your life insurance policy and the capability to make changes to your policy over the Internet exists. Some companies already provide this service, and your demands will drive the rest to do the same.

Legislation - insurance

Because the industry was built in a climate of legislation, regula­tion, and business plans designed for a stable economy with a 3.62 percent average prime rate, its performance was less than satisfactory in the volatile 1970s and 1980s. In fact, in the early 1980s, the Federal Trade Commission's report on life insurance cost disclosure stated that effective price competition did not exist in the life insurance business and that rates of return were not what they could be. The government was complaining about low rates of return! In a turnabout, after the blizzard of failures in the 1990s, the government forced through legislation that requires the general accounts of insurance companies to be invested in safe portfolios that will have low rates of return.

The government-mandated portfolios of long-term bonds and mortgages, which insurance companies accumulated during the long period of relatively low interest rates, did look bad in the period from 1979 through 1983. The rates of return looked espe­cially low when compared with the money-market rates that were available in the early 1980s, for example, 12.78 percent in 1980, 16.82 percent in 1981, and 12.23 percent in 1982. But, then, all long-term, interest-sensitive investment vehicles, such as whole life in­surance policies, look bad in an economy in which the interest rate is increasing.

The Tax Reform Act of 1984 created a niche market for single-premium life that would pay the high current interest rates of the day. Then legislation in 1988 limited the amount of money that could be put into this type of policy to earn The high interest rates and consequently snuffed out the product. The insurance industry in those days went for higher interest rates as consumers cried, "Higher than the rest... why take less?" Aggressive companies like Executive Life pushed the junk bond mania beyond the limits and failed. Consumers learned from these failures, and the pen­dulum swung back. The next cry, heard in the 1990s, was "Rated best... I won't take less"

Insurance company rating services sprang into prominence. Standard & Poor's (standardandpoors.com), Moody's (moodys. com), Duff and Phelps (which joined with Fitch Financial) (dcrco.com), Weiss (weissratings.com), and A. M. Best (ambest. com) all blessed or damned insurance companies with their ABCs and created the public demand for "AAA." Meanwhile the supply of AAA-rated companies decreased to a handful.

Of course, we all criticized the government and state insur­ance commissioners for not correcting the problems sooner and preventing insurance company failures. Now the insurance com­missioners of the various states are responding through their cen­tral organization, the National Association of Insurance Commis­sioners (naic.org). They tell the insurance companies how much surplus (assets in excess of liabilities) the companies need to be considered financially sound. They call this measure the risk-based capital ratio.

Thus if an insurance company has assets the commissioners define as risky, the company needs to have more surplus than if it has assets the commissioners deem to be safe, such as short-term government bonds. So what do you think the insurance com­panies are doing? They are managing their general account in­vestments to get high grades from the commissioners because they know that you, the public, want that now. You and the regulators are getting what you have asked for, squeaky clean general ac­counts that are earning what you would expect from a low-risk, low-return type of investment. The returns in the general account type of product are often so low that they are close to the mini­mum contract guarantee. It is entirely possible that the day will come when your company skips its dividend in your whole life policy, or says it will pay only the minimum interest guaranteed in your universal life contract.

Deregulation - Insurance

You used to buy life insurance from a salesperson who specialized in life insurance. Now the properly licensed individual may be a ".com" on Internet, a banker, a CPA, a lawyer, a stockbroker, a CFP, or any other financial advisor. Consumers today are de­manding that they be able to buy their life insurance from an advisor they trust. And they expect that advisor to have, or to obtain, the life insurance expertise their situation demands. The elimination of the regulatory barriers has vastly increased competition for the consumer's life insurance business. Today's well-educated and very demanding consumer is drawing more consumer-orientated products into the marketplace. Of course, de­regulation leads to reregulation and legislation.

The Economy - Insurance

The general account life insurance products of whole life and uni­versal life are interest rate-driven products. The managers of the general account try to manage that account to obtain the best re­turn possible using interest-bearing investments. The life insur­ance industry existed for almost 150 years within a very stable economy. For example, the prime rate from 1930 to 1969 ranged between 1.5 and 8.5 percent, averaging 3.62 percent in a relatively predictable economic environment. The life insurance industry had an easy time investing the assets in those general accounts for this extended period of time.

In the period from 1970 to 1979, the average prime rate was 9.63 percent, with a range of 5 to 15.5 percent. In a 60-day period in May and June 1980, the prime rate went from a low of 12 to a high of 19, a movement of 7 percent. Between 1980 and 1982, the rate not only averaged 17.6 percent, but also experienced unprec­edented volatility, ranging from 11 percent to an all-time high of 21.5 in December 1980. Then came the tumble throughout the 1990s, with long-term interest rates approaching 5.5 percent in the fall of 2000.

Exhibit 1.1 presents a graph illustrating that interest rate trends have been of long duration. Long-term bond rates were in a downtrend for 135 years, from 1799 to 1935. Those rates then moved sideways over 20 years and were in the 2 to 3 percent ranges from 1935 through 1956. Interest rates then started an uptrend that ended 35 years later with the yield on the 30-year Treasury bond at about 15 percent. Since 1981, the cyclical trend of interest rates has been down.

We have no idea whether interest rates will go up, will tend to go back to their 200-year average of 5.5 percent, or will go below that average for an extended period of time. The point is that extended periods of low interest rates have happened, and some economists and analysts are predicting that they will happen again. If this long term, low-interest-rate environment should oc­cur, the rate of return passed through to policy owners holding general account products also will be low.

While interest rates were volatile and hitting unprecedented highs in the 1980s, the stock market was also making dramatic changes. The Dow Jones Industrial Average (DJIA) first rose to 200 in 1928. It then rose to 400 just prior to the crash of 1929 and did not get back to 200 until 1950. It finally hit 400 again in 1954. For 26 years the DJIA volatility was 200 points. The 1000-point level was not breached until November 1972. It took 77 years to get to the first 1000 points on the Dow. But in May 1999, it took only 24 trading days to go from 10,000 to 11,000.

We all have seen that these dramatic economic changes have had an equally dramatic impact on the way the consumer saves and invests. Saving for retirement is not the same for a person born in 1950 as it was for a person born in 1900. Today's retirees cannot manage retirement the same way that their parents did. As the consumer has changed, insurance companies have had to change their products and their approach to the consumer.

The insurance industry yesterday and today

To understand life insurance, it is important to appreciate the economic and sociological forces impacting the industry, causing changes in its structure and products. The objective is to select appropriate products to provide long-term satisfaction. Risk and return are very much a part of the picture, and one just understand the risks to realize the potential returns.

In John Watt’s prophetic 1987 book addressed to the insurance industry, The Financial Services Shockwave, he discussed “Six diverse, largely unrelated forces (shockwaves) at word to alter your lifestyle forever.”

• The economy
• Deregulation
• Legislation
• Demographics
• Technology
• Consumer knowledge, attitudes, and habits

We will examine some of these briefly.

Annual multi trip travel insurance - The Insurance Industry Today

The Insurance Industry Today

In the original 1988 edition of the life insurance investment advisor, Chapter 1 began stating “The financial services businesses have been revolutionized …” Little did I know then that is was just the tip of the iceberg, that “You ain’t seen noting yet” better described the situation.

Since then, the insurance industry has been in turmoil. Insurance commissioners of various states had to take over 47 failing companies in 1989, 41 in 1990, 69 in 1991 (the year such industry giants as Executive Life, Mutual Benefit Life, First Capital, and Monarch Life failed), 32 in 1992, 22 in 1993, 12 in 1994, 8 in 1995, 7 in 1996, and 11 in 1997. It is not over. On August 10, 1999, St.Louis—based General American Life Insurance Company asked for and received regulatory protection from a virtual run on the bank by its institutional investors as a result of the fact that its ratings had been downgraded by the rating services. At the time, the company had $1.63 billion in capital to meet its obligations but was out of cash to meet liquidation demands. By the end of August, Met Life had committed to buy Deneral American for $1.2 billion and assure the healthy continuation of the company. Today you cannot be sure that the insurance company that you buy from will be the insurance company that you die with.

Insurance commissioners take over when they question an insurance company’s ability to fulfill its obligations to its policy owners. Their first action usually is to stop or reduce payments to all creditors, including policy owners with general account products. Anyone who has suffered the consequences of this action realizes that investments within insurance contracts are important and deserve attention. In many cases, these people regretfully learned that chasing the highest interest rate led them to the weakest insurance company. Salespeople also finally realized that those companies offering the highest commissions and interest rates were often the most vulnerable. None of us—consumers, insurance agents, insurance companies, or insurance regulators—will ever be the same, and yet many still fall prey to making the same mistakes today.

This does not mean that the 1988 version of The Life Insurance Investment Advisor is in error or no longer of value. In fact, it is valuable for its historic perspective and as a balanced, even academic, study of the industry and its products at that time. It contained statements like “We hope Executive Life can pay.” It couldn’t! In retrospect, it turned out to be one of the most traumatic of the insurance company failures.

This book, The New Life Insurance Investment Advisor, the first edition of which was published in 1994, does not treat life insurance academically. It is a consumer’s handbook. The objective is to show the consumer what life insurance policies are available, how to choose among them, and, most importantly, how to manage the policies once they own them. It is a book “with and attitude” that does not treat kindly those products that this author considers unacceptable for the new generation of insurance buyers.