A Memo to Life Insurance CEOs: How to Make Your Company One That Is Truly “Admired.” Confidence and Pride Will Combine to Become the “Killer App” of Your Future

dm-turn2A recent conversation with a life insurance company executive led me to write this essay. During our discussion the executive mentioned that one of his CEO’s goals is to see that this particular insurance company become one that is widelyadmired.” Thirty years ago upstart names like Fidelity and Vanguard thought about what it would take to become admired organizations. They acted aggressively and attracted trillions of dollars in assets, much of that at the expense of insurers. Now, life Insurance CEOs find themselves at a momentous juncture, a moment when they must define their companies’ future success and prestige. Their decision-making can lead them to immense growth and admiration, or marginalization and lost shareholder value. What decisions will today’s life company CEOs wish to be remembered for?

WHAT WILL IT TAKE for a life insurer to achieve admired status? The first question that comes to mind is which audience should come to admire the life insurance company? Consumers? Distributors? The press? Regulators, rating agencies? All of the above? And for exactly what quality or qualities should the insurer be admired?

Although I know the CEO in question I haven’t yet had the opportunity to explore his thoughts and goals. In advance of that I’d like to outline the dynamics for transformation that, in my judgment, will allow a life insurance company to be admired not just by customers and distributors, but also by the press and regulators.

My thinking on this subject is not without context. If you are a regular reader of this blog you will be familiar with numerous essays I’ve published about challenges facing life insurers. These articles have appeared at this site as well as in numerous journals including InvestmentNews, Financial Planning, National Underwriter and Research Magazine, to name a few. This elaborate and ongoing exploration has been sparked by my fear that insurers may misfire on what should be their greatest opportunity for new business– Boomer retirement.

I’ve not hesitated to identify and criticize some of the anti-consumer sales practices and sub-par product creation that has, in part, led to today’s negative public image of annuities, in particular. I’ve always attempted to be constructive in my criticism, however. What will it take for a life insurer to become admired?

Confidence, Pride and Passing “The New York Times Test”

For a life insurer to transcend the present climate of negative perception and to elevate itself to admired status, a top down, CEO-driven priority to instill confidence among consumers must take root. “Confidence” is the number one deliverable for life insurers in the years ahead. They will either deliver it successfully or see their market share and public image erode even further.

The next key deliverable is pride. A CEO who is able to have pride in his or her entire product line, pride in all aspects of the sales process, and, critically, pride in the face of press scrutiny will be well on the way to achieving admired company status for his or her company. Pride that becomes infectious and filters through the entire organization will both galvanize all to the mission of best serving consumers’ interests and lead to high-quality growth.

We are well aware of instances in financial services where certain business practices become the subject of articles and exposes leading to embarrassment, damaged reputations, litigation, and the destruction of shareholder value. In some cases, even the CEO’s forced resignation. When such incidents occur consumers’ confidence is damaged- sometimes permanently.

The CEO of tomorrow’s admired life insurer will be able to feel the sense of pride even if any or all of the insurer’s business practices were to become the subject of a front page article in The New York Times. The notion of passing “The New York Times Test” should be tested against current insurer business practices. Any that that fail to meet this standard should be eliminated even if eliminating those leads to short-term pain. Passing the test on all counts properly aligns the company for success in both the near-term and long-term future. It also separates it from lesser organizations unwilling to place themselves under intensive self scrutiny.

Failure to deliver confidence to a life insurer’s present and prospective customers should be understood by CEOs to mean nothing less than missing out on the Boomer retirement opportunity.

Consumers’ Confidence Must Extend to The Product Itself, Not Just the Agent

Why do I believe that confidence and pride will combine to be the “killer app” of the life insurance company’s future?
And why do I believe that no genuine admiration of a life insurer can occur unless and until its customers can be truly confident about the PRODUCTS they purchase? The reason is that unlike in the past when insurers could ignite robust sales of iffy products based solely upon consumers’ confidence in their agents, the distribution phase will require consumers to also have absolute confidence in the specific product or solution they are purchasing.

I urge CEO’s take heed; the road to your company’s future success passes not through your distributors’ loyalty but rather through your customers’ emotions. But, not the emotions of fear and greed that have so often been successfully exploited to ignite past accumulation sales. Future success will be built upon your solving a key, emotionally-based equation:

Clarity plus Comfort = Confidence. Call it the Three-Cs of future success.

Reasons for Believing that a Confidence-Centric Sea Change is At Hand

Why do I believe that trust in the product as well as in the intermediary will be required going forward? There are several reasons:

• “Going forward” implies the conduct of an insurer’s business in the distribution phase.

• In terms of the insurance carrier’s future, the stakes in the distribution phase are so high, the business opportunity so vast, and the potential financial liability so extreme, a carrier will face harsh sanctions if it fumbles the ball on the mission of creating retirement security

• Unlike during the accumulation phase, if a consumer purchased the wrong product he or she may have suffered, say, a missed growth opportunity by 100 or 200 basis points, or faced a partial loss of liquidity for a period of years. That doesn’t make for a happy customer, but there is still no permanent damage done.

• During the distribution phase, however, a bad recommendation resulting in the purchase of the “wrong” income product may cause a consumer’s income to fail to keep pace with inflation or, perhaps, even cause “portfolio ruin.” For the unfortunate customer this may mean many years spent in old age with insufficient retirement income.

Consider the comments of Paul Lofties, Head of Wealth Management Services for the large independent broker-dealer, Securities America Investments. In an interview with me, he described future liability potential arising out of sales of variable annuities sold as “solutions” to provide durable retirement income. According to Lofties:

“The research that we’ve done just doesn’t show that there’s much opportunity for that income to step-up to keep pace with inflation or that’s its going to return principal. Because of that, if this is your single product solution, 5, 10, 15 years down the road you’re going to start to see some negative repercussions. Locking somebody into a solution like that may mean not being able to keep pace with inflation.”

“A further danger is that given the way that most of those products work, if you do indeed go over and above your withdrawal benefit it will reset the guarantee. So, if my actual account balance has dropped by 25%, and I now take a distribution that’s above my guarantee, in most of these products the guarantee resets at where the account value is, which would just be disastrous for somebody. That’s the most common single product solution, today, and I think it’s got a lot of problems if it’s used as a single product solution.”

I think about Lofties’ comments in the context of life insurers selling fixed annuities, primarily. I would argue that the indexed annuities, for instance (which are now being dressed-up with income riders) offer even less potential to keep pace with inflation than do variable annuities. What does this imply for a life insurer’s future liability potential if, say, an agent places too high a percentage of a customer’s assets in such a product?

• I believe that there is little chance of a carrier becoming admired unless the retirement products’ (annuities) sales process is radically transformed including reliance upon new technology-based communications strategies, enhancements in intermediary productivity and the introduction of more consumer-oriented products. Why? An already hostile and aggressive consumer press, aggressive insurance and securities regulators, plaintiffs’ attorneys, and, more significantly, dramatically new and non-traditional competition will force insurers to add far more consumer value to their products resulting in significantly lower compensation for intermediaries. The only solution to this thorny set of changes is to increase the productivity of intermediaries; larger volumes offset lower commissions allowing intermediaries to remain financially viable.

• The future competitive landscape for life insurers will be radically altered and include head-to-head combat with large asset management firms (with superior public images) that have already set their sights on the large Boomer consumer market. CEOs, get ready for combat on your traditional turf with the Goldman Sachs and Morgan Stanleys of the world! Consider the comments of Dr. Moshe Milevsky in response to my question on the certain debut of structured products in the consumer market:

“I think that’s what’s going to happen with some of the innovation in structured products in the US. Wherein there are a number of traditional asset management shops that are thinking about it, and they are talking about it. They’ve been talking about it for years. This is not something new to them.”

As soon as one of them makes that final move and brings it to market, everybody else will step in. I think that’s what’s going to happen. When will this happen? It’s tough to predict, but my sense is there is going to be clustered. I wouldn’t be surprised if two years from now there are 12 companies offering a new class of products that didn’t exist two years ago.”

• The lack of transparency in the life insurance industry has destroyed growth opportunities for insurers and, unless arrested, will likely prevent insurers from reaching their full potential in Boomer retirement. As I often observe, when I entered the life insurance business in 1977 it was life insurers that led in the management of pension assets. Enter the mutual fund complexes, and their superior business model that included genuine, confidence-building transparency. The result is that life insurers lost the pension business. What are the implications for life insurers if transparency is not introduced? I asked this question of Beacon Research’s Jeremy Alexander:

“I was a producer for ten years. When I was producer I was always in an uncomfortable position, where it took me at least a couple of meetings to get clients to trust me. Why? Because I was an insurance guy. Well, I didn’t think that this was fair. And I couldn’t understand what I was considered inferior, say, to a stockbroker. But the bottom line was that an individual could come into Merrill Lynch, and a Merrill broker would say, ‘Here’s what I recommend.’ And that person could go to their local library and check out S&P or Morningstar or Lipper, and they could say, ‘Gee, that was a great recommendation.’ And the rep could say, ‘We use this third party source and here’s how we came up with your analysis.’

“Well, as an insurance guy, I couldn’t do that. And I had clients who asked me would you sell this to your parents? And they’d look for me to flinch. Now that’s not the way to sell. That’s why the insurance industry has so many problems with how people perceive the industry. It’s simply that they can’t know that the recommendation is good. Until you have transparency you can’t have an efficient market. It’s bonds before Bloomberg. It’s mutual funds before Joe Mansueto. And until the industry solves this problem, it will always suffer from a poor perception.”

I asked Moshe Milevsky about the same issue:

“The black box of investments no longer exists; you can drill down to literally the stocks, the companies that you own. I think that’s what’s going to happen with many of the financial insurance products out there. Obviously, this is a controversial issue. For example, the whole topic of the life settlement business, a secondary market for unwanted life insurance. Open up the newspaper in Florida and you’ll see 12 different advertisements for seminars on how to get rid of your unwanted life insurance policy. Many, many people in the industry think that’s not good, a lot of insurance companies will say that they don’t like that trend, but I think that it’s happening and that’s another step in the transparency process. We have to rationalize pricing. I’m more of an observer than a participant in these markets, but I definitely think that transparency is a good way to describe it.”

Why Communications is More Important than Products for Life Insurers

How can it be that one industry is both the best at sales and the worst at marketing? The issue of Communications is often paid lip service but remains underappreciated in most life insurance companies. This must change. Why? Because I’m convinced that the “war” over Boomer retirement assets will be communications-based rather than product-based. CEOs, you need to drive a focus and priority around the communication of compliant, value-based messages in order to increase market share. This is an even more important issue for life insurers than for providers of other types of financial products because insurance products are inherently more complex.

In thinking about communications CEOs should be asking themselves some tough questions: Does my company excel at marketing? Are my agents sufficiently productive to make a successful conversion to levelized or reduced compensation? Is there a high level of inconsistency in the way my company’s products are explained to consumers? Will current or planned strategies for assessing suitability go far enough in protecting my company from future financial liability? Do I have any ticking time-bombs from past years’ sales efforts that may explode in my face?

These questions involve issues and challenges that can be at least partially mitigated through excellence in communications and marketing.

In my interview with Moshe Milevsky, I asked him if he agreed with my assertion that in the future it won’t be the organizations with the “best” products that will be most successful in terms of new sales. Rather, it will be those that are the best communicators- the ones able to communicate their value to a vast audience of potential consumers. This is what Milevsky said in response:

“I do. In fact I’m really resonating with the first comment that you made that it’s not necessarily the best product that’s going to win. I’m seeing that now, and it would be nice to have kind of a coherent framework to understand why it’s always going to be the second and the third best product that’s going to win.”

“It might very well be because of their ability to communicate their message better as opposed to the first one that put all its effort into product development and forgot about the second and third steps which are to make sure that people understand this and to communicate it and people absorb it. I see a lot of wholesalers in action that do these seminars and I get to listen before and after to some of the folks that get up and pitch various products. I see that the ones that are able to communicate in an almost simplistic way what a particular product or strategy does end up winning as opposed to the one that comes in with the very long list of product features and kind of confuses people.”

“Even though it’s really a better product they are not the ones that get the business. It’s almost as if I scale back on the bells and whistles and focus on the 2 or 3 really good things about your product and put the rest of your effort into explaining this to individuals as opposed to the other way around. I really do resonate with that. It’s only with time that I’ve come to appreciate how important the communication part is.”

“As a graduate student at university you never really appreciate or are taught the importance of clear communication. A professor with a Nobel Prize standing at the black board scribbling with chalk is a genius. It doesn’t matter if he can communicate or not. It’s the thoughts that count. It’s the papers that they wrote. It’s the products that they have helped develop. In time I’ve realized that it’s much more about communication, inspiration and clarity of ideas than it is about the actual development. It’s certainly a combination of the two. I do resonate with your earlier comment.”

Admired in the Future? An Achievable Goal that Implies Much Work to Be Done

Yes, I believe it is possible for a life insurer to become truly admired. Will attaining admired status be easy? No. Is it worthwhile to invest in the tools, transformation processes and technologies necessary to achieve it? Certainly.

As stated above, the stakes are too high to not attempt to have your company become admired. Thirty years ago upstart names like Fidelity and Vanguard thought about what it would take to become admired organizations. They acted aggressively and attracted trillions of dollars in assets, much of that at the expense of insurers. Now, life Insurance CEOs find themselves at a momentous juncture, a moment when they must define their companies’ future success and prestige. Their decision-making can lead them to immense growth and admiration, or marginalization and lost shareholder value. What decisions will today’s life company CEOs wish to be remembered for?

©Copyright 2007 David A. Macchia. All rights reserved.