The Preventable Demise of the Fixed Annuity Business: Part One of a Multi-Part Series
So I want you to get up now. I want all of you to get up out of your chairs. I want you to get up right now and go to the window. Open it, and stick your head out, and yell, ‘I’m as mad as hell, and I’m not going to take this anymore!’ I want you to get up right now, sit up, go to your windows, open them and stick your head out and yell – ‘I’m as mad as hell and I’m not going to take this anymore!’ Things have got to change.
But first, you’ve gotta get mad!…You’ve got to say, ‘I’m as mad as hell, and I’m not going to take this anymore!’ Then we’ll figure out what to do about the depression and the inflation and the oil crisis. But first get up out of your chairs, open the window, stick your head out, and yell, and say it: ‘I’m as mad as hell, and I’m not going to take this anymore! News anchor Howard Beale in the 1976 film, Network
This is it. I’ve reached my Howard Beal moment. Maybe it’s because I live in Massachusetts, or perhaps it’s just the years of accumulated frustration that has taken me to the breaking point. But the complaints issued last month by Massachusetts Secretary of State, William Galvin, against two Massachusetts annuity producers were the straw that broke this camel’s back.
It’s time for someone to publicly step-up and do what no one else in the annuity business seems to want to do: address the disease causing the problems in the industry rather than the symptoms. I’ve been waiting for the carrier Presidents and association leaders to do just this, but they’ve fiddled so long and so ineffectively that Rome is now very nearly burnt beyond recognition. With apologies to the countless agents I’ve worked with over these many years, as well as to my numerous friends (and customers) in senior executive positions- all great people, no one is exempt from responsibility here.
So this, then, is the first in a multi-part series in which I will seek to unlock the reasons why the annuity business finds itself in its present messy state. My sole motivation is to protect and expand an industry that has been very good to me, has given me an opportunity to succeed, and has allowed me to be more financially successful than anyone would have had the right to expect.
Unique Perspective
When it comes to commenting on the annuity industry, I have something of a non-traditional if not unique perspective that may make me uniquely qualified to take on this mission; I’ve been a successful agent, an agent recruiter, an agent trainer and a principal of two successful independent marketing organizations that distributed fixed annuity products through independent agents.
For more than 20 years I’ve also been a consultant to life insurance companies and broker-dealers, and I’ve worked closely with many -level executives to help define solutions that meet sales, marketing and distribution challenges. Although my time is now solely spent as a consultant concentrating on technology, new media, retirement income and compliance, it was until only recently that I kept a leg in each pond.
First, please understand that the annuity business today is locked-into two, mutually destructive vicious cycles which, unless arrested, will spell the failure of the business as we know it. One vicious cycle concerns the constant pressure agents feel to run away from any identity that overtly conveys their actual intent to sell annuities. The other vicious cycle concerns product manufacturing activities that serve to erode already poor agent productivity.
To be clear, “failure’ of the annuity business in this context doesn’t mean going the way of the dinosaurs but rather something that is to me even worse: a failure to live up to its business potential at a critical time resulting in marginalization by competing industries which usurp it’s value and standing.
Am I being an alarmist? Yes, certainly. I’m I overstating the danger? Hardly. In some jurisdictions it’s now arguably illegal for annuity producers to carry on in their daily work. Senior citizens- for whom I was taught some 30 years ago were perfectly suited for annuities- have today become a “protected class” of buyers; protected from “High Commission Annuities.”, that is. It’s not just Massachusetts, of course. It’s also Washington, Missouri and Minnesota, to name just a few. It’s thousands of negative press reports concerning annuity products and sales practices. It’s Parade Magazine telling its readers to, “Avoid a Costly Mistake.”
I’ve known- and recruited- thousands of insurance and annuity producers. In the early part of my career I built multiple successful distribution organizations. In large measure my success in attracting agents was do to an excellent ability to both evaluate producers’ talents and motivate them to adopt my vision of greater professional and financial success.
As a consultant, I’ve also worked closely with dozens of life insurance companies. Under consulting arrangements which have spanned as long as 12 years, I’ve worked with senior executives including company presidents, chief actuaries, product actuaries, CMOs, CFOs, RDs and countless mid-level executives. I’ve participated in hundreds of meetings addressing topics such as product development, marketing strategy and distribution strategy. I’ve helped define high-level strategy for new, targeted markets, distribution acquisition, value proposition enhancement and product development.
These experiences have allowed me to see both sides of an equation which equals today’s unfortunate annuity market upheaval.
Honesty & Honor on Both Sides
There is simply no doubt that the vast majority of producers as well as the vast majority of life insurance company executives are honest, honorable and decent people. That said, I can tell you that there is little in the way of meaningful communications between the two groups. Each group privately disparages the other. Each holds a fundamental mistrust of the other. Each feels that its own inherent competencies are the most difficult to achieve, and the most valuable.
Yet, there is a fundamental imbalance that is at all times is operative. The carrier is the “dealer.” It holds all the cards. It has all of the financial muscle, product-creation abilities and pricing power.
The agent/distributor is the “player”, reliant upon the carrier for product, compensation, appointment, opportunity.
For all its strengths, the carrier is vulnerable, even potentially non-viable without ongoing distribution. It works hard to conceal the vividness of this naked truth from its producers. The producer consistently undervalues his or her value, and would be surprised to learn how desperately it is prized inside the “Home Office.”
The relationship- and relationship dynamics- described above have developed, coincidentally, over the period since I entered financial services through the insurance door in 1977. As a rookie insurance agent I was unaware that technology was about to unleash a paradigm shift that would have career-long and dramatic implications for me and everyone else.
Unleashing the PC in the Rate Book Era
My career began in the last stages of the Rate Book era. No PC to help illustrate and explain product vales or contract provisions. My Rate Book contained annuity (annuitization) rates and costs per $1,000 of life insurance for all ages, as well as historical dividend payout information for in-force life insurance policies.
Because today’s computer-generated sales tools didn’t even exist, my ability to sell something was conditional upon my capacity to be persuasive and conceptual. To engender emotional responses that tug at feelings of loss, guilt, greed and fear. That’s why my employer, MONY, provided training programs designed to develop my sales skills. I was taught to sell in a certain manner; say certain words, probe for certain reactions and answer certain objections. I didn’t realize it at the time but I was being taught to sell in a needs-based, conceptual manner.
Back when I was selling life insurance using only a rate book and my powers of persuasiveness, the industry was in a state I would describe as “Black Box.” It was shrouded in mystery, there was little or no ability to compare prices, replacing an existing policy for a new one was considered an unethical act, and most agents- some 80%- worked for a single life insurance company employer, sold that company’s products, exclusively, and told their prospects that their company was the “best” company to buy from. I certainly did.
The introduction of the PC spawned the ability of data collection allowing easy access to comparative pricing which itself ignited a monumental shift. All of a sudden agents who had exclusively sold one company’s products realized that there was a big, undiscovered, and potentially lucrative world out there. An entirely new (or at least new to the vast majority of agents) business model began to emerge: Rather than representing one company’s products to consumers, I represent consumers and choose only the best products from among all companies. Adopting of this new business model, of course, required resigning from the primary company in order to work as a “broker.”
At the same time that this distribution shift was unfolding, computerization enabled a concomitant paradigm shift in product design. 1979-1980 saw the introduction of interest sensitive, universal life insurance. All of a sudden a product emerged (in a high interest rate environment, no less) that made traditional life insurance seem very expensive if not archaic. The introduction of universal life products with double-digit crediting rates sparked a massive replacement of traditional policies not to mention a range war between old-line mutual insurance companies and up-start stock life insurance companies.
Both of these technologically-driven phenomena led to another paradigm shift; life companies began to abandon traditional development of insurance sales people in favor of concentrating exclusively on the manufacture of new products. The great splitting-away of distribution from product manufacturer thus began.
I was there and I can tell you that there was nothing nefarious about both agents and companies making these changes. Both groups saw it in their best interest in light of the challenges they were facing. But it’s also true that neither group was quite ready for what was ahead of them. And what was ahead of them would constitute the greatest challenge the industry has faced in at least 30 years.
Let’s fast-forward those 30 years. There’s been a complete reversal among agents in the way that they work. Today, the 80% that previously were bond to a single company are free and independent. Most carriers compete aggressively for independent distribution; very few carriers recruit and develop agents any more.
In a sense, the carriers lost their soul when they lost their agents. The agents were a counter weight, an alternative point of view, a sounding board to the real, street-level dynamics. Independent agents were different by definition, unable to be embraced as closely. After all, tomorrow they might be talking to my chief competitor.
When carriers adopted the manufacturer model exclusively, they effectively set agents adrift to fend for themselves in terms of training, marketing, imaging, prospecting, coaching and mentoring. Were agents prepared to take on these responsibilities? They were most certainly not, in my judgment.
In the next installment I’ll describe how a direct correlation can be drawn between the carriers’ earlier decision to abandon agent development to today’s market conduct and public image challenges.
©Copyright 2007 David A. Macchia. All rights reserved.