Whose Side Am I On? I’m On the Side of a Successful Annuity Industry. And I Can Prove It!
Following my essay on the July 8th article that appeared on the front page of the New York Times, I heard through a friend that a life insurance executive employed by one of the companies mentioned in the Times article read my piece and then called my friend to ask, “Whose side is Macchia on?” It’s a fair question that deserves a straight answer. The answer is that I’m on the side of a vital and healthy annuity industry. Please read on and I’ll prove it to you.
Clearly, some of what I’ve written about the annuity industry is critical of certain sales practices and products that I view as ultimately detrimental to the health of the entire annuity industry. I’ve also criticized in a general sense the top management of some companies for countenancing these practices. By doing this I’ve served as a lighting rod for some who reflexively seek to defend the status quo even though that defense is damaging to the long-term interests of the industry.
As someone who truly loves the insurance business and has benefited so much from my involvement in it, my criticism has always been intended as constructive. Of course, it may not appear that way to some.
The Process: Good People and Bad Practices
Sometimes good and decent people ignite bad business practices. In one of the installments of the blog series I called “The Preventable Demise of the Fixed Annuity Industry” I talked about the fact that the people in management positions in life insurance companies are almost universally good and decent individuals. I’ve met hundreds of insurance company executives and I’d be hard pressed to remember more than a couple I didn’t like. The business is staffed by legions of quality people.
I’ve had the greatest association with executives responsible for sales, marketing and product distribution. Virtually all of these people live under high pressure to deliver sales on a quarter-by-quarter basis. Because this pressure comes from top management, it’s almost impossible for these individuals to take a long-term view. At the CEO or Presidential levels there is also often times severe pressure to achieve sales targets. This gets transmitted to the distribution executives, regional managers, sales desk and individual wholesalers who are charged with forging the relationships with distributors that result in new sales.
The distributors present a constant challenge to insurance company distribution executives who are many times played-off against each other by the distributors. The big marketing companies ask, “Company A did ‘this’ for me so why don’t you match it?” There’s intense pressure on company “B” to match company”A”. The “this” that’s being asked for has often been products that pay higher compensation or have “special” features that appeal to marketing companies and down line agents.
This process repeats itself in a serial fashion and the result over a number of years is that products that start out with excellent consumer value can devolve to versions that are far worse. To effectively disguise the loss of consumer value gimmicky features emerge that mask the higher costs structures needed to generate higher levels of commissions. This is the history of the indexed annuity business.
As this process unfolds the annuity providers find themselves between a rock and a hard place. They are under pressure to generate new sales and they are forced to make compromises within limits to get those sales.
The intensity of competition among carriers for relationships with distributors is extreme. The natural tendency is to cave in (again, within limits) and give the distributors what they are asking for. All product manufacturers need distribution to be successful.
So what’s described above shows how good and decent people perform in a high-pressure game to deliver annuity sales. No one involved intended to damage anyone, least of all consumers. It’s a big, complex and aggressive process that yields the negative results we have today.
None of this, however, changes the fact that in order for the annuity industry to reach its potential it must confront the negative results the process delivers. As years pass and the negative results expand exponentially culminating in Sunday’s New York Time article, you reach a point where the business is so threatened at its most fundamental level that drastic action is called for. We’re at that point, in my judgment.
The Gifts We Are Given
We’re all blessed with skills that are as diverse as we are. Take me golfing and you’ll be in for a good laugh, I have to tee-off with an 8-iron because it’s the only club I can use to hit the ball straight. On the positive side I was blessed with a special vision for this industry and I could see years ago what the industry is confronted with now.
Two years ago I saw the future of the equity-indexed annuity business. I saw that it was on a dangerous course in terms of its most popular products offering the lowest levels of value to the consumer. I saw the unpleasant inevitable result of combining gimmicky products with poor sales practices. I literally had the vision of the New York Times article of last Sunday.
Driven both by my sincere desire to set the indexed annuity business on a course for quality growth (and make some money), in November of 2005 I conceived and set about to build a web-based application designed to separate the quality providers of equity-indexed annuities from the “bad guys.” Even then I recognized the urgency to create an un-level playing field in favor of the good companies at the expense of the other companies. The solution to accomplish this was a one-of-a-kind web-based application called EIAToday™. We went to work on the application development in December of 2005 and finished it by late February of 2006.
The idea behind EIAToday was to use compliant, web-based technology, video sales presentations and web-based marketing to dramatically improve the manner in which agents could explain the benefits of indexed annuities. It was intended to help expand the “pie” and increase the total volume of annuity business agents produce (I remain convinced that only by helping agents grow their sales volumes will they be able to afford the transition to superior products).
The technology platform underneath EIAToday was unprecedented in its capabilities and would have allowed quality insurance carriers to distribute indexed annuity products across multiple distribution channels in a consistent and compliant fashion. The companies would have been able to monitor their agents and insure that all required broker-dealer disclosure on an agent-by-agent basis was being presented to the public. The technology would have allowed the carriers to meet any distributor-specific requirements in terms of customized marketing materials and disclosures.
Every agent would have been provided a personally-branded micro site capable of streaming a compelling (and compliant) video educational presentation for consumers on indexed annuities. This would have enabled more consumers to learn about indexed annuities in a way that maximizes convenience and compliance. Remarkably, the video presentation even received successful review by the NASD.
Actually, the reaction among the life insurance executives to the NASD-reviewed presentation was quite interesting. Some reacted extremely negatively feeling that I had essentially betrayed the industry by asking the NASD (through a B-D customer) to review a presentation on what is not a security. Others thought it was very effective. In fact, as an educational presentation it achieves what I like Wealth2k to achieve: it explains a complex product in a fair and balanced manner without sacrificing sales appeal. Had it gone into wide circulation it would have been a key enabler in helping insurance companies foster quality relationships with broker-dealers. It’s just what the broker-dealers needed… and still need to better educate their registered reps.
It was a time-consuming and expensive effort to build the EIAToday application and I honestly felt that I had conceived a better future for the indexed annuity industry.
I invited eight quality companies to the Ritz Carlton hotel in Boston to come together and redefine the future of the indexed business. What an ambition! They did come. Some sent more than one person. What resulted from the day long meeting? Nothing much. Actually one company did signal interest but that company hadn’t yet come to market with its indexed annuity and ultimately never did.
These quality companies passed on what was a remarkable opportunity to distance themselves from those companies that have spoiled things for all annuity companies. They could have benefited themselves and consumers greatly had they been able to pull the trigger.
No regrets.
I have no regrets at all over the EIAToday effort in spite of the substantial financial and emotional investment made. I still like and respect all of the people who attended that opportunity meeting. I understand that when things are going pretty well it’s difficult for insurers to come to a decision to change what they are doing.
But now I believe that companies no longer have the luxury of suspending disbelief. Sales are declining, the public image of annuities has plummeted, regulators are advising seniors to stay away and the future is uncertain. Perhaps I should pull EIAToday out of the closet? Make it exclusive to one company?
The next few months will prove to be a very interesting time for the entire annuity industry. How it chooses to respond to today’s vexing problems will likely define its future for the next decade. It will also largely determine its success in attracting Boomers’ retirement assets.
I think my tangible investment in developing the EIAToday application proves how determined I was then and am today to help make a more healthy and successful annuity industry. It also proves that my vision is quite real. When challenges present themselves one can hunker down and defend even the worst aspects of the status quo, or, see that a new and promising door has been opened.
©Copyright 2007 David A. Macchia. All rights reserved.