2012 Doom or Boom?
When you ask insurance professionals about predictions, of course you don’t expect wild fantasies such as jet-powered agents and X-Ray objection detectors. Also, don’t expect doomsday prophesies such as Mayan predictions for the “end of time” (that’s on Dec. 21, 2012, by the way).
But you can expect some talk about radical changes that could propel the business into a different era, including: regulatory decisions that could pull products from insurance producers’ hands, technology that can better engage prospects in the sales process, continued market disruptions that push money under the mattress, unending low-interest rates that will remain a fact of life and a hungry deficit that could devour insurance products’ tax favored status.
In discussions with four people representing divergent perspectives on insurance distribution, one thing is certain— expect uncertainty in every aspect of business. When these accomplished professionals examined the trend lines into 2012, they saw strong forces converging on the insular world of insurance. To thrive in this environment, producers have to raise their eyes to see the larger universe in order to spot the approaching challenges. The most successful, according to our experts, will be the ones who anticipate and welcome changes.
The common prediction was that complacency is not an option. Jeffrey R. Hughes, GAMA International CEO, advised expecting constant and disruptive change. In short, learn to sail choppy seas. GAMA is an association for field leaders in the insurance and financial services.
“Each of my predictions spells some uncertainty, but each also spells opportunity,” Hughes said. “I don’t pretend to have the answers. I can only say to myself, ‘I need to keep my hand on the pulse because each of those will have a direct effect on the industry. And, in turn, will have a direct effect on how effectively we can distribute products in an environment that’s so uncertain itself.’ “
Shock waves from the economic collapse of 2008 are still hitting the insurance industry, rippling from carriers to producers. In fact, our experts predict the effects will intensify in 2012.
Some of that intensification will come from rules that regulators are still putting together from the Dodd-Frank Wall Street Reform and Consumer Protection Act. They haven’t even decided on some basic definitions and objectives that will guide regulation. Phrases such as “harmonizing fiduciary standards” might sound arcane, but they can change the way producers sell.
The federal push to standardize regulation can have a profound effect on insurance producers, forcing them to become financial advisors. Eric Thomes, chairman of the National Association for Fixed Annuities (NAFA), said that it will not serve the business or clients well.
“It’s applying certain standards that may not actually apply,” said Thomes, who is also senior vice president of sales at Allianz Life. “You’ve got the equity standards on the insurance side of the business.”
Another proposed definition that is infuriating NAFA and other groups was one for “swaps,” which could characterize some annuities and life insurance products as securities swaps. That would likely mean a completely different distribution for those products—and producers would have to have a securities license to sell them.
The experts agreed that the implications of Dodd-Frank could be vast. Another effect on annuity producers in particular will be states’ adoption of the National Association of Insurance Commissioners’ (NAIC) Model Suitability Act. It is a requirement in the Harkin Amendment, which banned the Securities and Exchange Commission (SEC) from regulating annuities. The rules impose stiffer compliance requirements on producers with insurance companies directly overseeing their conduct. In the past, that was left to distributors or to producers themselves.
Because of the suitability act, not only will producers have more regimen and eyes over their shoulders—but maybe even fewer carriers to do business with— because some insurance companies have responded by being far more selective in choosing distributors.
In one way, producers can feel flattered by all the extra scrutiny because it’s an indication that their products are becoming more popular, Thomes said. He compared the current experience with indexed annuities to the meteoric rise in another popular product.
“Look at the mutual fund business 25 years ago,” Thomes said. “It was just coming onto the scene and, when it became mainstream, the regulatory scrutiny around it and the oversight became all that more. Fixed indexed annuities are still just a $30 billion to $32 billion market, which is not small— but it pales in comparison to the variable annuity market. If this continues to grow and becomes more mainstream, the regulatory scrutiny is only going to go up, especially because you’re dealing with the senior population.”
Also tied to greater federal scrutiny of products and conduct is the ever-present possibility that the federal government could take over insurance regulation, which Thomes described as “always looming.” Some have seen the creation of the Federal Insurance Office (FIO) as a small step toward that goal, although others consider it a long overdue seat at the Washington, D.C., table. Expect more discussion on this in 2012 as regulators and legislators craft the Dodd- Frank standards.
Robert Kerzner, CEO of the insurance research firm LIMRA, sees insurance companies assailed from many sides, with results felt at the producer level.
“The regulatory and legislative agendas will continue to be an area where senior management will be highly focused,” Kerzner said. “Whether it’s the big issues like Dodd-Frank, taxation, reserving or accounting—frankly, their dance card will be pretty full. I think we can anticipate there’ll be other issues that’ll arise unexpectedly, as issues like unclaimed property have.”
That will mean less innovation from carriers in areas such as products. And, that could have some unintended consequences on producers and the economy overall.
“I think the unfortunate thing is that this will take attention and resources away from focusing on other things like growth,” Kerzner said. “If we did begin to grow faster, it could spur the industry to hire more people and deploy more capital that could be put back into the economy. So I’m not certain how that’s going to play out—except for its being a drain on focus and resource.”
Of course, any discussion about regulation and insurance must touch on health care reform. The Supreme Court will be considering the law in 2012, with recent reports about the justices meeting “in secret” about the law even before they get the case. Although many arguments have been made about the law, the primary issue is the individual mandate’s constitutionality.
If the mandate is stricken, even the reform’s supporters say the law would be undermined and could be scrapped. Health insurers demanded the mandate in exchange for universal coverage, which is a basic building block for the reform.
Jennifer Borislow, Million Dollar Round Table (MDRT) president, sees a new universe developing in the health insurance and benefits business. That started years ago with stiffer regulations and it is only accelerating now. In fact, she jokes that in her practice, they call it HIPAACA—a combination of HIPAA (Health Insurance Portability and Accountability Act) and ACA (Affordable Care Act, as the reform law is known).
“If it’s not regulations, it’s compliance,” Borislow said. “Our advisor’s role will become even more critical, because people need us to get through the complexity of products, needs and services. Even just understanding the insurance exchange, how their benefits work in conjunction with the exchange and what compliance and audits have to happen, have all become huge issues for our clients.”
Borislow is based in Massachusetts, which already has an exchange and many of the reforms in place. Many of the reforms make business very difficult for health insurance producers. But rather than lament the impositions, Borislow and her staff took it as an opportunity to create a new way of doing things—of growing instead of shrinking from the challenge.
“We now have a full-time compliance person on our staff,” Borislow said. “That’s all they do—legal background and compliance audits for our clients to make sure that all the checklists are done, they meet at the minimum the state mandates and they’re prepared for what’s coming in 2013 and 2014, when you’ll see a lot of the healthcare reform pieces come into play.”
Borislow predicts that small operators will have a tougher time going it alone in 2012, particularly as compensation requirements change.
”You really have to grow or you’re not going to make it in our industry,” she said. “When legislation comes in, they run the risk of losing clients, losing members to exchanges or to decisions that are completely out of their control. In Massachusetts, we see carriers changing our compensation structure; so, we’re going from receiving commission to a PEPM, a ‘per employee per month charge.’ So no matter what the rate increase is, we now get the same fee one year to the next, to the next. And with a declining employee base, producers are actually making less per case.”
Her answer was to become far more than an insurance seller. She said it was imperative to develop underwriting, actuarial support, wellness and compliance services. This year, several independents joined her firm to take advantage of those services. She expects that trend to continue.
We can no longer say technology will change how business is done; it’s already changing. Technology is becoming an umbrella term covering not just hardware and software, but those things are shaping consumer behavior.
Consumers expect salespeople to have a website, be on LinkedIn and other social media. Potential clients would likely think it weird that a producer had no Google presence.
Many of the experts said the iPad and tablets will change how producers will interact with clients. LIMRA research shows people still want face-to-face interaction with a producer—not necessarily in person, but perhaps virtually with Skype.
During LIMRA’s annual conference, CEO Kerzner took that face-toface interaction even further when he showed the audience a scenario of a new producer curbside at a prospect’s house. Before the producer went in, he contacted a mentor through his iPad for a quick training refresher to build his confidence.
At the meeting, LIMRA also showed off its “Ready-2-Retire” program, a tablet application that allows producers to help pre-retirees clarify their own thinking and recognize their dreams for their senior years. Producers can then be the hero and help make them their realities. These tools can help the industry achieve another goal: reaching the middle market. It’s no secret that companies and producers have been aiming for the big cases to the point where the number of policies plummeted over the past few decades, even while the overall policy value has increased.
For producers to increase the number of middle-market clients with their smaller cases, they’ll need more efficiency. Companies can step in to help, said Hughes of GAMA.
“This is where the manufacturers have an opportunity because technology and the middle market go hand in glove in terms of solutions,” Hughes said. “That’s not to say that State Farm should take agents off the street—because I think they’re our best beachhead to serving the middle market. But it can help others who say their cost-revenue analysis doesn’t support face-to-face assets in front of the middle market.”
All this talk of companies getting involved in the client-level distribution might worry independent producers, but Kerzner said he sees technology building an essential partnership.
“This really gives producers the potential to radically alter their business model, and conceivably be able to see many more people in the same period of time,” Kerzner said. “Likewise, if carriers can get better at actually completing business online, so those producers could get apps in real-time, working online with a consumer makes more sense.”
In fact, Kerzner showed a scenario in the meeting that illustrated that partnership. In that demonstration, a young client seeks information online for insurance. Once she gets to the point she wants to speak with a real person, an option pops up to speak to one of several local independent producers. She chooses one based on the producer’s profile and sees that she is online and available for a chat. Within moments, the producer is talking to a very strong lead.
“And that certainly could change our business model,” Kerzner said. “But we’ll have to see how long that really takes.” Some experts are betting changes and opportunities will be rapid-fire in 2012, which is what Borislow expects.
“You really have to be on your game of what’s happening,” she said. “The use of technology is going to be a big part of what every financial advisor is going to need to work more efficiently—because that’s what clients expect. We bought a bunch of iPads in our office and we use them for client meetings. We overnight it to the client the night before so they can have the iPad in front of them for the presentation. We’re trying to get away from some of the binders.”
3. Market Volatility, Malaise and Double-Dip Recession
Experts said it will be clear in 2012 that market volatility has become a fact of life. Some even expect a double-dip recession next year. The big concern is that the volatility and the unpredictability of the next financial disaster will deepen a sense of malaise. When people don’t know what to do, they usually do nothing.
Hughes of GAMA said drags on the economy seem to be digging in rather than easing.
“Four hundred point swings in the market used to be pretty rare,” Hughes said. “We’re in for more of the same in the next year.”
But the most significant drag is the real estate market, with little lift in 2012. The market will not be rebounding to pre-recession levels because that was an artificial high, Hughes said.
“The real estate market has the most profound effect on people’s lifestyles and nothing tells me that people are going to regain the equity that makes them more willing to look longer into the future.” Hughes said. “The middle market is even more profoundly affected than the upper tier. I think the middle market will be less well-served by the industry than it has been.”
Hughes and Thomes of Allianz said global events will intrude even more on the U.S. economy, contributing to a sense of helplessness in American consumers.
“In times of extreme volatility, people flee to the sidelines,” Thomes said. “They go to cash and they go to money market accounts. They might go to their mattress, which is not the best decision, but people are doing it in huge numbers, just like you saw in ’08 and ’09.”
Besides hiding money, another consequence is that people tend not to plan for their later years, figuring they will just go on working.
“Everybody’s talking about the doubledip recession and saying they will just work longer,” Thomes said. “They don’t realize that that might not be a viable option because they may be pushed out of their job or have to deal with a sick family member or spouse.”
Challenge No.1 for producers will be reaching these people, who might not be looking beyond their foxholes. And then making them aware of the steps they can take to protect their future and family.
4. Low Interest Rates
One of the most significant economic forces on insurance products is interest rates and they will hover near zero through 2012.
Thomes said the low rates will have an effect on product pricing because of companies’ low return from treasuries and other bonds. Of course, low returns on annuities also make them a tough sell, although they tend to give consumers a better return than CDs.
Another surprising consequence is convincing clients that interest rates will rise someday. Anyone who was an adult in the 1970s and early ‘80s probably remembers the caustic effect of dizzying interest rates. But rates don’t have to climb to double digits to batter a retirement.
Even with an average inflation rate of a modest 3 percent, which can seriously erode savings over the 25 to 30 years people could be in retirement. Companies are offering inflation protection in their annuity products, but the challenge will be getting clients to appreciate the inflation risk.
5. Deficit and the Tax Implications
The drive to control the deficit is expected to force hard choices in many areas, with more revenue prospects on the table. For decades, presidential administrations and legislators have mentioned the tax-favored status of insurance. The most vulnerable is the inside buildup, which is a popular aspect of insurance, particularly with the big policies.
Pressure is especially high to develop new government revenue and legislators have indicated that removing tax advantages is more palatable than raising rates. But beyond that, why is the insurance tax status more vulnerable in 2012 than any other year?
Our experts say the vulnerability comes from another problem vexing the industry: the underserved middle market. Hughes of GAMA said the insurance industry is trying to differentiate itself from banking and securities, but its results might undermine that intention by not serving the middle market.
“I agree with those who say that, at some point, Congress will ask the question, ‘Who are you serving?’ ” Hughes said. “And when the answer is ‘the top 1 percent,’ then the tax deferral, the tax-free buildup of cash, will come into question.”
What About that Rocket- Powered Producer?
The funny thing about trying to tell the future is that the future doesn’t change much. Someday we’ll cure cancer; someday we’ll all fly around with rockets on our back; and someday insurance will be sold without independent producers.
That last one is a perennial prediction, which Kerzner of LIMRA found interesting. It seems, as far as you can go back, the existence of independent producers was always threatened by something and people always seemed to think the worst. He remembers that a decade or so ago, people were predicting the demise of independent insurance distribution. And, yet—it is still alive and kicking. So the odds are good that, in the next decade and the one after that, we’ll still find independent insurance producers. But their way of life might be far different, and for the better.
“There will be radical change, and I believe it will be driven by technology,” Kerzner said. “I think there will still be many producers. But, they will be able to see far more clients by using technology rather than getting in the car, driving an hour and hoping a client actually showed up. That could certainly increase productivity by a quantum leap.” Borislow of MDRT agreed that new technology will improve the business, but more important is a new perspective on fulfilling some old values.
“My prediction is that the advisors will still play a critical role,” Borislow said. “Those who are working in the best interests of their clients will develop the trust and confidence that will make the advisor front-and-center in the planning process.”
December 2011 Issue of Insurance News Net Magazine. Steven A. Morelli is editor-in-chief for InsuranceNewsNet.