Study Finds Warning Signs For Independent Producers
An interview with Peter Walker
Peter Walker, a director at the widely respected McKinsey & Co. consulting firm, unveiled some alarming findings at the LIMRA annual conference from his two-year study on the insurance industry. He discovered the insurance industry is losing its share of consumers to other financial services. In this discussion, he looks at why that is happening and reveals even more unnerving data regarding independent producers.
INN: It seems that your analysis found some unsettling long-term trends. What did you find?
WALKER: We’ve looked at the microeconomics of the life industry going back over the past 10 years. When you look at the industry as a whole, returns have been coming down fairly substantially in the past three years, driven by the financial meltdown. The industry, which used to exceed its cost-to-capital consistently, is now underperforming, leading to lots of economic pressure. Another long-term trend is the steady decline in the number of life policies sold. This has been going on for decades, as the industry has increasingly moved upscale, leaving the large middle market unserved. Also, when you look at the share of household assets, you see that mutual funds, 401Ks, IRAs, stocks, bonds and deposits are all building share. And, life insurance is the only area where it’s been a declining share on the consumer balance sheet.
INN: Why do you think the life industry is losing share of the consumer dollar?
WALKER: Part of that is because the distribution force has been aging quite steadily and relatively few of the producers have succession plans. There’s a real question of where distribution is going to come from. It’s been a very challenging decade and the trends don’t look that good. Independent agents had been steadily building share at the expense of the captives. But that trend reversed itself over the past four years, and now the captives are outgrowing independents at a fairly substantial rate. A large factor is the big mutuals, which are doing very well and recruiting at a fairly rapid rate. If you think about the companies that were hurt the most during the meltdown—AIG, ING, Sun Life, etc.—they are heavily skewed toward third-party distribution. So, the big mutuals are building their agency force rapidly, while a lot of the third-party product providers are cutting back their product portfolio because they’ve been hurt on the balance sheet side.
INN: You mentioned that the industry appeared to be going upscale. When did that start?
WALKER: That’s been going on for the past few decades. To give you some numbers: in 1985, the industry sold 17.1 million policies, and the average face amount was $53,000. In 2010, the industry sold 9.3 million policies, with the average face amount of $177,000. If you look back at who were the big middle income sales forces, it was John Hancock, MetLife, Prudential. Most of those companies have shifted increasingly to third-party broker distribution and have not been recruiting significant numbers of agents to serve the middle market. So the mutuals, who continue to recruit, are largely affluent market-oriented, like Northwestern Mutual, New York Life, Guardian and Mass Mutual.
INN: What kind of impact did that have on independent producers?
WALKER: Career producers had been losing share every year, until four years ago when it started to reverse itself. That is probably a reflection of the increased aging of the independents and the cutback of the product providers that fueled a lot of the independents’ growth.
INN: In one sense, things seem to be OK because the overall income has been increasing. What makes the aging producer a critical problem?
WALKER: Agents tend to grow with their clients. We’re missing out on relationships that you develop when you start early and grow with them into their 50s. Most people typically sell to their peer group. So you’ve got an agent population that’s not being replaced and it is focusing on people in their 50s and 60s. If it continues to shrink and not pick up people at a younger age, what’s going happen to the life business when you go out another decade? It’s the same thing with personal computers (PC). PCs are gradually losing out to the iPads and tablets of the world, even though the PC market still looks big. So, you could still look at healthy numbers, but if you look at the underlying drivers and say you’re losing the next generation, then you’ve got to be pretty worried.