Insurance Industry Must Fight for Relevance

American College President Larry Barton is known for his straight talk from his perch as the head of insurance’s leading educational institution. He was in top form when he spoke at his college’s online town hall earlier this year, where he said he was very concerned about the industry and companies in particular. In a discussion with lnsuranceNewsNet, he discussed what is concerning him about the industry and how independent insurance producers can thrive in today’s economy.

 INN: In your town hall presentation you seemed have some concern about companies. Why is that?

BARTON: I think our country is in the middle of a colossal failure when it comes to protecting financial literacy, and specifically building financial strength for the future when it comes to products. The reason is, obviously, that you have broken social security systems. You have Medicare, which is extremely complicated for the average consumer. The good news is that roughly a quarter of all working people are still covered by a traditional DB (defined benefit plans). And you have about three-quarters of workers that are involved with some type of 401K or 4038. So you have some people that are in moderately good shape. But we know we have tens of millions of people at high risk because their primary source of income is Social Security.

I’ve never worried, nor do I think any sane person should worry, about the ultra-affluent. They have the tax advisors, the products, the structures and the tax shelters to help them. And, most important of all they are diversified. I’m more concerned about the middle and lower class where the products are often priced at a point that is difficult to attain.

We’re in the middle of this very serious quagmire where a couple of interesting things are going on. First, the actual cost of product has come down when it comes to life products, which is something that the industry has done a lousy job of advertising. A term policy is somewhere between 30 and 50 percent cheaper than it was 10 years ago. Cheaper! Secondly, there are huge exceptions, but the industry could be far more aggressive in talking about the benefits of whole life. We have somehow become intimidated, maybe by legislative pressure, to not talk about the benefits of tax-free buildup. But the benefits of tax-free buildup largely benefit the middle class and the people at risk. We should rally around and celebrate the fact that they can access that money, that it does grow over time and that it is forced savings.

We have one month a year now called Life Insurance Awareness Month, and they do a pretty good job, but it’s only one month of the year. This is not the Jerry Lewis Telethon. We shouldn’t be out there just once a year-there should be a yearlong massive effort to say to the country that there are life and annuity products that can help you. Because if you rely upon the government to take care of you in your golden years, they will not be golden but copper, and you’re going to be lucky to get copper.

INN: How do insurance companies fit into the new economy?

BARTON: Our country is deeply dependent upon the health and well-being of our insurance companies. If you really look at what happened since 2008-the banks the Lehman Brothers, hedge funds-there’s been a hemorrhage of capital and of good will. People don’t trust a lot of these big institutions-that was not true of the insurance companies. They are highly capitalized; they’re strong.

INN: So, why are you concerned about life insurance companies?

BARTON: The low interest rate environment is paralyzing the opportunity for the insurance companies to invest in the future. And at a point where companies made guarantees of 3, 4, 5, 6 percent on fixed annuities, they did so because of strong historical records of sound investment. But no one anticipated a Fed that would freeze rates effectively dose to zero for potentially three years. Now, will these companies be able to continue to pay annuities? I guess they will. But they will have to be ultra conservative in being able to offer anything meaningful in terms of opportunity for a generation that’s already at risk.

INN: What do producers do at this point?

BARTON: I think a smart advisor today is going to open the kimono and they’re going to be willing to talk about the options available to the client. Because so many for so many years were selling basically one or two ponies, they were not versatile in looking at some of the other products that are out there.

INN: Does that mean that Insurance producers need to get a securities license?

BARTON: It may mean that they should consider it, even merely to hedge their career and to have opportunities in the future. I don’t think it should be mandated to have a securities license but if insurance agents want to move into that, it would be a wonderful time to start looking at it. Ultimately, there will be fewer companies in the insurance space. We are seeing a shrinkage and consolidation that is only going to accelerate. You have companies that are pulling out of the United States, and you have others that are doubling down on the United States. And that’s why if you have bet the farm on basically one or two products, you’re missing out on an incredible opportunity to help that client.

INN: Do you think the typical insurance producer is aware of the consolidation dynamics that you described? BARTON: I’m astounded at how little people read. Yesterday, I spoke to a company at its annual meeting, and I asked this question, “How many people in this room read The Wall Street Journal this past week?” And maybe it’s 10 percent. Shame on those insurance agents. Because you know who’s reading The Wall Street Journal?  Their clients. Those agents are out of touch because they’re getting inundated by the chief marketing officer pumping them up with the newest product and sales numbers but they’re not looking at the news. They’re not paying attention to the Fed. They don’t even capture at all what’s going on in Business Week or Fortune. And if you’re not looking at lnsuranceNewsNet, how can you be relevant? You’re not going to be relevant if you’re not reading this stuff.

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