According to Alastair Rickard, insurance company management teams generally don’t understand the essential nature of the business: getting life insurance out to the public. Insurance is sold, he says, but despite the fact this axiom – one of the industry’s oldest – remains relevant today, companies have continued to shut down or decrease their ability to present buying opportunities to the public.
Mr. Rickard is a former executive with Mutual Life which became Clarica Life after its acquisition by Sun Life Financial. He is a longtime industry observer and in 2007 was the winner of the Donald J. Johnston award for his outstanding contribution to the financial planning profession in Canada. He also writes the popular insurance-focused blog: RicardsRead.com. “There aren’t enough people running life insurance companies that can get their heads around this basic premise about the business. The business they’re in is about selling stuff. If you’re going to sell stuff, especially stuff that isn’t buyer-initiated, by and large you’ve got to have the people to do it.”
With the exception of Sun Life Financial, which purchased the Mutual Life/Clarica Life business, in part to procure the company’s sales force, Mr. Rickard says companies systematically dismantled their career agency systems over time because it was perceived that distribution by way of the various brokerage options in Canada was a cheaper and easier way to go.
Worse, he points out that selling insurance is far more difficult than the business of selling mutual funds and other wealth management assets. “These are products that people actually think they might like,” he says. “You can recruit an asset product sales force, if that’s what you want, far more easily and with far more success than you can recruit people who can make a career out of selling (insurance). Life insurance is the hard sale.”
Once companies had “freed” themselves of the expense and management difficulties associated with operating an effective career agency system, “in the short term, some of them thought they had found the magic bullet.” Since then, he says companies increasingly pursued market share and sales through the brokerage system, using underpriced and overcompensated products – a trend that he says reinsurance companies contributed to with their own racing efforts to secure market share.
“If you are paying too much to a brokerage system because you’re trying to compete for their time, attention, and business while, at the same time, you’re lowering the price of your product year after year, of course there’s no profit in it,” he says. “There’s no particular trick, as the industry has demonstrated, in selling great quantities of brokerage business that’s underpriced and overcompensated.”
The management bias or myopia against agency distribution persists, meanwhile, in part because there are few people who understand this rather unique aspect of the business. “The life insurance business is a good deal more complicated than Tim Hortons or other successful businesses. The challenge in the future, as in the past, is that too many people make it into life company senior management without really understanding the business they’re in.”
Lapse-supported pricing
In addition to this, he says there are certain structural and product manifestations that are also helping to keep this line of thinking entrenched. Lapse-supported pricing of certain term products is one area he points to in this respect.
“Essentially, you’re hoping that you will lose the business, that those to whom you are selling will replace it or not service it, and it will lapse in one way or another,” he says. “If you have been dependent to a significant extent on lapse-supported products, your attitude to distribution will be influenced. A good career system means your products have very low lapse rates.”
Despite the criticisms though, the story is not an entirely negative one: “Ordinary individual life insurance is, as it has long been, a socially significant product,” Mr. Rickard writes on his blog. The so-called golden egg, he says, is not the vast world market. Instead, he says company profitability is dependent and reliant on their core Canadian operations. As for the push into Asia that many are undertaking, “It’s a smart thing to do,” he says, “provided it’s carefully managed and limited in its potential downside for the company – as long as management isn’t so absorbed with Asia that they forget where profitability lies.”
Great expectations
This tendency to get overly and sometimes singularly focused on one avenue to profitability is another contributing factor to the corporate myopia about the industry’s core business. He says a third contributing factor is short-term thinking, driven by the need to appease analysts and shareholders. “One of the sad things for me is watching how these companies think long-range planning is the next two quarters.” Expectations for long-term care, for example, were “grossly inflated,” in the same way he says critical illness was oversold as a way to gain market share.
“In career management terms, people become invested in a set of expectations, a set of golden objectives.” When these don’t pan out as hoped, the knee-jerk tendency is then to pull the product instead of setting a more realistic set of expectations for the products and their distribution.
In the future, he says companies who are serious about competing for individual life insurance sales will likely need to revisit and reconsider their dependence on brokerage services going forward. At the same time, he expects the industry’s business will remain concentrated in the hands of only three or four carriers, particularly if the government’s position on foreign ownership remains unchanged.
On the asset side of the business, he expects management fees (MERs) will need to come down over time, and companies will be faced with the challenge of maintaining “an intelligent balance” of asset products and life insurance. “Indeed, the challenge for career agency system management is, after they are established with a book of business on the insurance side, is to keep them from shifting too much over to the easier sale on the mutual fund asset side.”
In governance, change could be driven by institutional investors taking an active interest in governance and management. “I think the boards of directors in life insurance companies need to be populated by a lot more people who know something about the business.”
Finally, he says company and management reasoning that the insurance industry is “mature” and generally not profitable, will be seen, eventually, “as largely fallacious reasoning.”
