Bob Kerzner is a passionate advocate for the life insurance industry. Since 2004 he has been the President & CEO of LIMRA International, a world-wide organization dedicated to providing its nine-hundred member companies research, value-added marketing and distribution expertise. As Kerzner describes it, over its ninety-year heritage LIMRA has become the repository for all of the life insurance industry's knowledge and research. Not Long ago LIMRA merged with LOMA, a worldwide organization of more than 1200 member companies that is engaged in research and education designed to improve company operations. Kerzner now leads both organizations.
Kerzner offers us some valuable insights in this wide-ranging interview including comments on the insurance industry's future role in Boomer retirement.
Macchia: To begin, Bob, and before we jump into the LIMRA discussion, I think people would be interested in knowing about Bob Kerzner, the executive. Would you be kind enough to talk about how you came into the financial services industry, how that began, and the steps that led you to your current position as President and CEO of LIMRA?Kerzner: Sure. Actually when I graduated from college, David, I said that I would do anything except sell life insurance. It was the only thing that I had absolutely indicated I wouldn't do.
And yet an opportunity came my way that I absolutely found fascinating. It was, in fact, an opportunity to sell life insurance in a different way, working through independent agents and working with their best, wealthy clients. Once I got into it, I found out that I loved it -- that it was an intense business and one that would allow me to be creative in helping people find solutions to complex problems using a unique financial tool. I worked for one company for 30 years -- working my way up from the lowest field sales position to field management and ultimately running the entire life insurance division with both top-line and bottom-line responsibility. I really had a wonderful career.
After I retired, I decided that it was time for a change, to do something different. Being CEO of LIMRA allowed me to use my 30 years worth of knowledge in a very different way and allowed me to do something bigger for an industry that I've grown attached to.
Your answer reminds me of something, perhaps because it's reflective of my own background. But I've always believed that people who entered the business through the door of sales, people who have had real experience at the retail level, who understood the dynamics of prospecting and presenting to retail clients and all that that implies, that such people obtain what amounts to a life-long advantage in terms of how they are able to apply their knowledge and skills of the business no matter where their careers may take them. I wonder if you buy into that?Unequivocally. My experience in the field-having the experience of actually sitting across a table from a potential customer and trying to convince them that our product could solve a problem -gave me a unique perspective when I was running the division many years later. I don't think that there's any other way that you get that kind of perspective.
And frankly, one of the saddest things today is that very, very few of the most senior people - the CEO roles in our industry - are coming from the field. We're certainly seeing less and less. And I do think that you get a very different point of view, as you say, that stays with you forever.
A relevant analogy can be found, again, in terms of my own experience in which I describe my having had a leg in each of two separate and distinct ponds. Meaning, the different experiences of the world of agents and distribution, the salt water pond, and another set of experiences having to do with the business challenges of product manufacturers- the fresh water pond. I observe that it's rare that these two ponds meet and the water becomes brackish. And because they do not meet well, it's seldom that there is genuine understanding of each other's challenges and frustrations and it's rare that meaningful communication exists between the two populations. Do you agree with how I see it?Well, from my viewpoint I see it slightly different. We're creating a product in our business that's very technical. It must be passed through 50 different states, often the SEC, and the NASD, which will care about how you sell it. During the development process, it's easy to get wrapped up in the complexities and lose sight of the consumer's needs.
I think that having the experience of facing customers eyeball-to-eyeball, face-to-face gives you a perspective to step away for a moment from all of the technical parts and say, "OK, how is this going to play out at the kitchen table."
Let me ask you about LIMRA. LIMRA is an organization with a long history. It has a high profile, and it's well thought of. For readers who may not be familiar with the organization's mission and activities, would you describe them?The first thing, to your point, is to explain that LIMRA is ninety years old. If you think about how few companies make it ninety years, I think that will tell you that there's something about what we've done that is significant.
First and foremost, LIMRA is about research. For ninety years we've been the repository for of all the industry's knowledge and research. Generally speaking, when somebody reads a report about insurance or suggests that somebody's number one in the industry, they're usually referring to LIMRA's benchmarking of the industry.
We also do a lot of the forward-thinking research about where the business is going. We've certainly been conducting more consumer research to try to understand how people see our industry, and think about our products; and what motivates people to buy or not to buy our products.
A leading strength has also been in the distribution area. We've trained many managers throughout the industry. Most of the industry's senior people were products years ago of LIMRA training.
We've expanded abroad. We're now in 64 countries worldwide with more than 800 member companies. We're now training in emerging markets in Eastern Europe, as well as throughout Asia, on ways to modernize distribution and increase productivity to help companies be more successful.
That's certainly a broad array of activities LIMRA is involved in. But I want to ask about the organizational structure. LIMA is chartered as a non-profit organization, I believe?Yes. We are owned by our members. They fund all of the research, but I should mention that we also have businesses that are not part of our 501 C(6). We have a wholly-owned subsidiary that provides an array of services to the industry. For example, for 65 years we have done the testing for companies to determine who is most likely to become successful as a producer. Today, we do similar testing for a number of fortune 100 companies, including leading stock brokerage firms. We've become significant in the compliance business. We help provide shared solutions to the industry designed to address real problems companies are facing.
Beyond the research, we conduct an array of other activities, such as consulting, with a strong practice in compensation planning. And, David, I think I'd be remiss if I didn't mention one more thing that is really at the core of LIMRA, and that is networking. We run a broad spectrum of conferences and committee meetings throughout the year where people who share the same roles and responsibilities can talk about and share best practices, share ideas and really get to know one another. That's a really important aspect of LIMRA. It's where the industry meets.
Sort of a vortex for the insurance industry. I like your word better than mine.
Let me ask you about another issue which may become very important in LIMRA's future, and that is the idea of a merger between LIMRA and LOMA. I presume that the decision to combine LIMRA and LOMA comes out of an analysis that defines synergies and benefits arising out of such a combination. Will you talk a bit about LOMA's work and then describe the benefits you see resulting from such a merger?This is really an idea whose time has come. It's been looked at in the past and for a variety of reasons, the timing was not right. LOMA is clearly in the education business. While we have educated the field, LOMA has been the major educator of the Home Office staff. Their FLMI designation within the back offices of companies is really the designation, the gold standard. It is the training, the broad knowledge that industry professionals want. Both, because of the depth and breadth of that training and because it actually helps them do what they do better.
LOMA runs conferences just as we do, but often there's more of a technology or efficiency focus. So while we do many of the same things, we do them in different parts of the organization. Coming together helps us take care of the totality of these education needs.
A combination is also greatly complementary. They have built a great e-learning platform. We have not done that. Why should the industry pay for two e-learning systems? The benefits of merger are that the industry could have, for the same capital outlay, a much broader capability to serve the entire life insurance company. So, those are just a few of the highlights.
Bob, I'd like to shift to some challenges and opportunities facing life insurers. As you know I am a creature of the insurance business having begun in 1977 as an agent at the lowest rung. I very much value the 30 years I've been associated with this industry. I've had opportunities and financial rewards beyond anything I could have hoped for including an excellent education. So as someone who has gained a lot from the industry I'm an advocate for its best interests in the future, especially in terms of the Boomer retirement opportunity.
I often times think, however, that life insurers are not likely to reach their fullest business potential unless and until some of the most intractable challenges and problems that hold back its growth are first identified, and then dealt with and eliminated so that the industry can set itself up for robust growth. I wonder if, at a high level, this is something that you think about? And if it is, perhaps we can explore some subsets of this?It's something that we think about a lot. In fact, what I can tell you is that in large measure our annual meeting, which is our most senior and largest conference of the year, is really aimed at these very topics. This year's theme is about execution.
In my opening remarks, I will take a clip of a comment made last year by the president of a major mutual fund company who charged that the life insurance industry is going to blow the opportunity because they have not been very good at execution. Ironically, that mutual fund company is owned by a life insurance company. So, I thought it was a particularly interesting statement. We took it seriously enough that we built this year's program around the concept of execution. What does our industry have to do to capture their fair share of that opportunity that everybody knows is the biggest in history?
A couple of the things that are important to look at: First, many companies are too siloed to look at the total needs of the customer-we don't spend enough time as some other parts of the financial services industry to really understand what the customer wants, how they think. Although, we certainly think that LIMRA can play a role in that piece.
Second, there's a lot of discussion about whether we take too much of a product focus. The industry often takes a manufacturing view. Is that the best approach? Third is an issue that LIMRA talks about--it's part of who we are, our fabric-- and that's distribution. The number of producers continues to decline in terms of career agents. The number of new agents continues to decline. So, will there be enough distribution to meet these needs? And, if not, which we believe is a certainty, what will the new avenues be to get our products in front of people more often?
So, these are some of the key issues that will be focused on at our annual meeting. I might mention that our special guest will be Alan Greenspan, who will certainly tell us about some of the macro-financial issues that we need to be thinking about.
What's you've articulated here is in my day-to-day wheelhouse. Let me begin this by telling you that one of the reasons that this blog was started was to try to galvanize the attention of industry leaders to some of the very challenges you've just mentioned. One of the issues that I've written about extensively is reflected in my own experience where 30 years ago I entered the business at the end of the rate book era and then saw that the introduction of the PC began to change things rather dramatically. It became easier for agents to assess the relative benefits of different companies' products, whereas previously they may have been focused exclusively on a single company's products. And this led to a major shift in the way producers work which has led to today's reality that most agents are independent agents.
As this change took root the insurance companies tended to revert to a stance where the concentration was increasingly on manufacturing products rather than developing producers. The intensive training and education that was once routinely provided was in many cases eliminated, and agents transitioned from career agents to what might be termed "free agents." And I would argue that this is one of the most significant reasons that the industry is plagued by a poor public image and poor sales practices. I wonder if you buy into that historical chain of events and its leading to some of today's problems?Yeah.... ah... unfortunately, I think that there's a missing piece in what you've suggested. We have created a model that actually talks about the natural events that occur as a market emerges. What I can tell you, David, is that virtually all countries begin with a very strong career agent system and over time, alternate distribution begins to enter. Part of the issue is that somewhere along the line, products begin to become much more sophisticated, producers may well not be trained adequately, sales practices become aggressive and issues emerge around mis-selling. Now I should be clear that this even occurs in alternate distribution.
So, it's not just agents. Those practices tend to invite tighter and tighter regulation. There tends to be a scandal resulting in poor public image and then, ironically, it tends to become more difficult to recruit more people because now the job is harder. Anyone today, who has to go through the myriad of 30-page proposals, 200-page prospectuses and all of the rest, can certainly see what happens as products become more complex like they do in a mature market. But you can't just lay that at the company doorstep. In fact, unfortunately, the actions of producers, whether they are career agents or people working for financial institutions, help to create this problem.
You know, I think that's fair. But don't you also think there's something more? As career agents have increasingly become independent, they have also become more increasingly underproductive than they were in the past. For instance, when I was a young agent I was expected to achieve at least one sale of life insurance per week. And some of the veteran agents completed two or even three sales each week. This is phenomenally more productive than today's agents achieve.
As low productivity has taken root among the agent ranks there's a natural tendency to seek out products which pay higher levels of commissions on each individual sale. And so you have the emergence of a viscous cycle where companies are more reliant on independent agents to a greater extent than ever before, and they attempt to placate the agents' desire for higher and higher compensation, which leads to less and less consumer value in the products and to an ever-increasing negative public image. This creates a vicious cycle which is difficult to interrupt. Do you see that?Well, yes, but once again let me cite some LIMRA data. In fact, over the past 30 years, the number of policies per year sold-hence the number of families we touch-has consistently declined every year, proving your point that agents have become less productive. However, producers at the same time are selling a total amount of life insurance premium that continues to escalate.
So what I would suggest the data says that, number one, agents have gone upscale and have continuously moved more up-market, selling fewer but larger face-amount policies. Second, as you are well aware, agents are selling a much broader array of products than 30 years ago. They can sell annuities, mutual funds- and life insurance. So some of that decrease in productivity has to do with the producers' ability to get to their income objective by selling investment products, which are easier. Certainly when I was President of the broker-dealer, I saw that when annuity sales skyrocketed, life insurance sales often went the other way. So I think, David, that today producers can get to their desired income level in different ways.
I agree with what you say but I would also argue that simple inflation over a 30-year period would account for a large increase in the size of the life insurance policies sold.You're absolutely correct, in fact when you look at the industry on the life insurance side, in constant dollars we've actually been declining rather than increasing as the numbers suggest. That's a fair point.
Let me jump into another assertion I make which may be off-putting to some, but it's something I believe to be true after many years of personal observation. And that is that the life insurance industry- somehow- simultaneously develops both the world's finest sales people and the world's worst marketers. And that the poor quality of marketing accounts to some extent- and maybe a large extent- for many of the industry's contemporary challenges. Would you agree with this assertion?I think that there's been a history of us doing a good job on one-on-one sales but a far less effective job at building corporate images of marketing as other have done in other sectors of the financial services industry.
I actually am optimistic in that in the last 12 months I've seen a difference here. If you look at a number of companies and how they are positioning themselves in today's environment, you see improvement. I even played segments of a number of companies' commercials at one of our conferences last year to show how I felt that they were doing a far better job of marketing, on image, on outcome, and on getting people to think about the kind of retirement and lifestyle they want. I think that they are doing a much better job than a couple of years ago. There's even one company that's doing an outstanding job of creating emotion around our products, getting to the core triggers of why someone buys life insurance. So I think that the companies are getting better at marketing.
I'm glad to hear that because I believe that to a great extent, the emotion component has been what's missing from so much of the industry's marketing initiatives. I'm happy that this is starting to happen now as the Boomer retirement opportunity begins to unfold. And I'd like to move our conversation in that direction, if I could.Sure.
One of the products that has emerged in recent years and has morphed considerably since its introduction is the variable annuity contract. The variable annuity is beset today with its own negative perceptions which, I would argue, derives from historically ill-conceived marketing strategies and poor positioning. I say ill-conceived marketing and positioning because over recent years the VA product was showcased as an alternative to other investments such as mutual funds. This invited criticisms over comparative cost structures not to mention unfavorable income tax comparisons.
Now with the recent refocus on guaranteed withdrawal riders, it seems the variable annuity product can be re-characterized, repositioned as what it really is- an insurance vehicle capable of delivering a set of benefits that can be extremely beneficial to people needing a guaranteed baseline retirement income. I wonder if you see the issue this way, Bob, in terms of my belief that there's been an historical mistake made over the product's positioning, and that now there's an excellent opportunity to re-focus the insured aspects of the VA contract? And that these insured benefits have costs which are justifiable? I guess what I'm saying is, do you see this as a timely opportunity to correct past mistakes and set the stage for growth in the VA line?I think that there are a lot of complexities in that proposition. Let me go at it this way. I was in the field. I used to talk with a client about the two lives of an annuity- the pay-in period and the pay-out period. I tried to make absolutely certain that clients understood that one of the significant advantages was the tax preference during the build-up years, and that they really understood why that was a benefit. And in the early years, that certainly was a key component of what got us the attention-the fact that you could get those gains in the market, you could supplement your retirement savings ... and it was a good forced savings vehicle.
We spent hardly any time regrettably--and this is where I think we made the mistake-- in talking about what annuities do best in terms of the pay-out phase. When we hit the downturn in the market, many were concerned that variable annuities would suffer a precipitous drop in sales. And here's where I would take a slightly different perspective and say that I think the industry did a great job of determining what it is that the consumer really wants. LIMRA data suggested that more absolute certainty is what the consumer wanted. What people love most about our industry is our guarantees.
A lot of very creative people, David, did a great job in saying, "how do we make this product, which is about risk and upside in the market, how do we take some of that sting out of it?" Many of the riders we have today grew out of that.
But also during that period, I believe, companies--because of the downturn--did a much better job of making people understand that the death benefit really was extremely valuable. I'd agree, however that there was a period of time that we didn't sell that benefit well and didn't make people understand its true value.
Let me conclude with this. The industry has enjoyed seven consecutive quarters of record-breaking sales of variable annuities. That's in large measure due to the creativity, to the improvement in positioning and the creation of these riders, which gave American consumers more of what they said they wanted.
Well I agree with much of what you say. And you should know that I'm a strong advocate of the variable annuity. I believe it's underutilized. But I would... not challenge... but remind you of the fact that while sales growth has been obvious, there are still inherent weaknesses in those results in the sense that approximately two-thirds of those sales derive from 1025(a) (1035?) exchanges, and we still have a situation where four fifths of advisors shun the variability annuity contract. And to me this goes back to historical ineffectiveness on properly positioning the product. This is the challenge going forward, in my judgment. We're talking about a unique type of product with a solid and valuable benefit structure, but minds have to be changed. And often the insurance business doesn't get the benefit of the doubt...And I think, David, we absolutely agree, and I'm not suggesting we can't do much better -- that there isn't tremendous upside opportunity, and that there doesn't need to be some different alternatives made available -- to get those other advisors in the game. We also have to do a better job of using the product with younger clients in their forties, as a systematic tool for savings.
You're right. But I can't buy into "ineffective: which suggests that they did everything wrong. But I certainly concur on a lot of the issues you've raised. We could do a lot better. That would be where even more growth could come from.
Yes, and you could argue that given the amount of money that's going to be moving in the future, that, wherever VA sales are today they could be five times greater in the future. And that actually gets to the next topic of Boomer retirement, where the ultimate war will be won or lost by each segment of the industry. It is about retaining the asset. That is the next battleground and frankly, the one for the next 20 or 30 years that really matters a lot. Clearly, annuities' offer the potential to provide periodic payouts like no other financial vehicle can. And therein lies one of the great opportunities and still unresolved challenges for our industry: can we be the one to really get the income phase right? To take advantage of the unique structural, financial leveragable opportunities- and all that we do best- to really capture our share of the assets in the payout phase?
That's the key question. I think you're exactly right. There are many elements to answering that question. Communications is a big part of it, technology is a part of it, competition is a part of it. Let me focus on competition. In the current issue of National Underwriter there's an article written by Norse Blazzard and Judith Hasenhauer which talks about copycats eying the development of variable annuity type features. Here's a quote: Most likely, every major investment firm is busily working on providing a GMWB to customers by mutual funds, managed separate accounts and even hedge funds, all without requiring the clients to become involved with a VA."
I also recently noted an article which addresses the growth of structured products. And I've written myself about structured products and the fact that large asset management firms which have traditionally aimed structured products at the institutional markets are now aiming them increasingly at the high net worth market and, potentially, the mass market, with intention of replicating some of the core benefits found in traditional annuity contracts. In a recent interview at this Blog I asked Professor Moshe Milevsky about this very issue. Moshe predicated that within two years we may see a dozen major, new players- in terms of major asset management firms- coming to market with structured products for consumers that target what is inherently and traditionally the insurers' playing field. I wonder if this is something that you and LIMRA think about and what the impact of new competition may pose in the way of challenges for life insurers?Yeah, it's a great question and it's something that we think about a lot. We have begun working on what we call Phase Five, which predicts the future of the industry. And, in fact, what we say that it is highly likely that there will be other new players -- different forms of competition -- than exist today. We also did another study with a group called DSI, which is linked to Wharton, and we looked at four possible future scenarios of what the life insurance industry could look like in 2016. The two major axes that we thought would alter most the future of the industry were first, "will there or will there not be high demand?" And second, "what will the environmental climate for competition be?"
In the last five years, we've begun to use dynamic hedging. We've used financial tools from other large financial institutions that have made many of these guarantees that we've associated with our products possible and have made their success. Others, who accumulate assets are envious of our success and will look to emulate what we've done successfully to broaden their offerings. Americans have demonstrated that they are willing to pay an extra charge for that guarantee. So I do think that you are going to see new forms of competition from non-traditional sources. And as I say, this is one of the things that we are talking about and predicting. It's highly likely.
Bob, next I'd like to delve into one of my favorite topics and that is the issue of communications. Basically, I ask everyone I interview the same question on this topic. And I'm interested in the various responses I receive. I believe quite strongly- and have stated publicly- that the high stakes business opportunity wrapped around Boomer retirement will prove to reveal winners... and losers. And to an extent-not exclusively, certainly- but to arguably a significant extent- the winners will not be those with the so-called "best product", but rather will be those which excel at compliantly communicating their value to a large and fluid marketplace. I wonder if you agree with this assertion?I'm not at all suggesting that's not important but I think there are a couple of other issues. Number one, I believe that innovation is important. If you look at the leaders, you'll note that they are often very early to market with major innovations and are constantly innovating. The bigger companies that are well positioned and are innovative, will be the most successful. That's one of the things that will remain important.
I still believe that distribution is critical. The companies that have the best distribution will have one of the important keys to success. And finally, this issue we talked about earlier- execution- is important. Who will be able to put all the pieces together and deliver across a platform?
I'm not suggesting that communications isn't crucial because, as you pointed out, more of the producers are independent. You're going to have to communicate why you're better, how you're bringing more value. Not just to consumers but also to other distribution channels -- and in a way that's superior to competitors.
So I think you're right, it's one of the elements but to say which is most important is difficult.
I think that's very fair. I want to ask you about a quote that I saw recently from Mark Timergien of Moss Adams, who made some comments indicating that there's going to be far too many consumers for the amount of available advisors. He also stated that 70% of the industry is made up of solo practitioners who don't want to grow. I wonder what changes you envision that may have to emerge for companies to get to the effective distribution that you just described as being so important? In fact, we just completed and released joint work with Mark and Moss- Adams on this very subject last week. We believe distribution will have to be substantially different in the future. That doesn't mean that existing distribution goes away -- but I will talk at length at our annual meeting about why we believe that technology is a game-changer. We expect technology will have a material change on how distribution could look in 5 to 10 years.
Just like we couldn't have envisioned the impact that the iPod would have on the music industry, I think we could see distinctly new forms of distribution because of technology. Technology that makes the ability to purchase our products easier, as well as technology that allows us to get our message to consumers in new and different ways.
OK, you know that I agree with that. Now I'd like to end by asking you a couple of personal questions. And the first is this: If you were not the CEO of LIMRA but instead could have any other occupation in any other field, what would you choose to be?I tell you, I ask that question when I interview people. I'll be very candid with you. I'm enjoying this immensely and as corny as it may sound, there's nothing I'd rather be doing.
Last question. I want you to visualize your own retirement in its most ideally, perfect form. Where would you be and what would you be doing?Retirement for me in its totality will be an oxymoron if I have good health. I need to be engaged, I need to be doing something. Retirement, as most people think of it, is an end point where I begin a different lifestyle without any responsibility. It's hard for me to conjure up.
I want to thank you for your time and your answers. This has been great!I've enjoyed it, David.
David Macchia runs Wealth2K, www.wealth2k.com, a financial-services media and marketing company focused on retirement income