Ultimately, Fairness Will Prevail Over Self-Interest

In my early days in the insurance business, our local marketplace was infected by purveyors of stock and life insurance packaged together.

Because of low capital requirements for new life insurance companies, Arizona was a magnet for opportunists seeking to capitalize on the success of established life insurance companies.

The typical pitch entailed the salesperson pointing to large successful companies, lifting up their record of growth and then posing the question, “Wouldnt you like to have owned stock in such a company at its beginning and shared in its growth? Our plan gives you that opportunity.”

Some of these salespeople were so uninformed that they even pointed to large mutual companies in their examples.

The objective was to sell stock in these start-up companies as well as small amounts of life insurance. I well remember talking to some of these people (when they tried to recruit me) and having them relate how easy the sale was. According to them, it was easy because if a prospect wanted insurance, you sold that and gave them the stock, whereas if they did not want insurance you sold the merits of the stock and gave them the insurance. A great example of “go with the flow.”

The abuses of this concept became so outrageous that the department of insurance stepped in and banned the practice of selling stock and insurance in tandem. The purpose of the ban was to prevent fraud and a conflict of interest in the sales process. The citizens of our state were, thereby, well served by the insurance department, for I am not aware that any of these companies ever amounted to much and, in many cases, whatever assets they managed to acquire were siphoned off into other enterprises owned by the organizers of the life companies.

This was indeed a dark period in the history of our business. Moreover, I believe it represents one of the pitfalls in financial services where sales people just go with the flow and take the path of least resistance to make a sale.

A recent joint meeting of a National Association of Insurance and Financial Advisors local association and the local Society of Financial Service Professionals chapter revived some of the foregoing history in my mind. The meeting was an annual tradition between the two organizations to discuss ethical practices. The speaker was a noted lawyer and CPA, best known for his work in fraud investigation and for cleaning up companies and other organizations engaged in questionable practices.

In his presentation, he used the Enron case as the horrible example wherein accounting, legal and banking services all were used to build a house of cards, and largely as a result of numerous conflicts of interest. It now appears that Enron was better at simulating profits than stimulating them, but the will of advisors to ask hard questions was stifled by an array of conflicts and self-interest.

While not specifically referencing the recently repealed Glass-Steagall Act, the speaker did lay the blame for many of the problems in this case to tearing down the walls that Congress put in place in the 1930s. Too many advisors were wearing too many hats and while it may have broadened their view of what was happening, it, nevertheless, clouded their judgment.

At any rate, much of what the speaker related is very much in the public domain and will eventually work its way through the courts. I guess we all hope, as this process goes forward, we will learn lessons that will lead to better corporate conduct in the future.

Of particular interest to me was a question that was posed in the Q&A session that followed the presentation. A member of the audience asked: “Is it likely that the whole area of financial services will also receive similar scrutiny?” His answer was an absolute and unqualified “Yes.”

I believe the speaker was correct in his answer to this question and, in fact, the process is already well underway. For the past two years the National Association of Insurance Commissioners has been mulling over a model bill covering Life Insurance and Annuities Suitability Regulation. Despite strong testimony from NAIFA, the proposed regulation is severely flawed and imposes unequal treatment on the various segments of the marketing and distribution system.

In its present form, the draft regulation imposes the bulk of responsibility for suitability of recommendations upon producers. Lesser standards will be imposed upon companies than those required of producers and regulation hardly touches “direct writers” who have their own history of marketing abuses.

It is well to remember that the abuses I mentioned in the opening of this article originated with the offending companies. It was the company that developed the concepts and the sales material that was used to bilk consumers. The people who tried to recruit me were not producers but, rather, they were company people bent on a plan of deception.

I can understand why reputable companies may not wish to be held liable for every statement made by their representatives at the point of sale. But that does not alter the fact that opportunists do exist and they should not be provided a gaping loophole to jump through.

Given the fact that abuses at any level will ultimately be settled by the courts, from which the companies cannot escape irrespective of the provisions of the regulation, it seems to me that their own interests are better served by shouldering an equal burden, thereby limiting the opportunists ability to taint our business.

Personally, I believe the whole concept of suitability as applied to life insurance products is flawed. But if we have to have it, it should be leveled fairly and equally upon all parties.


Reproduced from National Underwriter Life & Health/Financial Services Edition, April 15, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.