A statement at the very end of last weeks cover story almost took my breath away.
“Primary insurers are back in the risk-taking business in a significant way,” said the author, Scott Machut, who is vice president-special risk reinsurance at ING Re, Minneapolis (see NU, May 13).
This observation was not only correct, in my opinion, but also very timely, for it provides an excellent starting point for the second part of a discussion begun in this column last month (NU, April 1). Thats when we looked at how the word “insurance” is coming back into favor, along with the safe-money solutions that insurance offers.
Now, we’ll explore how this shift puts risk-bearing back into the limelight, and how that may affect you as insurance marketer and/or developer.
Machuts statement–about returning to the risk-taking business–naturally resonates with that purpose. He was referring to risks insurers are assuming as they adjust to new market conditions. But it has broader application, too.
You see, while you may now be offering more “safe-money” solutions than previously, you may also be taking on risks you thought youd never see again. And some readers, who never before dealt with traditional policies and guarantees, may be meeting these risks for the very first time.
As youll recall, throughout the 1990s, the insurance industry “financialized” itself. That is, to keep step with the go-go economy, many players put as much financial punch into their world as they could.
Many variable insurers pumped up the number of subaccounts in their products, for instance. They expanded the number of retail money managers the products offer, too. Some ordinary life insurance marketers brought spread-sheet selling into staggering complexity. Some insurers debuted equity index annuities, only to find themselves chatting with agents about “how the options market impacts EIA pricing.”
Then too, there was the stampede towards adding “Financial Services” to marketing names; the race towards convergence of insurance, banking, and securities; and the forging of financial alliances of varied styles and descriptions.
Again and again, product wags barked about how the changes were putting more risk onto the shoulders of consumers–because a good many designs offered scaled-back guarantees or none at all. The risk the critics spotlighted is the risk a contract would fail to do what policyowners wanted or expected. The owners might be left holding an empty bag, critics warned.
To illustrate: When talking about variable life, the oft- cited risk was that the underlying subaccounts could drop so low the policy would crash, forcing owners to fork over more money or lapse.
Another example: When talking about fixed EIAs, which do have a guaranteed interest floor, critics had another complaint. They said the design presents owners with the risk the policy may never credit enough excess interest (via linking to growth in an equity index) to make the EIA purchase worthwhile.