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The Sharks Are CirclingAgain

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A few years back, Savings and Loan institutions all across the country collapsed, creating one of the largest financial disasters in our history. The taxpayer-funded bailout ultimately cost tens of billions of dollars. The remarkable thing about this crisis is that it came almost without warning–the media was caught napping.

As the details of the S&L crisis were unveiled, questions started to be raised about the entire financial services business, and speculation about “who will be next” was rampant. The media, like a pack of sharks on a feeding frenzy, began focusing on the insurance industry.

The perception at that time was the media had missed the warning signs in the S&L debacle, and they were determined not to miss the next crisis. The result was a lot of overzealous reporting that generated a lot more concern over our business than was justified by the facts.

The liquidity problems of a handful of companies and the demutualization of a major company to deal with the problem were seen by the sharks as evidence that we were a business that was in trouble. Their reporting magnified the extent of any real problems existing, thereby exacerbating the issue.

Thanks to great leadership at what was then the American Council of Life Insurance, measures were taken to offset the negative press reports, and a safety net was put in place to prevent any of the dire predictions coming out of the shark pack from becoming reality. It was a tense period in our history, but in time it became obvious that the industry was solid and the sharks, with no apology for the hysteria they created, moved on to other targets.

But now the sharks are back, led by Wall Street Journal reporters Theo Francis and Ellen E. Schulz. In a series of articles in the Journal, which have been picked up by local papers and TV around the country, Francis and Schultz have used the “tyranny of words” to demonize certain insurance products and the corporate clients who use them.

Specifically, they have targeted the use of corporate-owned life insurance by decrying practices that have not been in use since 1996. Had these articles been written 15 years ago, there might have been some justification for them, although even then, sales were not in violation of any laws in effect.

I guess the implication in these articles I most object to is the notion that when the corporation is the beneficiary of a life insurance policy, it means nothing to rank-and-file employees. That is utter nonsense!

The last multi-million-dollar sale in which I was involved before leaving the field was on the life of the owner of a large car dealership. The policy was not purchased to solve his estate problem; other insurance and planning had already accomplished that objective. The corporate-owned policy had one single purpose–to leave the corporation, in the event of the owners death, in a position to meet the financial criteria necessary to maintain the franchise with the car manufacturer. By doing this, the jobs of the 350 employees would be continued without interruption. The corporation may have been the direct beneficiary, but it was the “little people” who benefited most.

One of the most difficult tasks a business faces is matching future liabilities with assets that will become available when needed. Life insurance has always been an invaluable tool in dealing with this problem because, more often, the event that produces the liability (death of a key person) also produces the funds to stabilize the business. I believe that is now conventional wisdom and that is not under attack.

However, there is another aspect of life insurance that is equally valuable, even though less understood. When large numbers of employees are insured, the actuarial capabilities of insurance companies and consultants can determine with considerable accuracy the mortality of such a group. The ability to predict income with some reliability from such plans raises the comfort level of companies that provide long-term benefits to employees and retirees.

There is probably no sadder plight than the retiree who suddenly discovers his former employer, because of a mismatch of assets and liabilities, can no longer afford to continue health benefits. With people living longer and coupled with rising costs for health care, the problem grows and pressure on social programs increases.

The articles by Schultz and Francis portray the tax advantages of COLI plans as some sort of a rip-off. If that were the only objective, there are other options open to companies that might be even more fruitful. While tax aspects are important, the most valuable part of COLI plans is their ability to predict future income that can be matched with future liabilities regardless of market conditions. If those liabilities are not met, then it is the rank-and-file employees who are most likely to suffer because of lost benefits. It would be helpful if the sharks looked at the total picture instead of feeding on their own bias.

The reporting in their articles is sadly lacking in assessment of current practices and overall balance. It is the sort of story one is more apt to read in a tabloid purchased at a supermarket check-out than in a venerable publication like the Wall Street Journal.

Reproduced from National Underwriter Life & Health/Financial Services Edition, May 27 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.