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August 11, 2002 at 08:00 PM
The turmoil in the stock market, along with the slowdown in the economy, has caused many of us to make changes in our plans.
Retirements and capital expenditures are being postponed, and many business friends are looking for work. To make the situation worse, many purchasers of equity indexed and equity-based insurance products have seen their contract values plummet, and they do not understand what has happened.
Further, the current downturn is a new phenomenon for many people in the financial services industry. The last prolonged stock market slump was during the period of 1968 to 1974. It is probable that the vast majority of people who now work in financial services began their careers after that last long-term down market ended.
Therefore, they have known nothing but economic growth and growth in the stock indexes.
Despite that, most of us who live in the sophisticated world of market-based investments do tend to understand the cyclic nature of the market. We generally expect markets to go down as well as up. We may not like what happens when markets tumble, but we at least understand what is happening.
Can we say the same about customers who have bought the industrys products, on the assumption that their contracts would only increase in value? This is the question the industry is confronting now.
Equity indexed and equity-based insurance products have been the backbone of the life insurance industry for many years. The business has enjoyed tremendous success in sales of these products. And the two of us are sure that most sellers of these products have been circumspect about ensuring purchasers understand the risks of investing in products subject to market fluctuations.
Nevertheless, this is a good time to put a priority on maintaining effective communication with customers. Marketers need to make sure clients are still aware that there are certain risks inherent in the purchase of a product that depends on market performance for its value.
Perhaps the most important lesson to be learned from bad times in the stock market is how important is the long-term nature of the products the financial services industry sells.
Put simply: No one should buy equity-related products with a short-term horizon.
