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Life Health > Life Insurance

Stars Rise, But They Also Fall

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As I write this, the year 2003 is offering up its last gasps and 2004 is just hours away. There is no doubt 2003 will loom large in future history books because of the momentous events that occurred during this period. This year the world witnessed the fall of regimes that had the potential to spread human misery beyond their own borders while continuing the rule of tyranny among their own people.

In the process, the world also saw the rise of the awesome military power our country possesses and a growing realization of how carefully it must be used. Fortunes on the international scene will no doubt continue to rise and fall as events unfold. Our hope for 2004 is that we always will use our power wisely and for the betterment of all mankind.

But closer to home, we also have witnessed the rise and fall of ideas and institutions within our own business. Products that previously had been consigned to the scrap heap of history are re-emerging, mergers have changed the landscape at the corporate level and some financial services have lost a bit of their glitter.

From a personal perspective, one of the more hopeful signs for the future has been the rise in popularity of Whole Life. I freely admit to being a “whole life freak” and I never lost faith in it as our core product. In one sense, its re-emergence is a sign of the strength of our business. When companies were turning their back on whole life, I often wondered whether or not their primary motivation was to shift investment risk to the policyholders and away from the companies. A few shaky companies a decade ago, I believe, certainly added substance to the suspicion.

As whole life gains in popularity, we return to our roots and assume our role as a guarantor of security rather than as a custodian of policyholder funds subject to the vicissitudes of the equity markets. “We promise to pay” once more has a definitive meaning one can count on.

In a parallel way, we also are witnessing a rise in popularity of defined benefit pension plans. The disappointments associated with a variety of defined contribution plans that replaced the defined benefit plans of yesteryear have spawned a new appreciation of guarantees. Once more the idea that “the most important part about money for future delivery is, will it be there” is gaining credence. The second most important part of money for the future is “how much.” It is almost always a mistake to reverse those priorities.

Indices that measure the performance of the stock market also started to rise in 2003 and hopefully will continue into 2004. It does appear at this juncture that the rise is based on more solid evidence of corporate performance than the wild expectations associated with the dot-com bubble of the late 1990s. But even in this sector there is some cause for concern as the reputation of mutual funds falls a bit because of scandals in their trading strategies.

I cant say that I fully understand the problems created by “late trading,” but a reading of the financial press certainly indicates there has been some hanky-panky going on at the expense of the mutual fund investors.

At the very least, such scandals illustrate the problems that arise where there is a concentration of large amounts of money, a condition that usually attracts those looking for an unearned share. Mutual fund managers are quick to point out that even though losses to investors in the aggregate amount to billions of dollars, the loss to the average investor is measured in nickels and dimes.

Averages, however, do not tell the whole story. Five thousand two hundred investors put $813 million into a fund in El Toro, California, which has been described as a “house of cards” ready to collapse. The losses to these people will certainly not be nickels and dimes. Similar stories cropping up all too frequently serve to contribute to the fall in confidence of the managers of investment funds of all types.

We did not hear much about the privatization of Social Security in 2003. However, with the rise in stock prices, advocates will no doubt come back out of the woodwork and renew efforts to sell this idea. This time around, the selling may be a bit tougher to folks with decimated 401(k) plans that did not live up to expectations when they were needed.

Presently, Social Security is essentially a defined benefit plan with a cost of living factor (COLA). I continue to believe that that is the best structure to form the base for ones retirement security. With that base intact and functioning, then a person may look to more speculative ventures that may or may not be more productive. The current rise in preference to defined benefit plans in the private sector should send a strong message to government that it should not make the mistake many companies did when they abandoned their defined benefit plans a few years ago in pursuit of unrealistic expectations from equities.

The rise and fall of institutions and ideas appears to be a permanent part of the natural order of things. But my hope for each of you in this new year is that you are able to attach yourself to the stars that are rising and avoid those that are in a free fall.

Happy New Year!

Reproduced from National Underwriter Edition, January 16, 2004. Copyright 2004 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.


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