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Life Health > Life Insurance

Simplification Redux

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Some product development issues just wont go away. Take simplification. As you can see from this weeks spotlight on cutting edge products, simplifying products is back on the minds of insurance product developers.

The new area of concern is product guaranteesparticularly in universal life, variable universal life and variable annuities, but also in other areas.

The insurance world seems awash in guarantee features and options right now. The advisor can, for instance, recommend a term life policy with a return of premium guarantee, or not. Or recommend a ROP guarantee of 10, 20 or 30 years. The advisor can recommend a secondary (no-lapse) guarantee in UL of assorted durations, or not. In long term care insurance, the advisor might recommend a 10-pay plan that guarantees paid-up status after 10 years of premium payment, or not. In annuities, robust death benefit and withdrawal guarantees in variable products are abundant, and in the fixed products, not only are minimum interest rate guarantees offered but so are CD-type interest rates over several years. The options go on.

This is insurance heaven for the practitioner who understands how different guarantees work and which ones are most suited to what situations.

But heaven help the advisoror call center workerwho doesnt get it. Heaven help the consumers, too, if they get stuck with insurance people who dont get it.

When the new breed of guarantees started surfacing in the last several years, they seemed to provide desperately needed respite from the uncertainties of the risk-shifting, youre-on-your-own 1990s. Here, finally, insurance contracts once again were doing what insurance is known to do very wellprovide guaranteed protection against a stated risk.

Wow, what a concept. In the late 1990s, some VA experts said they could not sell the new VA death benefit guarantees fast enough. “It is so simple,” they exuded at the time. “More, more,” they said. And developers compliednot only in VAs but in various other products, as noted earlier.

Now, though, the great simplifiers, guarantees, are poised to become the new complicators. Part of the complexity has to do with the cost of the guarantee to the consumerdo people really want to pay so much just for the right to get back their deposited premium after 10 years?

Another part has to do with the funding level required to support the guaranteesis it adequate? Is it possible? Can it be reinsured? What about hedging it? Are the standards fair and equitable?

Still, another part is the wide variance in guarantee provisions. As you know by now, not all guarantees are made the same.

There is an ouch in here somewhereto the point that some regulators are examining the infrastructure behind the guarantees, and some heads in the business are starting to re-think their approaches. Can this be simplified without losing the market impact?

Oh, does that question ever have a familiar ring to it.

During the 1990s, National Underwriter carried countless articles on how the product profusion of the day was making things pretty complex out there for consumers and advisors. One year, we also ran a monthly section on simplification ideas for annuity, life, disability, health, long term care and other lines. In the latter half of the 1990s, some regulators even pulled the plug on approvals for the then very new equity index annuities; the reasons cited included complexity (of course).

It is not clear that things have gotten a whole lot better. However, the decade did produce a crop of new insurance education, certification and designation programs. And some products, like VAs and LTC policies, did achieve standardization as they moved into a more mature phase of their life cycles. For a while, simplification talk seemed to fade away.

But now, here it is again, the talk about needing simplification. Only this time, the wraparound issues are transparency, full disclosure and compliance, not risk-shifting.

It is tantalizing to think that some product tweaks here, education there and disclosure reform over there would take care of things. Who knows, maybe they will. However, the lessons learned from the past should be kept in mind.

First, old-fashioned simple products are gone forever, subsumed in the forward thrust of technology, process control and medical underwriting advances as well as in the starburst of diversity demographics. One-size-fits-all just doesnt work anymore.

Second, the best hope is to simplify the learning curve, presentation, systems and support on whatever products are at hand. In a free-market system, differentiation of designi.e., complexitywill not go away.

Finally, providing education helps, but ensuring that this education produces results helps even more. Where simplification is concerned, look for signs that newly educated staffers are using what they have learned to bring things into focus for customersto help them see. What good is all that education if staff is not applying it in the interests of the firm and its clients?

Bottom line: Simplification will come more from the processes a firm uses than the products it sells. Thats where the competitive advantage will be for financial professionals and their providers.

Reproduced from National Underwriter Edition, December 3, 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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