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Risky Business

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Not a week goes by that someone does not ask me, “What are the prevailing trends impacting insurance products today?”

Increasingly, Ive been answering in terms of risks that bear upon productstheir marketing as well as their design and implementation.

After all, insurance is not only a risk-bearing business. It is also a , at least where products are concerned. Thats because many varied factors can, and do, affect a products sales success, service, viability and profitability.

Anyone having anything to do with insurance and financial products knows that. Even when the products offer guarantees, there are risks (i.e., how strong is the company issuing the guarantee; how long does the guarantee last; how rich is the guarantee; etc.).

Industry developers and marketers certainly do their utmost to manage product risks they face daily. Witness the stampede a few years back to lower the guaranteed minimum interest rate in fixed annuities.

That initiative involved a lot of regulatory interchange and a long process of pulling, tweaking and re-filing of products. However, the risk management aspect was front and center: The moves were made to protect against the adverse effects of interest rate risk posed by the then-prolonged low interest rate environment. That, in turn, helped ensure continued availability of traditional fixed annuities.

Some people would just as soon deal with financial product risk by avoiding it. Thats not all bad, but its not really practical. Most people just cannot avoid encountering some level of risk during the buying and selling of financial products.

For example, if Susan Consumer wants to buy a universal life insurance policy, she will likely need to assess the interest rate risk implicit in buying such a product. So will her advisor, who also will need to know Ms. Customers risk tolerance. Also, developers need to price their ULs with interest rate risk in mind; marketers need to position the UL in view of that risk, etc.

The name of the game is risk mitigation, or reducing the level of risk all along the product food chain. At the very least, this entails identifying the risks and developing action plans accordingly.

So, what are the product risks that seem most pressing in 2005? Here are several:

Advisory risk. This is the risk that product-related advice may not be suitable and/or that advice recipients may not use advisory services properly.

Complexity risk. In particular, providers of multi-option and highly flexible products risk misunderstanding and improper use. Advisors presenting complex financial plans face a similar risk and so do the consumers who buy them.

Interest rate risk. As indicated above, this is part and parcel of interest-sensitive products and accounts. Even providers of non-interest-sensitive products are affectedbecause of how interest trends impact buying preferences.

Longevity risk. With people living longer, product risk increasingly centers on a products ability to adapt successfully over longer life spans.

Market risk. Variable product firms and clients risk suffering downturns associated with falloffs in the securities markets. Those who are involved in alternative products (like index annuities) feel market shifts, too, though indirectly so.

Morbidity risk. With more people living longer, the risk rises that more older people will be experiencing periods of disability.

Pricing risk. Can todays prices be supported successfully for 20-40 years? The long term care insurance industry has had some tussles with this risk. So have some carriers in the disability insurance industry.

Privacy/security risk. Many laws and regulations exist to ensure that financial firms adequately address privacy and security issues related to personal information that firms collect. But what about the risks related to customers who do not themselves engage in safe, secure information practices?

Regulatory risk. The names of Spitzer and Donaldson should make the case here.

Reserving risk. This is a constant risk and concern for actuaries and regulators charged with seeing to it that product reserves are sound and at adequate levels.

Reputational/headline risk. Any product, especially a new strain, risks damage to reputation if controversy arises around iteven if the allegations are unfounded.

Underwriting risk. Life and health underwriters always face the risk of making unprofitable risk selection decisions, but increasingly they are being pressed to get it right all the time, which is hardly possible.

The above list is by no means exhaustive. But it does make the point, that everyonebe they developers, advisors, administrators, service staff or consumersfaces product risks. Therefore, mitigation is, or should be, on the front burner.

Reproduced from National Underwriter Edition, April 1, 2005. Copyright 2005 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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