Experienced insurance professionals are tapping their desks right now, saying, “Uh-huh, I knew that was coming.”
On Oct. 19, 2007, the Dow dropped nearly 397 points, a powerful echo of that Black Monday 20 years ago, on October 19, 1987, when the Dow plunged 508 points. Every October 19th since then, financial people get the jitters, wondering if lightening will strike again. Now, this year, it happened.
Well, it happened–sort of.
There was a plunge, yes, but the 2 sell-offs differ greatly in proportion and impact. Twenty years ago, the Dow fell 22.6% to slightly over 1,738. People started fleeing the markets in droves. But this year, on October 19, it fell just 2.6%–to 13,522–but was back up the very next day by nearly 45 points or 0.33%.
Insurance professionals expected it, not because of the 20th anniversary but because “that’s what the market does–it goes up and down.”
But many are breathing easy, too, because they believe their clients are well diversified enough, and insured enough, to be insulated from the volatility. They know they can say the following to customers:
“Yes, the market dropped and your investments are off a bit, but you are okay.
“You have fixed insurance products, and their account values are not off. In fact, your policy values will continue to grow at least by the guaranteed minimum, no matter what the market does.
“You have death benefit guarantees and they will take care of your estate if the worst should happen right now.
“You have level term life insurance, and that premium is guaranteed for the stated period, regardless of market conditions.
“In your variable policies, you have income guarantees (or withdrawal guarantees, no-lapse guarantees, etc.), which you bought as extra protection just for periods like this.”
That is a much different story than back in 1987. Before that crash, the insurance sales focus was on a product’s “interest sensitivity” (the credited interest rates in universal life, interest sensitive whole life, fixed deferred annuities). Some industry players were gussying up their variable policies, too, or preparing to enter the variable business to catch the market wave.
Back then, fixed products certainly had underlying guarantees, but they weren’t a topic of conversation. Some products, like universal life, had moving parts, but no one discussed the worst-case impact of that. And in variable policies guarantees were hard to find.
So when the 1987 crash hit, the insurance sector was caught off guard. Many advisors and companies–though not all–were unprepared to offer the reassurance that comes with guarantees.
Hence, the industry’s flight for guarantees. For a while, this centered on “back to basics” (selling tried-and-true fixed policies). But as the 1990s wore on, brand new products and guarantees burst on the scene. These were not just in annuities and life insurance, but also in long term care and disability income insurance.
This activity has not stopped to this day. In recent years, for example, “return of premium” guarantees have been added to a wide variety of policies (not just term life).
The guarantees development has become so intense that some insurance wags are complaining that the pendulum has swung too far. Maybe there are too many guarantees, they say, and maybe the features are too confusing. Do buyers want to pay for that much security? Will the guarantees meet customer expectations? As recently as 2 weeks before the recent pull-back, one advisor asked me: “How can I be sure the company will meet its guarantees?” Another asked: “How can I justify the cost of these new guarantees?”
But on days like Oct. 19, 2007, it’s hard to find any insurance professional who is unhappy about offering, selling or having sold products with guarantees.
On days like October 19, they say, “market pull-backs like this justify our efforts to keep and enhance our guarantees.”
On days like October 19, no one quibbles about the industry’s 20-year focus on developing guarantee-rich products that cannot be found in securities.
In recent days, securities professionals have been reminding the public that it’s good to “buy (more shares) on market dips.” In fact, several claim this was the lesson learned from 1987. They say the bounce-backs that followed subsequent market drops prove this to be so.
Well, that may be a lesson learned. But, from an insurance perspective, 1987′s biggest lesson was to purchase products with guarantees. Why else would the large majority of modern-day customers voluntarily elect to pay for guarantee provisions in their new variable policies?
Insurance guarantees answer the “what if” question. Yes, some may need fine-tuning, but in no way should they be returned to oblivion.