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Hard Times And Life Insurance: Bright Spots Exist

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President Roosevelt said it best: “All we have to fear is fear itself.” Right now, there’s no shortage of fear.

Consider some recent headlines:

o Consumer Confidence Index hits a low of 57.2 in May, after 5 months of decline.

o Gas prices torpedo consumer sentiment.

o Weakening job prospects ahead.

o FDIC: the nation’s ailing banking system likely to weaken further.

o Inflation a top worry

Then there are the unbelievable events, such as the collapse of Bear Stearns and the huge losses at Soci?t? G?n?rale. Home foreclosures occur everywhere, even in the better parts of town. The word “insecurity” is prevalent, as are the new catch phrases–sub-prime crisis, credit swaps, derivatives and financial engineering.

A lot of the trouble relates to malperformance of a statistical measure known as the standard deviation, a measure of total risk resulting when an asset does not perform as expected. (When will we learn that the standard deviation doesn’t work, if the bad things happen all at the same time?)

To make things worse, the nation is now in an election cycle. This seems to create only 1 certainty: nothing helpful will be done until 2009.

In the meantime, it seems no one is buying anything. Credit is drying up everywhere. It is said that this fact may even be affecting the premium finance aspects of the insurance business.

So then, what about the insurance business? Some believe sales, productivity and opportunity in the life and health insurance sector are being hobbled by the very same forces. But look carefully, and some bright spots are clearly visible.

For instance, ordinary life sales in the first quarter of 2008 (compared to the first quarter of 2007) were up 1% by annualized premium and flat by face amount, according to LIMRA International, Windsor, Conn. For the quarter, the best performer was universal life in the LIMRA survey, with a growth rate of 8% by annualized premium and 6% by face amount.

Those numbers represent a pretty good performance for an economic period that is widely considered to be gloomy–especially since ordinary life sales have been essentially flat for several years.

Incidentally, the industry buzz has it that the premium finance aspects of the business are almost as active as ever, the credit crisis notwithstanding.

Bright spots like this should be sought out and built upon. For example, while I served as chief executive officer of a life company some time ago, gloomy economic periods kept coming along every 5 to 10 years. Things got rough. But those periods proved to be the occasions to improve customer service and persistency skills, and also to recruit really good new agents who were looking for new opportunities.

More importantly, I’m not aware that sales actually fell off during those difficult periods, despite fears that they would. Perhaps, this speaks to the fundamental value of the life insurance product, in bad times or good.

(As an aside, during one gloomy period, the company introduced an underwriting approach that treated everyone the same, depending only on the client’s own socio-economic circumstances. This proved to be a major marketing success. What’s more, as of 2008, socio-economic underwriting is of critical importance in the preferred, upper class market.)

What about recovery from gloomy periods? The chart shows 5 historic periods, as well as the present one. Three of the periods were election years in which the presidency would change (1932, 1980 and 2008). The very fact of an election seems to bring on uncertainty and a do-nothing mood; and that certainly seems to be happening right now. But new presidents eventually bring on recoveries (e.g., Roosevelt in 1934; Reagan in 1983). This is something to keep in mind as the industry moves through today’s difficult time.

Recoveries seem to take 2 to 3 years. But this time around, recovery may be quicker. For one thing, the present gloomy period really started in early 2007, so maybe 2008 is a working-out year. Besides, there are good signs: unemployment is not high; the dollar and oil prices seem to have stabilized (though the oil issue still has question marks); and yield on 10-year treasuries is up.

Long story short: there is reason to hope that recovery may start to emerge in 2009, after the new President takes office.


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