This article was supposed to be about annuities. But it is hard to write a dispassionate technical analysis when the entire life insurance and annuity industry is in chaos due to the deluge of bad news concerning the broad financial services industry. It is even harder to do in view of the impact of current developments on time-honored household names in the life insurance and annuity industry.
Hopefully, by time this article is published, the main part of the current crisis will be nothing but a bad memory.
That’s doubtful, though. The life and annuity industry, like the rest of the financial services industry, will likely bear little resemblance to the business where many have labored the bulk of their professional lives. Indeed, the very regulatory structure that most take for granted will likely change. It is probable that, as the industry emerges from this crisis, the federal government will have a much more significant role in everything the industry does than has been the case in the past.
Industry colleagues have been calling here, seeking perspective on the situation. They are wondering what can be done to learn from what has happened so the business can avoid anything similar happening in the future.
Although the life insurance industry has been caught up in the more general problems of the entire financial services industry, it seems that the highly publicized problems it faces are unusual for the business, given that this is an industry that has always been the most stable element in the financial services sector.
Fluctuations in other segments of the industry have had lesser impact on the life and annuity business because of the basic long-term nature of life insurance. After all, this is the insurance segment that is charged with managing policyholder assets to provide for lifetime protection against premature death or unforeseen longevity.
At least, that is the principle behind the life insurance process. The question is has the industry been true to this principle?
The life and annuity industry, like much of the rest of American business, seems to have drifted toward a short-term horizon in its management processes. It is more concerned with today’s market share and with the next call from analysts than with adhering to the long-term goals that are fundamental to the success of the industry and the products it creates and sells.
Unless the industry shifts from this short-term outlook, as it emerges from today’s crisis, it will likely be doomed to repeating it in some other iteration later on.
For quite some time, the life and annuity industry has incorporated into some of its products a number of features that seem to be more calculated to expand or maintain market share than to preserve and protect policyholder assets. Likewise, some of its investment practices may have been more speculative than is usual for a conservative business like life insurance.
Yet it is important to know that the state regulatory oversight of this industry seems to have been more effective than has been the case with federal oversight of other segments of the financial services industry. Also, the life and annuity processes themselves and the bulk of the life insurers seem to be sound (though it is not clear if all of the corporate interrelationships share such a sound basis).
The current fiscal crisis has sparked a demand for new, more comprehensive regulatory oversight of the entire financial services industry, including insurance.
There is intense pressure to create this new structure as soon as possible. This is unfortunate because such rushes to judgment rarely result in effective regulatory procedures. Instead, they merely compound and confuse the regulatory process and benefit no one but the bureaucrats.
Moreover, increased regulation merely for the sake of regulation chills the free market; it does not enhance it.
In addition, current accounting practices seem to lend themselves more to short-term management practices than was the case with the more traditional ones that prevailed in the past. Hopefully, any changes in the regulation of life insurance and annuities will also address insurance accounting and reporting to stimulate a longer-term management horizon.
If the industry must have a changed regulatory structure, it should be one built upon the foundation of existing structures. It should also be staffed by insurance professionals, rather than by people who may be good financial regulators but who have no understanding of the idiosyncrasies of life insurance and annuities and of the long-standing distribution processes so central to the business.
The two of us were active during the early years of variable annuities and variable life insurance. Many times, we had to assist federal regulators who were trying to understand the products and often to torture rules and regulations to fit the products and to torture products to fit the rules and regulations.
Breaking in a whole new set of federal regulators is not a labor for the faint of heart, let alone trying to adjust to new rules and regulations that may not truly be designed to accommodate life insurance or annuities. This is a key reason why it is essential that any changes to the regulatory process for the life insurance and annuity industry must be built on the existing structure, using existing expertise and recognize the long-term nature of the business.
This crisis will end and the life and annuity industry will be stronger than ever. If this current situation sparks a return to a longer-term management philosophy, it may be that it has been worth the agony everyone is currently enduring.