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Life Health > Life Insurance

Getting Perspective On The Economic Crisis And Its Impact On Insurance

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Today’s economic crisis in the United States happens to be coupled with a change in the presidency.

This is the fourth time I will have seen a new president installed during a time of crisis. The 3 previous times impacted the insurance industry and especially its savings (annuity) products. Looking back to those times might give today’s insurance professionals some perspective on today’s developments as well as the future.

The chart summarizes key markers for each period, leading me to conclude that:

o The 2008 crisis looks more and more like the Great Depression of the 1930s.

o Recovery will take 3 years.

o The industry will survive if it gets back to the basics.

Let’s back track to the Depression. I was age 11 in 1932. My father took painful pay cuts, but kept his job; that made me lucky. The unemployment rate was 25%; there was practically no security system. Unemployed fathers tried to survive doing odd jobs; mothers went door-to-door selling cookies which they had made. (Being in the Dust Bowl of the West didn’t help either.) Fortunately, a new president came along, Franklin Delano Roosevelt, in 1933. He immediately went to work raising confidence.

What about the insurance industry? As I discovered later, individual life insurance had been a savior for the business. It had cash and loan values, which provided money that distressed people needed. It also provided a revenue flow, which kept the industry’s stable companies in business. Field forces (who were nearly all “career shop”) also survived, partly because the product was revered by the public. (At my house, our highly-respected young home service agent called regularly.)

Note: Individual life business was really the savings vehicle then, just as “annuities” are today.

The next crisis/new presidency occurred in 1981. The crisis struck soon after the new president, Ronald Reagan, had been elected. Inflation hit 10.4% just when the stock market was losing 4.8%. But short-term interest rates reached an unbelievable 11.75%. Again, the new president created confidence, and the country was out of the woods by 1983.

During this period, the insurance industry started to see an ominous string of company weakenings and failures caused (in my opinion) by bad investment decisions at the management level. Foreign acquisition of U.S. companies was in vogue. A raft of new products appeared, such as universal life, variable universal life and variable annuities. These products featured very visible savings elements. But overly optimistic “illustrations” were made, way out into the future, ultimately giving the industry trouble after interest rates collapsed.

The 3rd crisis/new presidency occurred in 1990. Inflation reached 5.4%; stocks lost 3.2%; and the growth rate for gross domestic product was only 1.0%. This was the year of the Gulf War. The new president, William Jefferson Clinton, was elected in 1992 and recovery occurred by 1993.

By this time, the insurance industry’s field forces had evolved to encompass all financial and insurance services. They were much more independent than previously.

So what is to be made of the new crisis/new presidency period of 2008? It looks more and more like 1932. Business giants are stumbling or falling (Bear Stearns, Lehman, AIG). But no Hitler is coming on; lower oil prices have tamed the international bad guys. And the new president-elect, Barak Obama, has already renovated American leadership.

As of this writing, however, some U.S. life insurance companies are in trouble. Their stocks declined sharply after the election. Incredibly, some qualify for protections under the recently-enacted Troubled Assets Relief Program (TARP) and some do not. (This difference depends on whether a company is affiliated with a thrift institution or under Federal Reserve supervision.) Guarantees that were built into VA contracts, such as minimum income streams, are much riskier to offer now that market values have declined. And new capital is much harder to raise. Furthermore, “mark to market” rules are suddenly causing havoc with company financials. (In my opinion, there should be a temporary moratorium on all such rules.)

But to clear the gloom a bit, let’s review the S&P 500 stock market yields in the calendar years immediately following the 3 crisis/new presidency years named earlier:

1933: + 33.2%

1982: + 20.4%

1991: + 30.6%

Those positive numbers are a silver lining for sure. The hope–and the anticipation–is that similar results will follow this new crisis.

In the meantime, insurers should do their part to restore their bond of trust with the public, use common sense in their dealings, and realize that honest basic products are the way forward. And the field forces should realize that they are the public face of the insurance industry, no matter how diverse their organizational structure. They need to be the big tent for consumers seeking protection and safe financial instruments. The focus should be on building confidence.


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