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Life Health > Life Insurance > Term Insurance

Time To Adjust

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Some people say the market timers ruined it for everybody.

Other people say the day traders ruined it for everybody.

Still others say the federal regulators ruined it for everybody.

The “it” refers to the safe, stable world of long-term investing and planning, and long-term insurance products.

This has been “ruined,” these people say, by short-term approaches. Examples range from market timing inside of tax-qualified plans and products to, say, the sale of life policies 2 years after policy issue. Throw in some speculative investing, day trading, and shorting of stocks, and the money is on the fast track.

Oh, and top it off with a lot of liquidity features in the insurance products, so people can put money in and take it out almost like a savings account. Sounds long-term but feels short-term.

Meanwhile, the federal regulators–and let’s include the Financial Industry Regulatory Authority here along with the Securities and Exchange Commission–are pushing their way into insurance product regulation territory.

This is happening not just by way of review of practices and filings solidly within their purview, but also by fiat–i.e., issuing FINRA Notices and SEC Rules that seek to control various product particulars. Recent examples include: FINRA Notice 05-50, regarding index annuities, and SEC Rules 151A and 12h-7, regarding index and variable annuities, respectively.

These moves are being promoted as a way to protect the investing public, and that has a kind of long-term sheen to it. But scratch the surface just a bit and it looks very different.

Such efforts appear devoid of connection to the established (read, long-term) regulation of the specified products. Further, the advocates lack sufficient (read, long-term) experience in insurance to make consistently sound decisions about the products they propose to regulate.

The states have regulated insurance since the 1800s, and the system was officially buttressed by the McCarran-Ferguson Act of 1945. Yet the feds are seeking to usurp that long-term authority by regulating certain insurance products (or aspects of those products)–with very little documentation to support such a move.

This is every bit as short-sighted as market timing and day trading, in that it lacks coordination with, or reference to, the time-tested system of state regulation. It is like an auditor who, upon seeing a few problems at a company, suggests that he take over running the company.

At least the Optional Federal Charter legislation takes a longer view. Under the various OFC proposals, insurers can choose whether to continue with the time-tested system of state charter and regulation or to move over to a federal charter and regulation. It takes the existing system into full account, and allows choice.

Even the OFC legislation itself is long-term. It has been kicking around Congress for years. That gives the body politic plenty of time to digest its provisions and potential impact, and to make revisions accordingly.

Short-term moves do have a place in the economic system–for example, to respond to an emergency or a short period of need. Increasing the FDIC guarantee limits for a specified period is an example. And in deal-making, striking while the iron is hot has always been considered smart business.

But, in other cases, such as those mentioned earlier, the short-term moves are really processes or a way doing of business. That is really tough for long-term-oriented businesses to manage around and through.

Still, unless and until the pendulum swings back, that is what insurance professionals need to do.

For example, an advisor might have some clients who like to do market timing “on the side.” After realizing that this behavior is not going to change, the advisor can 1) decide not to do business with that client or 2) factor that reality into the financial plan.

An insurer may have some market timers among its variable policyholders, and will need to decide whether and how to address that, if it hasn’t already. A company may learn that someone on its own financial team “likes” to time and so will need to address how that proclivity may impact decision-making. Or, some investors may short the insurer’s stock, and the firm will need to manage through that.

As for regulation, some industry leaders are already getting with the program. They are training one eye on the state regulations of today and the other on those that could drop on them like a bomb tomorrow, courtesy of federal sanction.

Regarding products, why keep grousing about how the business has lost its long-term focus? Why not, instead, position insurance as a great counterpoint to the volatility of short-term moves?


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