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Double Standard

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One of the most interesting stories this week came from Washington, where, during the NAIFA annual meeting, when representatives from NAIFA and the AALU squared off with the Consumers Federation Alliance while testifying before Congress on the merits and flaws of the fiduciary standard under development for broker-dealers.

For those of you not up on this issue, in a nutshell, the SEC is looking to impose the same fiduciary responsibility that securities dealers have on insurance agents who sell products with a securities tie to them, such as annuities. Given how much this industry is devoted to selling annuities these days, such a standard would be a big deal for a huge number of agents. But not all agents, it is interesting to note. Those who already have their securities license don’t see the fiduciary standard as such a bad thing, as they’re abiding by it already and see such a thing as a helpful way to separate wheat from chaff in the marketplace. We saw the same split over the SEC’s now-failed Rule 151A, too, so when discussing the fiduciary standard, it’s important we don’t treat it like a universal doomsday development for the entire industry, because it would not be.

That said, the fiduciary standard is really just a symptom of a much bigger, much more troubling tidal force, and that is increased federal regulation of all financial services, including insurance. Ask any consumer advocate and they will tell you – right or wrong – that life insurance is regulated with a very light touch indeed, and that recent efforts by Washington to apply stricter standards to the industry is probably long overdue. I am not sure I agree with that sentiment, but one cannot deny that our friends at the SEC are hellbent on considering any insurance product that has a tie to securities trading as a securities product itself. It was a battle it lost over Rule 151A, and who knows? It might lose over the fiduciary standard, too. But it might not. Regardless, the passage of Dodd-Frank has given federal regulators broad power indeed to apply whatever rules they think the financial arena needs but does not have. Go ask anybody working for Barney Frank’s office whether they intend to back off any time soon. Better take some heartburn medication before you do, though.

With that in mind, I think it is important that the industry conduct some serious risk management when it comes to staving off additional federal regulation. After all, much of the impetus for the fiduciary standard comes from a perception that the industry is by default up to no good, or at least, it is so shot through with shady operators with no rules to play by that bad things are sure to result. That strikes me as a flawed and ignorant view of the industry, but when has that ever stopped Washington before? Whether it’s fair or not, that is the standard Washington is playing by, and it will pay to be mindful of it and correct certain things before the folks on Capitol Hill decide to do it for you.

There are two things in specific I have in mind. And both are, in their way, reflections of the other. They are current marketing concepts that may very well be driving in business the industry needs. But if these get too much public exposure, they are primed for opportunistic regulators to seize upon them and use them as cause for further regulation.

Annuities as insurance. In recent months, I have had a number of conversations with industry executives, producers and PR folks who are all promoting the notion that annuities are really a form of insurance against longevity risk. I have been in the insurance and risk management field for nearly 20 years, and I simply do not think that longevity risk is a legitimate insurance risk whatsoever. Yes, there is a risk you can outlive your retirement savings. Yes, annuities are an excellent way to hedge against that risk. But the central concept behind insurance is to have a tool that provides financial certainty against an adverse development whose manifestation is patently uncertain. You will never, ever, ever, ever convince the American public that growing old is a risk to insure against (by way of annuities), certainly not when you are also asking them to insure against not growing old (by way of life insurance). I have seen how frustrated the industry is over the public’s seeming inability to wrap its head around the need for life insurance. How can the industry possibly succeed on that front and at the same time convince people it needs to insure itself against its reverse? It is like trying to sell somebody collision insurance for their car and depreciation insurance in case their car lasts a lot longer than they ever though it would. People can not see things that completely. They can accept one risk or the other, and rare is the client who will accept both. But more importantly, annuities are essentially a financial planning product. They are not insurance like other forms of insurance are insurance. They just aren’t. And to suggest otherwise isn’t just confusing, but it is the sort of thing regulators can misinterpret as misleading. I do not think the industry is trying to pull the wool over anybody’s eyes when it markets annuities as longevity insurance. But try telling that to some legislator who wants to look tough at re-election time and decides to take a cheap shot at an industry whose marketing seems to contradict itself on a product that already has a bad reputation in terms of sales practices. Trust me on this one: annuities as longevity insurance is a bad concept, and one that should be dropped immediately.

Life insurance as an investment. This is the flip side of the annuities-as-insurance concept. For every conversation I have had touting the insurance-like qualities of annuities, I have had one that touts how great life insurance is as an investment vehicle. I have problems with this, too. Now, before I get too deeply into it, let me say that indeed, life insurance really can be a good investment. My father had a bunch of it that built up enough value to pay for my brothers and I to go to college – which was the real purpose of him having life insurance in the first place; to pay for our college should he die. (Given his health at the time, that was a distinct possibility.) So when I rail against insurance as an investment, it’s not that I have a problem with life insurance, or that it can’t actually be a good investment (it sure was for my family). My problem, like with annuities, is how its marketing falls into the gap between perception and reality. To quote one professional friend of mine, life insurance only looks good as an investment these days because almost every alternative to it looks awful. One day, when the markets recover (it’ll take a few years, but it will happen), life insurance will return to being a very modest return, and people will forget that you can use it like an investment vehicle. But until then, that is how it is being marketed by insurers, and it is a dangerous line to promote. Were somebody to broadcast to an open session of Congress during a budget session that there is an industry promoting an investment vehicle that is tax-free, you can bet that more than a few legislators would decide to look into it. More to the point, promoting life insurance as an investment comes dangerously close to securities territory. At the moment, the build-up value of life insurance can’t be regulated like a security, but will that really stop the SEC, which has already shown a proclivity for extending its jurisdiction by fiat? Sure, the industry can battle back such efforts, but why invite a fight at all? Life insurance sales could be better – they should be better, for our nation is critically underinsured – but it would be a smarter thing for the industry to educate people on their need for life insurance, and to develop products that even the working poor can afford than to pretend life insurance is something it is not (an investment vehicle) at a time when any product bearing such a handle will fall squarely within the gunsights of financial regulators.

Annuities as insurance. Insurance as investments. Somewhere along the line we got these wires crossed. This is not inherently wrong or bad or villainous, but it is only a matter of time before somebody with an axe to grind against the industry decides that they are, and takes action. Far better for the industry to pre-empt this by uncrossing its marketing efforts and re-focus on selling annuities and life insurance on what they really are: a fine do-it-yourself retirement fund, and a fine form of financial protection against personal catastrophe. The problem is not that these products are being marketed cleverly enough. The problem is that people think these products are too clever as it is, marketed mainly at people who are already seen as having a lot of money to spend.

The industry seems to model its sales efforts along the feeding patterns of a shark, which spends a huge amount of energy in the hopes of scoring something big like a tuna. Meanwhile, the ocean has whales in it that are an order of magnitude larger, and they get that way by eating huge quantities of the smallest creatures in the water. There are hundreds of millions of uninsured and underinsured poor and middle class in this country. They all need funeral expenses. They all fear the loss of a breadwinner. And they would all like to retire too, someday. In fact, they might be even more motivated to save aggressively toward it if shown a way to do so, because they might be the first generation in their family to earn such a rich reward in their autumn years. Why doesn’t the industry work harder to serve this need? Surely, whatever the reason is, cross-marketing annuities and life insurance as each other isn’t the way to do it. not for market share, not for profits, and certainly not to head off over-eager regulators at the pass.


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