As president and CEO of the Insured Retirement Institute (IRI), Cathy Weatherford’s mission is to educate the public, financial advisors and regulators about the importance of annuities in a retirement plan that is increasingly less dependent on company pensions and Social Security.
And she is uniquely qualified to lead that charge. Before she headed up Washington, D.C.-based IRI, a nonprofit group advocating proper retirement planning and the use of annuities and variable life products in those plans, she served as president of the National Association of Insurance Commissioners. She was also the first woman to head Oklahoma’s insurance commission.
LHP caught up with Weatherford as she presided over the organization’s 2012 Marketing Summit in New York City in early April.
In the first part of the conversation, Weatherford discussed why annuities are gaining in popularity, how they can fit into an individual’s retirement blueprint, and how insurers are managing risk in today’s volatile market.
In the second installment, she weighs in on the impact of several high-profile exits from the variable annuity business, how advisors can sell annuities to skeptical clients and the regulatory environment.
LHP: Some companies have actually left the variable annuity business. Can you comment on those developments?
Cathy Weatherford: They left the variable annuity business, but not because they went insolvent. They left the business because they decided to go in a different direction. I think that is very different from what we saw in the banking sector, where regulators changed the business strategies and models. The life insurance industry made its way through. I know we tend to have some angst around some of what I call strategic decisions to take their companies in different directions. They are still here, they are still standing. From a regulator’s perspective that’s pretty powerful.
LHP: Do you expect that more companies might leave the variable annuity business?
Weatherford: We have well over 40 companies right now. We are seeing new entrants into the marketplace. We are starting to see growth at the bottom. Let me give you my personal perspective around this. I was a regulator during Hurricane Andrewthe greatest losses the P&C industry ever saw. We saw some insolvencies and tremendous exodus away from coastal marketplaces. What did that industry do? They figured out catastrophe (CAT) modeling. They also figured out how not to have concentration in a single zip code. Everyone is back on the coast. The property and casualty industry has grown. People said the P&C industry will never be the same after Hurricane Andrew. We have the most vibrant P&C industry, it innovated and changed, and figured out strategies to come back to a marketplace. That is what American business is all about. You are not forced to be anywhere or in any product or any marketplace. In today’s environment, it’s incumbent on management and boards of directors to make strong, sound business decisions, and who’s to say that some of the retreats won’t be advancements in a few years.
The demographic is so powerful for this marketplace. The two generations coming behind [the boomers] could be even more powerful as a demographic because there is going to be less reliance on Social Security and company pensions. So self-financing and self-responsibility are only going to grow in America. I believe you have to take the long view here. In the short view, we’ve seen some changes in strategy, some changes in direction, but the opportunity is still here. The insurance industry has been doing this for 150 years and the life insurance industry knows how to have a long view in managing risk and delivering on their promises. I am an optimist. I believe this is going to be a very vibrant industry.
The other point I’d made about the life insurance industry is that with banks, you saw the development immediately. OK, it’s time to close. What we are seeing in the life insurance industry is that some of the issues around these decisions take a bit longer to develop. So the idea that everybody thought it should happen across the entire financial marketplace immediately after the crisis, during the crisis, or in the midst in the crisisthere are different types of financial institutions. With the insurance carriers, it doesn’t develop as quickly. You take a longer time to analyze and you are able to get a clearer picture and then you can make a decision. I think we are just now seeing the action and reaction to the crisis. But I think we have a really strong and vibrant future in this marketplace. I really do.
LHP: But there have been some high-profile exits from the variable annuity business, like Hartford. What impact does that have on consumers and advisors? How does the industry combat that?
Weatherford: Everyone has to have a new frame of mind and a new way of thinking since the financial crisis. This is just one more piece of it, one more step into it. So yes, I do think it’s incumbent on all of us who are involved in this industry to be mindful of the consumer mindset, but the consumer mindset is already there. They have already become skeptics of almost everything. So we have to continue to tamp down that skepticism. I think financial advisors have been through all types of turmoil, not just the insurance industry. Their turmoil and pain has been deep and expansive across every type of industry and product they represent and use with their clients. So we are all going to have to talk to our clients, and work with our advisors. Nothing beats good education and good facts to overcome these kinds of questions that might be in a financial advisor’s mind or a consumer’s mind.
LHP: Annuities can be a controversial product. How can advisors explain that can be useful in some circumstances?
Weatherford: There are over 40 companies still in the marketplace, and we are still in a growth mode at the bottom end with new entrants in the marketplace. So this is still a very vibrant industry, the products are still good, they still work, and they still solve for what financial advisors and clients are looking for. Financial advisors have a lot of tools, and they are able to do the analysis and the education with their clients. We may have a few hard quarters ahead of us, but then I think that it all settles out and everybody sees the way forward and that we continue with a very vibrant industry with the types of products that consumers are looking for.
LHP: The regulatory environment is always changing. Annuities are tax-deferred now, but that may be altered in the future. How can the industry address the regulatory environment and the changes that may be coming?
Weatherford: First and foremost, while tax deferral is on the list of tax expenditures the U.S. Congress looks at as part of tax reform, you cannot take the power of tax deferral away from saving vehicles that 50 percent of the U.S. has to use if people are going to be more self-responsible for retirement. They are responsible because they don’t have a workplace plan. And those who do have a workplace plan are looking for lifetime income. Social Security doesn’t solve [that problem] and the U.S. government knows that. While it may be visited, I do believe that our policymakers know that you have to keep the incentives there for people to be able to save for their retirements if you are going to ask them to become more self-responsible for their own retirements.
The other regulatory issues are some of the barriers and hurdles and regulations that have been heaped on this industry over the course of decades and that have had a cumulative effect. We’ve got to start working with the regulatory community. While I’m not saying take away consumer protections, I’m not saying that at all, I am saying that there are cumulative regulatory burdens on this industry that should not be there, and that the entire regulatory community, without sacrificing consumer protection, needs to figure out how they take some of this burden off it from a state and federal level. If we are going to require Americans to be more self-responsible and that they need to build out their own lifetime income, then you can’t keep heaping on regulation after regulation after regulation because there is cost to that and it’s passed on to the consumer. We have a lot of work ahead of us as an industry, as financial advisors, to make sure we retain tax deferral because our clients want it and need it if they are going to be required to save self-responsibility for retirement. We all need to work together to try to reduce some of the costsnot consumer protectionthrough our regulatory community. So we’ve got to a lot more education about that, too.
LHP: What regulations are most burdensome?
Weatherford: We are at the front end of doing that cost benefit analysis from the insurer level, the advisor level and the broker-dealer level. First, off the top of my head, is the cost of licensing across 50 states. That is the simplest thing that we all know still creates tremendous cost with little benefit, that you have to individually license across 50 states for an insurance license.