What Can We Do to Put Clients Back in Control?

-by Marc Schwartz

You’ve probably noticed that life insurance has been making headlines recently – which is rarely a good thing.

When both the Wall Street Journal and the New York Times sound off on how life insurance companies today are facing lawsuits from some of their customers, it’s clearly cause for concern.  The legal actions have mostly been prompted by increased premium requirements on universal life and long term care contracts.  According to the companies, there are many reasons for the actions that result in the increases, including slow growth, a shrinking sales force, increased compliance requirements, greater reinsurance oversight, but most importantly a sustained historically low interest rate environment.  As the Times put it:

“It adds up to a vexing math problem: how to back a promise of 4 percent in a 2-percent-or-less world. For life insurers — where more than three-quarters of the industry’s $6.4 trillion in invested assets are parked in bonds — low rates like these can be calamitous.”

Solution and Strategy Path

And how are companies reacting?  In various ways – some with increased COIs, others with more limited product selection, price increases, restricted term conversions, layoffs and expense reductions, sales and service pullbacks, and non-traditional (read ‘cheaper’) product distribution.

What makes this scenario even more alarming, and confusing, for our clients is the scattershot nature of the actions that companies have taken to mitigate the threat to their viability in the business.  Public relations disasters abound and company actions appear arbitrary to the general public.  One company pays an extraordinary dividend to its overseas parent of $785 million, and soon after informs certain customers that the premiums required to continue their policies will be significantly higher.  Another company discovers that its universal life insureds over 70 with face amounts of $1 million or more are experiencing higher than expected mortality, and their COI rates will be adjusted to reflect the additional claims expense.

Both the Journal and the Times articles imply that companies like these have resorted to pressing buttons and pulling levers that in effect transfer an increasing proportion of policy risk to their customers. The companies respond that the changes they require have been reviewed and approved by the appropriate regulatory agencies, and are allowed by contract.  But the transfer of risk is real:  the risk of higher costs and policy failure due to higher fees and expenses, higher than expected mortality, or lower than expected earnings and growth on policy equity.

This does not bode well for an industry built on trust, predictability and meeting client expectations.  Right now, some of our clients feel as if the industry has not lived up to that trust, and by companies using contractual provisions that had rarely, if ever, been used before.  Some clients feel as if their life insurance, and by extension their sense of security and peace of mind, is out of their control.    Which leaves us with an important question:  Are there ways that we, experienced and expert in our profession, can put our clients back in control?

The answer is yes. There are products and riders that you can recommend today that give clients the control they want and need.  Products with contractual guarantees and exit options that reduce uncertainty in just the right places:  death benefit guarantees, cash value floors, contractual flexibility, or guaranteed maximum premiums.  The key is knowing what’s important to your clients, and matching them with the right companies and products.  We’ll explore those options and opportunities in our next Windsor blog.