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1870The New York insurance commissioner looks at the marketplace:
"As already intimated, it is believed to be a fact, now causing quite
general complaint, that there are too many complicated schemes or
plans of insuring, and conducting companies, as well as too many
and too elaborate forms of contract or policy. Each new company
announces some new feature in its business, which is to enure greatly
to the advantage of the insured, and thus, with some seventy different
companies, each urging their superiority over all others, he who seeks
insurance, if he stops to hear all the arguments, and deliberately
determine which is really the best company, is likely to die before
he reaches a conclusion."
(from the Eleventh Annual Report of the Superintendent of the
Insurance Department of the State of New York, April 1, 1870)
1905A consulting actuary denounces the marketing of life insurance as an
investment to people who have no need for life insurance:"It seems reasonable, upon careful examination, to load a life insurance
premium with a sufficient provision for expenses to enable it to be sold
and the premiums to be collected, as well as for expenses of management.
Life insurance is needed by thousands who would never avail themselves
of it, were it not for the agents who urge its sale. It is as justifiable to use
10 per cent, or 15 per cent, of the premiums, or even more if there are
weekly collections, to defray the cost of finding patrons for life insurance,
as to add to the real cost of coal the expense of selling and delivering it,
whether by the ton or the basket. That is, because the benefit must be
paid for. The price may be high, but the thing is worth it and cannot be
furnished for less.
An investment stands upon a different footing. If handicapped in this
manner, it ceases to be an investment at all, and so can be sold only
by false representations of its real character. For that can hardly be
called an investment which returns less than is paid or which, after
years elapse, barely returns what has been paid. Stated in this bald
fashion, such a proposal would not be attractive to anybody. It can
be marketed, therefore, only by pretending that in some subtle way,
not easily comprehended, the deductions from the principal are going
to be made good out of the earnings and a round profit be realised
on the entire payments."
(from Miles Menander Dawson, The Business of Life Insurance, 1905)
1968Two insurance professors discuss the failure of traditional marketing
approaches to match products with needs:
"Perhaps the entire structure of life insurance marketing needs
retooling, as it relies almost exclusively on a marketing force
promoting an investment, yet basically untrained in matters of
investment. In making an investment use of life insurance, the
insurance oriented salesman is generally more conversant with the
advantages than the disadvantages of his recommendations. What is
needed is an insurance-investment counselor who has no special
financial interest in any investment alternative and is also conversant
with all major alternatives. Today, the typical insurance salesman not
only does not fully appreciate investment alternatives, but he often
has little understanding of the investment element of life insurance.
And his limited knowledge is strongly warped by his interest in the
commission structure of his product."
(from Juan B. Aponte and Herbert S. Denenberg, "A New Concept
of the Economics of Life Value and the Human Life Value: A Rationale
for Term Insurance as the Cornerstone of Insurance Marketing,"
Journal of Risk and Insurance, September 1968)
1989A New York insurance regulator discusses the problem of finding a
good life insurance agent:
"There are far too many agents in the first place. In the second place,
an awful lot of them are...Well, some of them are criminals really, but
very, very few. Most of them are so ignorant and ill-qualified, and I
think I could say most, but that still leaves room for thousands who
are very qualified and very able and if the consumers could only buy
their insurance from them, then we'd all be better off, I think, and
that's the way that consumers look at it."
(statement at an October 1989 meeting of the Society of Actuaries)
1991Fidelity Mutual's CEO tells its agents why they shouldn't worry about
the company's financial health:
"In short, while we certainly aren't perfect, we have a well-conceived
plan in effect designed to have us emerge as one of the premier
companies in the industry. We remain confident in, and committed to
the successful execution of the plan. As always, your confidence and
support remain crucial to the accomplishment of those goals."
(Letter dated July 17, 1991 from Warren W. Deakins to All Fidelity
Mutual Associates. Fidelity Mutual was taken over by Pennsylvania
insurance regulators 16 months later, and 100,000 policyholders
lost immediate access to their money.)
A member of the Society of Actuaries Task Force for Research on
Life Insurance Sales Illustrations explains why they didn't use focus
groups to find out what consumers think about policy illustrations:
"I'll respond briefly to the suggestion that we use focus groups to
get the consumer point of view. We did consider that early on in
our work and rejected it for a couple of reasons. One was the
time constraints we were under and the cost of doing focus groups.
But probably the most important reason is that if you get 15 people
in a room who are recent purchasers of life insurance and then spend
an hour or two dissecting the sales process and the use of their
illustrations in that sales process, you're likely to have 13 people
coming out slightly or greatly disillusioned over what they just did.
We found that our field force and our marketing department didn't
like that idea at all."
(statement by a Northwestern Mutual actuary at an October 1991
meeting of the Society of Actuaries)
1997A consulting actuary offers some advice to life insurance companies:
"Companies need to become much more consumer oriented. This
is going to allow consumers to understand the products more,
which will make the sales easier, which allows us to pay agents less
per sale. I think we need to try to improve the quality of information.
If you ask your friends from outside the insurance industry what
insurance products they have, ask them to explain why they have
those products. See how many can give you anything more than
vague answers. Then, read the material the insurance companies
are giving these people. See how many paragraphs you have to
read over three or four times to understand what the product is
and how it works. What chance does your average consumer have
of understanding these products?"
(statement by a Tillinghast actuary at a May 1997 meeting of the
Society of Actuaries)
An insurance company executive and a consumer advocate give
New York state legislators their views on a proposed law that
would allow the creation of mutual holding companies:"I would like to spend my time discussing the issue that all of the
mutual insurers in New York State believe is paramount with respect
to mutual holding companies. What's in it for our policyholders?
During the nearly two years that this legislation has been in the
making, the primary role of a mutual insurer — stewardship of its
policyholders' interests — has been at the heart of the principles that
are embodied in this proposed bill.
The desire to continue to perform this stewardship role for our
policyholders is indeed the main point behind the proposed mutual
holding company legislation."
Howard Atkins
Executive VP and CFO
New York Life
"I guarantee you, Mr. Chairman, if this bill prohibited any stock
ownership and any stock options by any of the management over
the next 20 years following the MHC conversion, we wouldn't be
here today."
Ralph Nader
Center for Study of Responsive Law
(statements given to the New York State Assembly Standing
Committee on Insurance, Public Hearing, Mutual Holding
Company Legislation for Life Insurance, October 8, 1997)
A former agency manager who now runs an Internet-based
publishing firm looks at the future impact of the Internet on life
insurance marketing:
"There's not one product on that list that Quotesmith puts up there
that's been designed for sale through the Internet. Every product
there has the same commission structure as is being sold by career
agents or brokerage agents anywhere in the United States, and for
me, that's kind of a ringer in the deal here...
I'm not an actuary, but I certainly can understand the difference
between 150% load of first-year premium versus 35% load. And
with the incredible power of distributing information that's available
on the Internet, it's not going to take too long before a whole lot of
consumers are going to understand that I can buy a product that has
35 cents on the dollar versus one that has $1.50.
I'm an agent, I've been in the business for 26 years, but I can assure
you that you cannot sell a relationship sale for that big a gap. So it is
going to be very interesting as more and more products are
developed that do have lower loads, it's going to put pressure on
the entire agency system. With the pressure of the information being
distributed and disseminated through the Internet where people are
finding out the true differences that can exist on those products, it's
going to put pressure on the agency system to lower and close that
gap some. I don't relish the thought of that happening, but I really
think it will."
(statement by the president of Financial Services Online at an October
1997 meeting of the Society of Actuaries)
A consulting actuary explains why the cost of selling cash value life insurance
needs to be reduced:"For a typical [universal life] product, a dollar premium received by an
insurance company would include approximately 27 cents for counseling
and service. Sixty-six cents would be for savings and protection, and seven
cents would go to profit.If you assume what customers want are prices associated with buying
competitive term products and good annuity or mutual fund products, then
we estimate that in order to generate a significant market interest in
permanent life insurance, current prices for competitive products must
decrease 12% to 15% in the market. The improvement must come from
counseling and service.Why is that you ask. Well, the market is currently smart and educated, and
we cannot trick them into lower benefits. We cannot provide lower benefits
for the same amount of money, especially in an era of full disclosure. Rates
of return for shareholders of insurance companies are barely at acceptable
rates of return. There is no room to take profit from a shareholder. The
balance must come out of counseling and service."
(statement by a Tillinghast actuary at an October 1997 meeting of the
Society of Actuaries)
1998A consulting actuary tells a story about commission disclosure, sort of:
"I was launching a product for a company and the first question that was
asked [by the bank's insurance representatives] was, 'What commission
are you paying to the bank?' That's a question that is not for a company
to answer. That's really for the bank program manager to answer. The
representatives were just hot that they couldn't get an answer to that from
their own manager or the company because they just believed that there
was so much money that was staying out of their pocket."(Statement by a Milliman & Robertson actuary at a June 1998 meeting
of the Society of Actuaries. Agents' lobbyists spring into action whenever
someone proposes the mandatory disclosure of agents' commissions,
but it's a different story when agents want to know what someone else
is making.)
1999Two tax advisers discuss split-dollar life insurance:
"Most split-dollar arrangements are sold by life insurance salespeople
who overwhelm their prospects with the magic of tax-free inside policy
compound interest build-ups. As compared to not doing anything,
the results of almost any life insurance program are truly wondrous,
especially over a 20-year horizon. What the taxpayer needs, however,
is to be able to look at other alternatives as well.In fact, one of our concerns is that the increasing practice of tax advisers
selling life insurance and other investments along with providing tax
advice deprives the taxpayer of someone who will offer an independent
analysis of proposals such as split-dollar insurance. The tax adviser who
is going to receive a commission on the transaction may believe that he
or she is fully objective in analyzing the client's needs and in presenting
the pros and cons of different alternatives. However, we are concerned
that there is going to be an unconscious bias in favor of the transactions
that produce commissions. We have observed that some tax advisers
have, in the past, been reluctant for the same reason to vigorously
critique proposals of life insurance people who referred substantial
amounts of business to them. The taxpayer is thus presented with
advisers who unanimously endorse both the economic and tax analysis
reflected in the life insurance company projections."Burgess J.W. Raby and William L. Raby, "What Gets Split With
Split-Dollar Life Insurance?", Insurance Tax Review, April 1999
2005The CEO of a major life insurance company explains why people
are better off if they don't know how much of their money goes
into the life insurance agent's pocket:"Reporter: What would be so bad about disclosing commissions
in life sales?CEO: The life sale is a very difficult sale. People have to talk about
their mortality, about how much money they really need. It's very
complicated. If right in the middle of this discussion, you throw in:
'And by the way, there's a 55% commission,'...You won't get the
sale. You've now created enough of a hurdle to kill that form of
distribution, and that's the only form that's proven successful in
getting life insurance really out. Plus, you're going to create the
potential for rebating, which is against the law in most states. There
would be pressure for rebates. And once you do that, then you
start affecting the income of these agents. Most of them don't even
make it. The industry is lucky to keep 20% after four years. If all
of a sudden rebating takes place, and their effective commission is
cut back because they're trying to compete on commissions, you
get rid of the career agency system...and many fewer people would
have life insurance."Sy Sternberg, CEO of New York Life Insurance Co., quoted in
Best's Review, February 2005
2015"Well, lapse-supported pricing seemed like a good idea at the time.
Our agents loved it. Consumers loved it. How could we have known
that it would turn out the way it did?"
(statement by an insurance company executive to a Congressional
committee investigating sales practices in the life insurance industry)
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