| Copyright: | A.M. Best Company, Inc. | | Source: | BestWire Services | | Wordcount: | |
The life industry faces a conundrum because it's facing the challenge of providing product guarantees at a time when financial security is more important to people than ever before, said the president of ING's U.S. retail life distribution.
The industry is a bit confused as a result of the financial market meltdown and credit crisis, said Daniel Mulheran, who noted that two dynamics emerged over the past 15 months.
People believe they need to be able to trust financial institutions, and that translates into wanting guarantees, according to Mulheran. The challenge, though, is that those guarantees -- very costly for insurers -- had a lot to do with causing the problems the industry got into, he said.
"Being able to foresee conditions that could put pressure on the ability to deliver on those guarantees was impossible," said Mulheran, who met with BestWire at Limra International's 2009 annual meeting in New York.
These guarantees include living benefit riders offered on stock market-linked variable annuities, he said. Variable annuities transfer most of the risk to the buyer, but by adding guarantees over the past several years, life insurers "were taking back a lot of the risk," Mulheran said.
Another guarantee is offered on the most popular permanent life insurance product -- no-lapse guarantee universal life, but these also have "a significant impact" on managing reserves, he said.
Turning to regulatory changes ahead for the U.S. financial-services industry, including life insurers, more regulation "is a certainty," Mulheran said. However, he cautioned against over-reaching due to the financial crisis.
The life insurance industry "is probably the most regulated industry in the United States today" but it's being pulled into the entire financial-services arena in terms of what's being considered for regulatory reform, Mulheran said.
The New York State Insurance Department has a proposal to institute broker compensation disclosure requirements, he said. "This is a knee jerk in the best possible form," Mulheran said. It grew out of the bid-rigging issues discovered by former Attorney General Eliott Spitzer, which dealt with instances of institutional purchases of property/casualty insurance, he said.
Under its proposal, the department would force a life insurance agent to disclose the entire compensation on a sale, Mulheran said. That's too stringent because the buyer has the chance to consider a clear illustration of what they're buying and make an assessment as to the value for the price to be paid, he said.
To expect every agent to be required to disclose to everyone they offer insurance to exactly what they will be paid "is tantamount to a dentist having to tell someone sitting in their chair what their margin is going to be on the crown they're about to put in their mouth," he said.
Turning to industry challenges, the affluent, or people with substantial assets, took a big hit during the heart of the financial storm, he said.
They're being careful about making significant, long-term financial decisions, and are waiting "for their portfolios to return, waiting for the environment to stabilize and waiting for their confidence to come back to make long-term decisions."
The company continues to see opportunity in the middle market, but the market has demonstrated the importance in having a broad market reach, Mulheran said. "Because the middle market has been more stable in staying the course with their purchasing."
[To listen to the interview with Mulheran in the near future, go to www.bestdayaudio.com]
(By Fran Matso Lysiak, senior associate editor, BestWeek: fran.lysiak@ambest.com)
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