By Steven A. Morelli
CHICAGO – While the East Coast braced for a hurricane on Monday, LIMRA’s CEO sounded the alarm about a different but also historic disturbance whirling toward the insurance industry.
While acknowleging the impact of Hurricane Sandy, and expressing concern for those in its path, Robert Kerzner delivered his dire warnings about another storm effecting the insurance industry during his annual address to hundreds of insurance company executives. Many of those concerns during the opening general session spoke right to agents.
Carriers are exiting markets in droves and in many cases leaving the country altogether. Companies are dropping entire lines of business, particularly in variable annuities and long-term care. The largest of the companies are looking to Latin America, Europe and Asia for business.The disruptions are unprecedented in their scope, Kerzner said: “This has never happened before on this scale.”
Many forces are feeding the storm, but Kerzner focused on two fronts in particular, demographics and regulation (with an assist by persistently low interest rates). Although demographics play a part in sunnier days, regulation is pretty much all dreary, all the time, in Kerzner’s estimation.
Regulatory changes are having a profound impact on companies with some of the pressure on capital requirements coming from harmonizing with international practices. Just the accounting standards alone are staggering for companies. Ireland, for example, faced a tenfold increase in data points required by adopting Solvency II standards.
“There are regulatory issues being debated now across the globe that could have cataclysmic effects on our business,” Kerzner said.
The United States is eyeing another piece of European financial fashion that would change how insurance is sold and could mothball the classic American insurance agent. That is the fee-based sales model, which more countries are requiring – and banning commissions. In 2013, three additional countries, the UK, the Netherlands and Australia, will ban commissions, Kerzner said. Some Asian nations are considering commission restrictions.
“Regulators believe producers paid on commission have a bias and an inherent lack of objectivity and that a fee-based system eliminates the problem,” Kerzner said.
But those restrictions might have the opposite effect and eliminate advice for many clients and reduce business. Although Europeans and Americans say in surveys that they would like a flat fee rather than a salesperson being paid a commission. But ask them what they would be willing to pay and that’s where it all falls flat because consumers don’t want to pay very much, about $100, far less than fee-based advisors usually charge.
As regulators struggle to shape a fiduciary standard, Kerzner cautioned against developing one that ends up working against consumers. If they do not, or cannot, pay for fee-based advice and commission-based advisors are not available, Americans will not get the financial protection they need.
“We must not let regulators and legislators pass well-intentioned legislation that makes it more difficult for middle class people to get basic advice,” he said.
Research shows why consumers need guidance to truly understand the consequences of their actions and to make the right decisions, Kerzner said.
“Behavioral economics tells us there are many things people believe they need, but it takes what one researcher calls a visceral reaction to get them to act,” he said. “Life agents and financial planners who meet with clients provide the guidance and tell the stories that trigger the visceral reaction.”
And it is not just regulators who don’t seem to get this. Some companies also seem to be missing that point.
“Some big names in financial services are spending a lot of money on TV ads trying to convince consumers they don’t need advice,” Kerzner continued. “They can do all their planning and investing online by themselves. However, the more you study the research on how consumers make financial decisions, the more you understand why there is a need for advisors.”