By Cyril Tuohy
The chief executive officer of one of the nation’s most respected life insurance companies decried the state of the industry.
John D. Johns, president, chairman and chief executive officer of Protective Life, said the industry had become commoditized and made it difficult for many consumers to buy life insurance and related products.
The comments, coming during a recent conference call with investors, provide some counterarguments to the refrain that life insurance companies have been hurt by low interest rates, stiffer competition and an aging distribution force.
Stock companies, Johns said, have “essentially lost” their relationship with customers through outsourcing distribution to third parties, and while “independent third parties do a pretty nice job,” they “enforce commoditization on the industry,” he said.
“There's so much ?spread sheeting’ every time a life insurance policy is sold through an independent channel out there, it's usually got a high level of price-driven aspect to it,” he said in a conference call last week. “And so what do you get? You get commoditization, you get spread sheeting, you get almost pure price competition, you get smaller margins, lower returns, more risk.”
Johns, who joined the company in 1993, has served as Protective’s CEO for the past 11 years. Protective, which has completed 47 acquisitions, is known for being stable and meeting all the terms of its deals, he said.
Commoditization isn’t only affecting carriers, it’s affecting wholesalers too, said John R. Sawyer, senior vice president of life and annuities for Protective Life.
For the first time in memory, wholesalers at the recent annual conference of the National Association of Independent Life Brokerage Agencies (NAILBA), complained that “agents are starting to commoditize us,” Sawyer said.
“Our margins are getting compressed in this business,” Sawyer said. “We have to find a different way to do business.”
Wholesalers told Sawyer they are starting to align themselves with a core group of insurance carriers they’d rather work with to help protect the distribution franchises, he said. “We’ll have to see how that plays out,” Sawyer said.
At the annual NAILBA convention in Grapevine, Texas, Raymond S. Phillips Jr., chairman of NAILBA, told InsuranceNewsNet that the industry was in a “period of chaos,” with regulatory changes, annuity application packages running more than 30 pages long, electronic delivery of policies and even Twitter announcements regarding annuity products.
A younger generation of brokerage agency leaders will soon be taking over, and Phillips admitted the industry and NAILBA were about to enter a new age.
Traditional life insurance agents, Johns also said, are rapidly becoming an “endangered species,” as they can’t make a living selling insurance only to middle market consumers. For example, selling a $500,000 term policy may garner the agent a $280 commission.
Hence all the attention paid to the affluent consumer, or the top 5 percent of households in the country. These customers are “oversold” and “probably have more life insurance than they really need, and everybody else is kind of getting ignored and left out of the mix,” Johns said.
Part of the commoditization phenomenon is that brokers view carriers themselves – not just their life or protection products – as a commodity.
Brokers will consider Protective Life, Lincoln Financial, MetLife, Principal Financial, Genworth, New York Life or Prudential, “but there's not any real sense that we're in this together and I think that's bad for both,” Johns said.
“It's really bad for us, it's bad for the distributor and it's bad for the consumer because really through collaboration you can get a lot of efficiency, you can deliver a lot more value to the customer, you can make the distributor business model work better and of course at the end of the day hopefully ours too and that's a problem,” Johns said.
Nor has the industry helped itself by making its products more complicated. It has therefore become difficult to buy life insurance or an annuity.
“It's hard to understand what you're buying and so a lot of people just don't,” Johns added. “They say, ‘I don't get it. It's just too much trouble. The agent knows or this broker knows more than I do so I'm at an information disadvantage and so I'll just pass, I'll defer.’ “
Johns’ candid commentary underscored the need for a radically different approach to the consumer – approaches that Protective Life will either expand on or announce in 2014.
“In this industry for the last 100 years, we've really thought of the customer as sort of a nuisance,” Johns said.
“All the focus has been on sell, sell, sell, sell, sell but after you sell, how can you get the unit costs in our call center down as much as we possibly can, and still have an acceptable, tolerable level of service,” he said.
Call centers, for example, are a key part of the relationship with prospects or customers who could develop into great customers, “if you just treated them the right way and have the right technology to do that,” he said.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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