I don’t pretend to have the prognostic abilities of Nostradamus. That is probably a good thing given the amount of ambiguity in our environment and industry as we enter a new decade.
Uncertainty is the biggest obstacle to progress, especially as it applies to long-term decision-making. For example, much of this blog was written and ready for publication prior to the greater than ten percent stock market correction precipitated by coronavirus concerns and a glut of oil in the market. The ability to predict the next two weeks, yet alone the remainder of 2020, is pure speculation at best.
However, as we look to the remainder of 2020, Andesa can provide some framework around the significant challenges facing the industry and allow our readers to draw conclusions in context of their own risk tolerance.
Pockets of Uncertainty:
Low-interest rate environment: After almost a decade of low-interest rates, the 10-year treasury made a slow climb from below 1.5% in the middle of 2016 to almost 3.25% in November 2018. However, 2019 brought three rate cuts by the Fed. Reaction to the coronavirus scare just recently resulted in another 50 basis point cut to the Fed Funds rate and the 10-year treasury fell to its lowest yield ever. Many experts predict further cuts will be necessary in 2020. This trend will continue to put pressure on banks’ financial performance (target market for BOLI) and continued performance and crediting rate pressure on life carriers.
The low interest rate environment creates some unique challenges for in-force BOLI case management. As cases drift out of corridor due to low rates and aging insureds, the policies become less efficient. For non-variable UL, we have seen scenarios where policies have “fully funded” up to defined IRS limits, and yet, are still in danger of lapsing. In these scenarios, funding is allowed only to keep the policies in force until the end of the policy year, but no further, resulting in highly inefficient policies (i.e. highest net amount at risk, leading to highest COI charges). Andesa works collaboratively with each of our carrier partners, as needed, to manage these contracts as efficiently as possible, based on their directions and guidance.
2017 CSO mortality: The NAIC adopted a new life insurance standard mortality table (2017 CSO) which is mandatory for insurance products sold after January 1, 2020. The new table improves mortality at most ages, which results in lower allowable premiums for a given death benefit. Generally, the attractiveness of cash value accumulation products will be negatively affected by the tables. Most COLI carriers delayed adoption of 2017 CSO as long as possible, and many had solid 2019 sales years with pre-2017 product sales. The combination of low-interest rates and new mortality tables present intermediate growth challenges for the industry.
Election Year: Election-year politics are usually positive for the stock market and economy. Only four times in the past 23 presidential elections did the stock market produce a negative result, and two of those dated back to the Depression. During the fourteen presidential election years since my birth, only two (2000 and 2008) produced negative results. Interestingly, both of those years featured the absence of an incumbent President in the race. Even the highly contested Trump/Clinton race of 2016 produced an almost 12% return for the S&P 500. With all the caveats of past results not guaranteeing future performance, the results of this year’s election campaigns will produce great uncertainty for much of 2020 with implications for society and the economy in the balance. While the market may price in eventualities, the nature of uncertainty tends to delay long-term investment decisions. Thus, we expect additional pressure on COLI and BOLI sales in 2020.
Changing face of distribution: The industry continues to witness a consolidation of the broker community serving the industry. Driven in part by succession planning for an aging demographic nearing retirement, the fast pace of technology and cybersecurity risk, access to capital in the hands of plenty of buyers, and a desire by some to focus on sales versus administration have led to a few years of industry consolidation. Some of the larger distribution groups are beginning to take action on recruitment and development of “the next generation,” a positive step in the long-term.
ICOLI: According to a recent survey published by Moody’s Investor Service, most major life insurance carriers own ICOLI, with much of the assets having been purchased in the 80’s and early 90’s. But as carriers continue to seek yield, ICOLI has found a favorable purchaser, and the industry has found a renewed source of larger case company-owned transactions. ICOLI was a key driver in 2019 sales performance and is expected to drive sales performance for most carriers even more in 2020. With the renewed interest in ICOLI, there will be continued challenges of regulatory oversight, as well as calls for additional transparency and disclosures.
Insurtech: Insurtech is the use of technology innovations designed to squeeze out savings and efficiency from the current insurance industry model. The past decade witnessed a significant number of new Insurtech startups as carriers sought technology innovation. The startup curve peaked in 2016 and had dropped considerably by the end of 2019. However, the amount of money invested in Insurtech has grown substantially, with the past three years representing as much as the prior 10-year period combined. The Property & Casualty market segment has garnered the most investments. Private equity and venture capital account for the vast majority of Insurtech investments (and the hype of the Insurtech news cycle), while most insurers remain passive watchers and experimenters rather than active investors. Many life carriers continue to be spectators. Their focus seems to be on the evaluation of new technologies and how to streamline legacy operations to take advantage of possible emergent winners.
Cybersecurity: One thing is for certain. Both regulations and cybersecurity threats continue to increase. Rarely a month goes by without a large data breach making headlines. Capital One, Facebook, Quest Diagnostics, and Zynga topped the list of significant data breaches in 2019. These data breaches exposed hundreds of millions of often personal, financial and medical records of customers and users. The California Consumer Privacy Act and the European Union’s General Data Protection Regulation come on the heels of NAIC and New York state regulations which require carriers to invest significant time and money to prepare and comply with the ever-evolving data protection landscape.
Conclusion and recommendations
Times of change and uncertainty require a great degree of flexibility, curiosity and humility. So, how can our industry leaders respond as we enter a new decade?
In the short-term, carriers and distribution should focus on efforts which help increase sales and reduce costs to operate and support:
- Seek efficiency: The COLI/BOLI sales cycle is extremely complex, and ongoing service requires timely access to accurate data. Opportunities to reduce redundant data entry, increase modelling capabilities or improve data availability are crucial to success.
- Introduce new product: Indexed UL and VUL products continue to offer more favorable reserving requirements. Consider development and timely introduction of new products to the market to provide secure, liquid and attractive long-term funding advantages.
- Focus on ICOLI: ICOLI will continue to present a short-term opportunity as carriers seek higher investment performance in a low-interest-rate environment.
- Improve customer service: Carriers are beginning to focus on the services they provide versus the products they sell. This is improving the customer experience. Carriers that work closely with their distribution partners to improve administration and information access enjoy an advantage in the marketplace. The industry is beginning to rally around streamlined claims administration to reduce the burden of certificate procurement. Common consent forms expedite multi-carrier case enrollments. Carriers can partner with technology and distribution leaders to aid in these continued quality improvements.
- Monitor regulatory changes: We have not seen the last of new standards and regulatory changes related to data protection. Active monitoring and timely intervention can help reduce costs associated with the protection of our customers’ information.
Beginning now, but with an eye on the future of the industry, carriers and distributors need to reflect on the changing landscape.
- Succession planning: Succession planning becomes a key strategy. The industry leaders are aging and, in many cases, are close to retirement. Those who built the industry in the 80’s and 90’s plan to exit the industry. Many who experienced the pre-crisis glory days are now ten years older. Carrier and producer succession are expectations for any modern day prospect/client.
- Educate the client: On a similar note, many of the leaders at the clients who purchased and manage COLI and BOLI are also aging and retiring. This results in a “knowledge gap” at the end client. Carriers and distributors can re-affirm their role as a trusted advisor through higher-touch service and education. White papers, blogs, educational videos, and market/industry presentations have quickly become expectations in the digital world.
Our industry will be heavily impacted by the amount of uncertainty in 2020. Your reactions, thoughts and recommendations are greatly appreciated. I hope to hear from you and continue the dialogue.