Steven Wevodau - Life Insurance

Times are tough—at least that’s the take-away from life insurers who are making the case that they need capital relief now.

A proposal very quietly floated in November and discussed out of earshot of attendees, consumer reps and media during the winter meeting of the National Association of Insurance Commissioners may well be given the blessing of state insurance commissioners by year-end.

The 9-point proposal advanced by the American Council of Life Insurers includes requests such as: eliminate “artificial constraints” of Regulation Triple-X; facilitate commissioners’ use of discretionary authority to exercise judgment to determine allowable U.S. collateral for reinsurance; waive the standard scenario for C-3 Phase II of risk-based capital; change a mortgage factor in the RBC calculation; and change statutory accounting requirements to follow GAAP rules regarding recognition of the deferred tax asset. These are all very technical ways of saying regulators will be loosening the drawstrings.

Paul Graham, an ACLI life actuary, explains that much of the due diligence has already been done by regulators who are gearing up for the advent of the principles-based reserving project which many say will streamline the reserving of life insurance products. The effective date of these proposals is just being pushed up, he says.

The benefit, he continues, is that risk-based capital will get a boost for many insurers allowing them to keep their current ratings and keep rating agencies at bay.

In fact, Bruce Ferguson, ACLI’s senior vice president-state relations, notes that RBC on average has dropped from 370 to around 300 and the helping hand from commissioners would bring that level up to around 330.

Data provided by Fred Townsend, president of Townsend Independent Actuarial Research Alliance, Wolcott, Conn., confirms that the numbers are not good. The top 100 insurers started the year with $306 billion in surplus but suffered $76 billion in net capital losses during the first 3 quarters, according to Townsend. The losses were offset by $40 billion paid in but were more than 5.5 times larger than net operational gains, he adds. (See story on page 40.)

However, it is really difficult to tell whether regulators concur with these assessments since the reasoning and the discussion among those regulators who are the technical experts was a private conversation on an important public policy issue.

When I asked one regulator why a technical meeting was being closed, the response was that companies were being used as examples, and although unnamed, could be traced by following the discussion. The companies themselves are not in trouble. They were asked to explain what the new proposal would mean to them.

Delivering a major proposal with a request for a 6-week turnaround and discussing it largely in secret with just bits of information getting out creates the impression that one or more companies are in really bad shape.

Even if that impression is not true as the ACLI and the new NAIC leadership are asserting in interviews, it is not unreasonable for such a perception to develop against a backdrop of fallen corporations including Bear Stearns, Lehman Brothers, and the government takeover of American International Group.

So then, is the ACLI proposal a good idea? That depends on which camp you are in.

For companies, it may well be if they get to keep their ratings and the industry as a whole is spared another blow. But, if a company ultimately fails because of looser requirements, the companies will be on the hook for the tab. They will be required to chip in for guaranty fund assessments.

For regulators, it is a coin toss. If they relax capital and surplus requirements and insurers weather this financial crisis, it will be a win. But, if they relax requirements and there is a failure attributable to the change, then it won’t help their case for state regulation.

For the ACLI, it is a win. It can tell its members it helped them with their RBC and rating agency problem. And, if a company fails because commissioners gave the green light to reduce capital, it will be a nice argument for federal regulation even if the ACLI is dismayed by that failure and its impact on the industry.

For investors in insurance stocks, at least initially, it looks like a win.

And what about the consumer whose name is often invoked at the NAIC? Here again, it’s a coin toss. The changes could take capital pressure off of carriers and reduce liquidity concerns. But whether it is actually a benefit will depend on how management deploys that newly freed up capital. Will insurance be cheaper? Will additional products be available? It remains to be seen.

The U.S. economy may be heading into a tailspin, but the prospect of a long and painful recession hasn’t stopped life brokerages agencies and independent marketing organizations from building out their businesses in 2008. Whatever the nation’s financial woes, sources tell National Underwriter, substantial investments in people, technology, geographic reach, marketing budgets—and, yes, fattened commission checks for producers—were critical to helping these middlemen keep pace in an increasingly competitive marketplace.

“The critical mass needed just to stay in the game is getting so high,” says S. Reed Ashwill, president of Borden Hamman Agency of Dallas, Tex. “We have to do so much more in production to stay at the same level that we had to change our business model.”

Adds John Bulbrook, CEO of Wellesley, Mass.-based Bulbrook/Drislane Brokerage: “There may be a recession, but we’re choosing not to participate in it. To succeed in this business, we’ve got to meet more people and work smarter. There’s no other way.”

Amid the credit crisis and economic contraction, IMOs and brokerage agencies reported mixed financial results. Jeff Cassat, a chartered financial consultant and vice president of marketing at Capitas Financial LLC, Minneapolis, Minn., notes that sales for the year were flat. Revenues from the firm’s national accounts (wire houses, banks and brokerages) were up, but revenues from the agency’s channel of independent advisors suffered a dip.

Likewise, Gary Baker, president of Baker & Associates Insurance Agency, Scottsdale, Ariz., reports that, following a “fabulous” first quarter, sales steadily declined in the second and third quarters of 2008 owing to the deteriorating economy. But he expects to close out the 4th quarter with a 70% increase (though down 25% for the year in comparison to 2007).

To the extent that IMOs and brokerages enjoyed gains, sources say the souring economy—and clients’ concerns about their own shrinking nest eggs—actually contributed to the positive performance. Among those taking this contrarian view is Bulbrook/Drislane Brokerage, which enjoyed “excellent” sales of fixed annuities.

“Since the onset of the financial crisis, we’re seeing more new policy applications than ever before,” says Bulbrook. “Because of declining stock portfolios people are worried and they want something safe. Also, the rates on fixed annuities are now superior to those offered on CDs.”

The attraction of “safe” insurance products in tough times is not confined to clients. Cassat says many affiliated investment professionals have expanded their portfolios and expertise to encompass life insurance-funded estate planning and executive benefit solutions because of the revenue potential. Among his best national accounts, Cassat counts registered reps employed at UBS, Morgan Stanley and Wachovia.

Life brokerages agencies and IMOs had more than a faltering economy to contend with this past year. Market-watchers say that an increasingly competitive landscape has forced many of these firms to overhaul their business models with a view to achieving greater economies of scale, adapting to the needs of a more mobile and technology-savvy field force and strengthening relationships with producers.

To realize these objectives, Borden Hamman “dramatically” increased its capacity by hiring more “external wholesaler” reps who interface with producers to consult on clients’ product needs. The company also invested heavily in information technology to give producers faster access to product information on-the-go; and to develop a “virtual” workforce of wholesale reps.

“It used to be that you had to have people inside a brick-and-mortar building to make things happen,” says Ashwill. “Thanks to voice-over-IP and other Internet-based technologies, the way we do business has changed. Now, I can hire employees anywhere in the U.S and interface with them remotely. But these technologies have also raised expectations in that advisors and their customers now demand instant access to information.”

Capitas Financial, too, expanded its national footprint, albeit on a more decentralized basis. The limited liability company is owned by 29 partners who, while sharing products, technical expertise, sales materials and IT resources, independently run businesses in their respective cities. In 2008, the company boosted the marketing presence and field support to many of the metro areas where some 180 affiliated producers operate.

The firm, which had long specialized in estate planning and executive benefits, also expanded its portfolio to long-term care insurance, corporate- and bank-owned life insurance (COLI/BOLI) and life settlements products.

Yet another independent life brokerage that is betting its future on an expanded field force is Cavalier Associates of Westlake Village, Calif. One of 56 member firms in the Advantage Insurance Network, the company this past year boosted its staff by 30% and its producer base by 25%, bringing the total to 600 agents. That has allowed the firm to make up in sales volume what it has lost on a per-case basis due to the faltering economy.

“Personal net worths have fallen dramatically, and that’s translated into smaller life insurance policies for funding estate and business plans,” says Jason Cavalier, president of Cavalier Associates and a chief marketing officer at Advantage Insurance Network. “The largest slowdown has been among older clients in the affluent market.”

The firm’s shift toward greater volume and smaller case sizes has also heightened its focus on a long-underserved demographic: prospects occupying the middle income brackets. But Cavalier acknowledges that nabbing a larger share of this market will remain an uphill battle so long as insurance products remain a more complicated and time-consuming sale than that required for other financial products, such as bank CDs.

For Gary Baker, however, the key to boosting sales in the middle market—and attracting more producers to the firm—is to boost commission bonuses. To that end, Baker’s firm partnered this past year with Brokers Alliance, a Fountain Hills, Ariz.-based IMO that enjoys a high-volume business selling term and universal life, annuities and disability income insurance.

“By marrying with Brokers Alliance, I’ve been able to boost transactions, which in turn has allowed me to pay a higher percentage in sales commissions to agents,” says Baker. “And that’s gotten their attention.”