Innovation, Good & Bad, in the Insurance Biz

One of the many things I was taught early on in Blogging School — BTW, where the hell is that degree from Nixon College?[1] — and then learned for myself from bitter blogging experience, is that — should you ever cherish hope that your work will be appreciated by readers — you must never, ever write posts that entertain more than ONE IDEA at a time: Boobus Americanus simply cannot focus on two things simultaneously.

This post, however, contains more than one, indeed, more than two ideas. What’s worse, among these ideas are two that are not only discretely different, but, to take it a step further, stand in flat contradiction to one another! F. Scott Fitzgerald once famously (and maybe even really) said, The test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time, and still retain the ability to function. Dear Reader, I’m sure that you, at least, are possessed of a first-rate intelligence, and so I’ll buck education and learning and proceed.

Here’re those two opposed ideas: The first is that Innovation is, or can be, Good. The second is that Innovation is, or can be, Bad.

But, wait, Innovation can be bad? How is that possible to contemplate, especially for us true blue Americans? If ever there were a concept that’s categorically, tautologically, American-exceptionally true, it’s that Innovation is Good; there is no limiting condition of can be. Baseball?: Nope, think of Steroids and HGH and A-Rod. Hot Dogs?: Good grief, we’re talking mystery meat. Apple Pie? No, that’s pesticides in the “fruit” and God-know-what-kind-of-chemicals in the flaky crust. Chevrolet? You must mean more recalls than cars on the road…

But Innovation? Innovation is unquestionably, without condition, without condition, and by definition, Good. Why, who would even bother to argue that Innovation is Good? Because it just so obviously is: Saying that Innovation is good would be just another pronouncement from the Dept. of Redundancy Dept. Even in the staid old and supposedly risk-averse Insurance Industry — where resides the oft-repeated myth that innovation is anathema –Innovation is implicitly understood to be unqualifiedly good. Yes, even there. I have no surveys to prove it, or research to back it up, but I’ll stake my last Jackson (soon to be a Stanton, maybe, the first woman to buy a life insurance policy in the U.S.) on the bet that every top-tier Insurance company, no, every Insurance company that’s at least bothered to craft an up-to-date Mission Statement, prominently features Innovation among its most desirable and desired goals.[2]

And innovation is not just high-sounding corporate blather, either. Let’s talk about product innovation, and who is there to say a bad word about product innovation? New products are the lifeblood of the insurance biz and if, well, most new insurance products are simply your actuaries’ version of your closest competitors’ newest products, or else new wine in old bottles, resurrections of products discarded decades ago (think Retirement Income Insurance, aka SPIAs, Single Premium Immediate Annuities, or SPDAs, Single Premium Deferred Annuities), well, hey, “New and Improved” is almost as sacrosanct as “Innovation” itself, right? And, besides, sometimes the new products really are new, really are Innovations.

I give you IUL: Indexed Universal Life Insurance, a truly new product just crying out to help life companies overcome the still-lingering effects of the 2008 Great Recession. Now, here is a innovation almost (almost?) too good to be true, a product that your offering-life insurance company can legally illustrate (i.e., forecast) financial returns — to quote the CEO of New York Life (which company declines to offer IUL)  — “that can never be achieved.” (To be fair, there apparently is a 1-to-2% chance that such results can be achieved, according to New York Life’s analysis.) It seems kind of a shame then that, according to LIMRA, 2015 is shaping up to be, as was 2014, “another flat year for life insurance sales,” but, hey, not so fast, if there is any light on the horizon, that light is, you guessed it, IUL:

By contrast, indexed universal life has been the bright spot in the industry for several years. In 2014 IUL saw double-digit growth, which it has achieved in all but two quarters since the economic downturn in 2008.

This product held the attention of many insurers, with new products and innovations introduced throughout the year. Strong growth was evident for most carriers, including several that entered the IUL space with new products at the end of 2013.[3]

That a product is essentially a fraud, a near-certain loss for the life insurance customer and a blow to whatever remains of consumer trust in the life business, well, hell, it’s a decided innovation. But it’s not only in product development that life insurance companies are innovating — I’m sticking to the life business here because that’s what I know best, but I invite you guys and gals in the P&C and Health and assorted other insurance businesses to please chime in with your own examples, some of which may be even more egregious that those mentioned here! The life business is also rather blatantly, quite profitably, and rather riskily (?) innovating in what we will politely call tax saving practices. True, there are some who see life companies using these tax saving methods as practicing “financial alchemy” (Benjamin Lawsky) and still others who see them as what you might call “economic traitors” (The New York Times). The Times article, which I’ll briefly summarize, is entitled Life Insurers Use State Laws to Avoid as Much as $100 Billion in U.S. Taxes, which is pretty much where the thought of “economic traitors” comes from, I guess.

Specifically, we’re talking about the newly-popular strategy of laying off statutorily-mandated reserves (i.e., money mandated to pay known claims) to company-owned “captive” reinsurers. According to the Times:

The insurers are taking advantage of fierce competition for their business among states, which have passed special laws that allow the companies to pull cash away from reserves they are required to keep to pay claims. The insurers use the money to pay for bonuses, shareholder dividends, acquisitions and other projects, and because of complicated accounting maneuvers, the money escapes federal taxation.

Pretty nifty little innovation here, no? — to the tune of $100 Billion, no less! Not to name any names here, but here’s one example of such innovative tax saving:

The Transamerica Life Insurance Company used a state law in Iowa last year to reap $1.8 billion from its reserves while also avoiding an estimated $640 million in federal taxes, according to company documents. The deal was unusually large but otherwise followed the general industry trend.

Now, me, I’m just a Marketing Guy, and I don’t know a lot about financial alchemy but, like pornography, I know it when I see it. And, as just a Marketing Guy, I know Innovation when I see it, and this is Innovation. (Thank you, States — Vermont, Iowa, Arizona, South Carolina, and good old standby, Delaware — without which such Innovation would not be possible.) But, I hasten to add, this particular Innovation, like life companies’ IUL product, strikes me as clear evidence that, indeed, Innovation can be Bad. In fact, some innovation can be very bad, indeed.

New York Life Insurance Company is actively calling out and fighting this state captive business as the shameful sham it is, as noted it does with the IUL product. But lest you think I am shilling for the company with which I spent my tender years, I’d like to point out that it was NYLIC that birthed the veritable Poster Child for Bad Life Insurance Innovation, namely Vanishing Premiums, or as NYLIC called it, Premium Offset Plan or POP. Long story short, POP-ing your policy (can) turn out to be a great way of POP-ing your policy right out of existence. It’s an innovation that can turn out to be bad, for customer, company, and industry, yes, the Trifecta.

A couple decades ago I wrote a brochure for New York Life called “A Company of Firsts,” listing and explaining its many industry innovations. My source was the so-called Actuaries Book — an actual book or, really, a binder containing sheaves dating back to the origin of the company in 1845 and written or blessed by the Chief Actuaries of the time; it was with obvious unease and great trepidation that the then-Chief Actuary allowed me to remove the venerable volume to my office so that I could more conveniently work from it. So: First life company to provide Dividends on a permanent Life Policy? NYLIC, check. First company to offer Waiver of Premium? check. First company to insure a woman? check. (Actually, Mutual of New York made the same claim since they sold simulataneously to Elizabeth Cady Stanton, but, hey, they don’t exist any longer so NYLIC can confidently bogart the honor.) In more recent decades: First company to provide full range of online customer self-service? First company to launch a mobile site? First company to launch on Social Media? New York Life, check, check, and check.

But the story now is POP, this really ingenious, innovative way for permanent life policyholders to apply policy dividends against their required annual premiums, thereby freeing out-of-pocket funds for much more exciting things than, uh, life insurance, and ain’t that grand? This worked really, really well in a rising interest rate environment when policy dividends could and very often did increase over and above the actual premium due, which was the case throughout most of the ’80s, but, uh, not so much when interest rates began to fall and dividends as originally illustrated inevitably failed to measure up. While the concept here is really not that difficult to grasp — your premium is still being paid, it’s just by dividends now rather than your out-of-pocket check — it must be said that New York Life agents sold the hell out of POP, as did the agents of other life companies that had quickly copied POP and even blatantly called it Vanishing Premiums (which, to its credit, New York Life never did). I would not hesitate to say that Vanishing Premiums, which really badly rocked the industry in the ’90s when, inevitably, the chickens came home to roost, is a scandal that the Life industry has not lived down to this day. Thank you Mother NYLIC for a great industry Innovation, one that need not have but most assuredly did turn out to be really, really BAD for all concerned.[4]

So, where have all these words gotten us? 1) Innovation is not, contrary to tacit cultural perception, always good; some innovations can be really bad, so bad they sometimes “win” the Trifecta of Disappointment. Lesson: Let’s be a lot more tolerant of nuance when we proclaim Innovation and innovations. 2) The insurance industry is every bit as much in love with Innovation as every other industry, and certainly the more sexy industries. Lesson: Kill the myth once and for all that innovation is anathema in the insurance industry; recognize that the industry is every bit as much a Whore for Innovation as your favorite other industry. Oh, and, as a consequence, let’s judge Innovation on what it does to the customer, the companies, the industry, and what it does for them.

Okay, I haven’t discussed any good innovations (although I did mention some above), therefore I must believe that Innovation is Bad. Not so quick: In sum and substance, I’m arguing for NUANCE. Yes, the insurance biz had better innovate, and innovate with all three, the customer, the company, and the industry. Because it’s still true: Objects in your rearview mirror — and in your peripheral vision — are closer than they appear.

Note: Because I was fearful of muddying the waters here, already stirred up by contrasting good and bad innovation, I have not considered whether capital-I Innovation is really all that it is cracked up to be. But Siva Vaidhyanathan has, in an important piece in (on?) Aeon, Between Innovation and Progress, in which he argues persuasively that “Innovation lacks a normative claim of significant betterment.” Perhaps that is why we see so many bad innovations?

[1] Just a little joke to lighten you up, Dear Reader, before we get to the boring and heavy stuff about the Insurance Biz and incendiary products and reinsurance captives. See A Rising Tide of Bogus Degrees for this mention of Nixon College.

[2] Along with Diversity and Inclusion, of course, but that’s a story I really don’t have the courage to write about.

[3] LIMRA’s 2015 Life Insurance Forecast. And, to be fair once again, we must note that LIMRA specifically calls out the “regulatory scrutiny” that is now being trained on “evaluating the illustration practices for these products.”

[4] If I glossed over this too quickly, you can read another brochure that I had the privilege to write, Choosing to Use Policy Dividends to Pay Premiums, under a less catchy title and with some unwarranted edits, on the New York Life Web site, here.

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8 Responses to Innovation, Good & Bad, in the Insurance Biz

  1. Mike Wise says:

    Ken, this was the best thing I read this week. And I read a lot of good stuff. Phenomenal. Hilarious, especially for insurance peeps. Wow. So rich. Man! You didn’t pull any punches. All true in my observations last 13 years.


  2. You are the only blogger I know who writes posts longer than I do! I appreciate the many insights in this one, Ken. Thanks.


    • khittel says:

      True, and the problem is they keep getting longer! I seem to have completely forgotten Bertrand Russell’s five rules of good writing, or maybe I just threw them out the window. At any rate, thanks for being a patient, forbearing reader.


  3. Lots of great material here, and nice to see a skeptical take on innovation. The point that innovation is nothing new in insurance is an important one. However, the problem here isn’t whether innovation is good, bad or indifferent, but that insurers should stay engaged with their moral compass. Also, technical innovation is badly needed by insurers, and the lack thereof really does threaten their business. That’s a different thing than product innovation, though there are legitimate opportunities and maybe a necessity for that, with the caveat mentioned above.

    Another important consideration is that in a rapidly changing business environment, when innovation is more urgently required, there will be failures. As Celent analyst Michael Fitzgerald says, insurers should take a more experimental approach, which involves tolerance of some manageable degree of failure.


    • khittel says:

      Thanks much, Anthony. I couldn’t agree more that “insurers should stay engaged with their moral compass.” This is a theme I have pounded out over the years in re: the remaining Mutuals, since I fear they are increasingly losing — or have already lost — the original meanings of mutuality, and believe that that is adequately captured in their non-public financial status. Important as that is in terms of long-term decision making on behalf of policyholders — and it is indeed crucially important — there is much that, to use an agent’s favorite, that is still left on the table. And this ballyhooed restricted definition of mutuality actually leaves a hole wide open for attack on behalf of the stock companies: You, mutual companies, make your decisions in darkness (and for personal greed?) due to the complete lack of public scrutiny and transparency endured by under-the-microscope us. (See Deidre Fernandes and Todd Wallack, “A rich financial realm run almost without oversight,” Boston Globe, June 7, 2015.) Given this all-too-accurate accusation, perhaps mutuals most especially must tightly embrace their moral compass and stretch a little farther in their understanding of the point of mutuality.

      As for the need for technical innovation as such in the business, I’m all for it: Unleash the drones! Power up your Fitbits! And how about maybe powering up a truly effective CRM capability and a truly useful Customer Web/Mobile Experience — there’s a little bit of work leftover on these old technical imperatives.

      Last but not least, you are preaching to the choir in re: experimentation. When I ran New York Life’s Corporate Internet dept., experimentation was our watchword — and daily practice. I could provide here an extremely long list of successes (& more than a few very fruitful failures) that our practice produced, but that would be both tiring and tiresome and inevitably perceived as braggadocio. But there is a good reason behind the general belief that New York Life was — I stress was — first among peers and competitors in re: all things digital. That reason was simply that we held no fear of failure and knew that we could learn from it and succeed.


  4. I absolutely agree with you that few in the life insurance industry have any concept of what real “innovation” in product would consist of. The lack of appreciation of the meaning of the term is apparent from the fact that what they usually herald as “innovation” in product is merely another way to [deceptively] market and sell the same old [and overly expensive] product to a new generation of the gullible. That’s not “innovation” but a perversion of the term, and the equivalent of putting lipstick on the pig of a product.

    Similarly, putting out inherently flawed “product” that will be unable to deliver on the promises and projections made over the expected lifetime of the product should be seen for what it is — not innovation but deceptive marketing and fraud on the consumer. That was the case with the examples you cited, and some of the 800 pound gorilla products you didn’t cite.

    Another thing that is not innovation but financial chicanery is the industry’s penchant for manufacturing phony earnings to bolster the price of shares in the stock market, and sometimes even hide what might be an insurer’s approaching insolvency. Moving funds from one pocket to another wouldn’t change my net worth. Nor would the true net worth or financial strength of an insurance enterprise change by engaging in essentially phony reinsurance with yourself. Yet the appearance of greater strength can be gained by an insurance company reinsuring its risks and freeing up reserves simply by using a wholly owned subsidiary reinsurance company domiciled in a state that has won “the race to the bottom,” whose governors, legislators and/or “regulators” were willing to remove the fig leaf that underfunded and poorly staffed state insurance departments can effectively regulate multinational insurance giants.

    Gerry Goldsholle
    Retired Chief Brokerage Executive, Metropolitan Life Insurance Company
    Founder & CEO, Advice Company /
    Executive Chairman, AdviceCo Ventures Company

    Liked by 2 people

    • khittel says:

      Wonderful, Gerry, I truly appreciate your comments; coming from you, this is quite a nice bit of validation.

      I hasten to add, for those who may not be in the know, that Gerry was one of the pioneers of the Internet and, well before he formally set out there and left the employ of the insurance industry, he had created and operationalized the Retained Asset Account, one of the most important innovations within the industry over the past 30 years.

      Or was the RAA the only true innovation in that time? Now that is something well worth writing about!

      Liked by 1 person

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