One of the many things I was taught early on in Blogging School — BTW, where the hell is that degree from Nixon College? — 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.
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.
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.
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?
 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.
 Along with Diversity and Inclusion, of course, but that’s a story I really don’t have the courage to write about.
 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.”
 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.