In the United States, life Insurance and annuities have historically, for the most part, been issued and distributed as product containers sold to consumers by insurance agents, and not usually as part of a holistic financial planning process. Because this is how insurance has historically been offered, protection decisions have historically been made separately from the consumer’s other financial decisions. Making risk protection decisions separate from broader wealth management decisions results in sub-optimal overall financial decision-making for many consumers.
Further, product selling does not mesh well with the fiduciary advice community, which comprises a growing proportion of the financial professional population. Risk management via insurance is just one of many functions that a financial adviser can connect a client to, whether or not the adviser themself is the placing insurance contract as its agent of record.
Fiduciary Insurance Services, LLC (FIS) believes that the historical lack of integration between the advisory and insurance communities has led to imperfect understanding of how risk protections add to broader consumer financial well-being, and that this lack of understanding has many consequences for consumers. One such consequence is the ever-shrinking proportion of Americans protected by life insurance. Another consequence of these misperceptions is that few new insurance ideas ever make it to market, because it is extremely expensive to launch and wholesale a new category of product.
What do we mean when we say “product”?
FIS believes that, in US insurance and financial services, a product that reaches the hands of a consumer is a legal contract in which intellectual property is embedded. Products are distributed via wholesalers. Wholesalers are people whose job it is to educate financial professionals on the benefits of their employer’s products, in hopes that the financial professional is then convinced to introduce that product to their client.
Figure 1: Anatomy of a Product in US Insurance and Financial Services
There have been few new ideas in insurance for years because insurance people understand the world through the lens of sold product, and issuers induce product sales for the reasons outlined above. For an insurer to develop a groundbreaking new type of product, it would have to single-handedly lobby for tax treatment/issuing authority for its organization’s idea. This is often prohibitively expensive.
What do we mean when we say “program”?
Programs, as distinct from products, can be deployed as service mark-able, tech-enabled frameworks that can systematically and responsibly weave together, or provide metrics that allow the adviser to combine, existing insurance and investment products in ways that improve on silo-ed product sale frameworks.
Service mark-able programs that provide systematic metrics enabling advisers to weave together products- for example, by providing income allocation and not just asset allocation metrics- could create an additional, and legitimate, service for which an issuer can charge for access. Doing so would create for insurance company issuers a supportable income stream that is not exclusively based on the sale of a product wrapper. This in turn would provide insurers with a sustainable business reason for moving to issuing fee-based insurance products in an environment that requires not only material risk-taking for an issuer of guarantees, but also heavy infrastructural investment.
FIS believes that for as long as we in the insurance industry understand the framework through which we operate through the lens of product selling, the distribution of which we can no longer control because of disuse of captive distribution, we will be vulnerable to death by commoditization/rate spike, and we will continue to fail to systematically integrate into the fee-based community. Product sales as the frame is inherently antithetical to how the fee-only community operates.
Because FIS believes that open and specific communication is critical to integrating the insurance and advice communities, FIS has included on its website its perspective on a glossary of terms relevant to this space.
There’s a mistaken notion out there that the sale of risk protections should be completed by insurance agents only, in isolation from broader planning and wealth management decisions. This perception is a material factor in why there have been few new ideas in insurance. Service markable programs that make it easy for adviser to implement a product suite are FIS’s idea #1 for how to change that perception.
Stay tuned for next topics in this series:
- How New Ideas Can Happen in Insurance, Part II: Defining the role of “Insurance Adviso(e)r”
- How New Ideas Can Happen in Insurance, Part III: Trademarking versus Service marking
FIS is currently exploring five (5) program constructs of its own spanning several arenas, as well as those initiated by clients:
Institutional annuity/managed accounts
Structured annuity/long term care combos
Retail life insurance in investment advice
Other institutional risk-pooling arenas
FIS seeks to provide advocacy, business plan creation, and program design services to insurers, recordkeepers, and other financial institutions, for use with their advisers and clients.