The Optional Federal Charter

These days there is a lot of discussion about the potential implementation of an optional Federal insurance charter. It would allow insurance carriers to opt-in to regulation at the Federal level, and free them from the constraints and restrictions of attempting to comply with up to 50 unique state regulations.

For many carriers, this could dramatically simplify operations. No more state-specific requirements for products, pricing, print, and systems. You would have to believe that the cost of doing business nationwide would be a fraction of what it is today, for many carriers, if they properly take advantage of the opportunity.

State insurance commissioners, predictably, are strongly opposed. They argue that they provide a valuable service to their constituents by protecting them from manipulation and predation by potentially unscrupulous insurers.

From the systems perspective, I think that state-specific regulations are a huge barrier to bringing a new enterprise system to market. You are forced to build enormous flexibility into a world-class system, so that you can try to bring some sanity to the world of 50-state compliance. If you fast-forward to the day when most carriers are chartered at the Federal level, all of that development can be eliminated, and the developers can focus on insurance product features, where the focus belongs.

So, the key question is this; do the state commissioners provide a valuable service, or simply introduce a level of bureaucracy that results in higher premiums for everyone? My gut tells me that it's possible that state regulation has outlived its usefulness, and the writing may be on the wall.

Interest rates, and the insurance industry

This morning, Merrill Lynch downgraded a bunch of large-cap banks and said that there is a 60% chance of a recession. And in response to this...

The market's up. Pretty substantially, too. So what gives? You'd think that with all of the liquidity concerns, a wholesale downgrade of banks would be taken as bad news.

That's the problem, though. I think the market is buying on bad news, in the hopes that bad news will spur a rate cut by the Fed. I've heard predictions of 50 basis points, and hopes of 100 basis points.

Cheap money's great, don't get me wrong. However, I don't think it's the Fed's job to try to stabilize the stock market, or the housing market. Using interest rates as a tool to control across-the-board price inflation is one thing; micromanaging individual components of the economy that are correcting, or overbought, is another thing altogether, and it's not a good thing.

Especially for us in the insurance industry. Carriers are limited in their investment options. They're also not necessarily as efficient as they could be, often due to substandard backoffice technology and a reluctance to upgrade. Combine that reluctance with a drain on surplus, and you have a recipe for more of the same headaches for carriers - headaches they've been living with pretty much since Y2K.

Let's hope that the Fed does the right thing, and keeps the rate where it's at in two weeks. The market will sell that day, but in the long run, we'll be better off.

Fed cuts discount rate by 50 basis points

In reaction to the current liquidity crisis, the Federal Reserve has cut the discount rate, the interest rate that the Fed charges to make direct loans to banks, to 5.75 percent, down from 6.25 percent. The target for the Federal Funds rate remains unchanged at 5.25%.

In a statement explaining the board's action, Federal Reserve Chairman Ben Bernanke and his colleagues said that while incoming data suggest the economy is continuing to expand at a moderate pace, "the downside risks to growth have increased appreciably."

This is a mixed bag for insurance companies. We've already seen Lincoln Financial sell 50% of their GMWB rider business to Swiss Re via a reinsurance agreement to raise cash. Obviously, global financial crisis is no fun for anyone, but the insurance industry really doesn't need another stretch of historic-low interest rates pressuring surplus. Neither do the vendors who serve.

Stay tuned.

I'm just askin'

So, when a policy administration vendor tells you that the neat thing about their system is that your non-technical people can build everything they need without vendor involvement, and then tell you that they've grown by 5 times in the last 5 years... doesn't that make you wonder what all those new people were doing?

I'm just askin'.

Aegon to buy Merrill Insurance for $1.3B

KPMG Insiders is reporting that Aegon will buy Merrill Insurance Units for $1.3B.

ACORD, after the honeymoon

There's a Dilbert cartoon in which the pointy-haired manager announces that the team is to use only open-source development tools, because "they're free". One of the realities about technology today is that once you've lost Scott Adams, you've lost the free marketing ride.

In our industry, the ACORD standards got a free ride for a long time. For several years, most decision makers at most carriers were watching, exploring, studying, contemplating, and analyzing the ACORD standards, and feeling just a little bit guilty about not actually USING them.

In many cases the entire discussion about interfaces just went away. All you had to do was say 'ACORD' and suddenly nobody was worried about integration. For the application vendor, this was always a huge relief, because any world-class enterprise system that is backed by a professional services organization can integrate with any other world-class enterprise system that is backed by a professional services organization. In other words, it got the conversation focused back upon what the system does, rather than how to connect the system with a bunch of stuff that needs to be replaced. That was good.

The trouble is that to many carriers, ACORD promised all of the integration flexibility without the expense of the professional services, and this caused the carriers to actually try to use the standard. First they had to join, and pay, and then they got what some (but not all) vendors had cautioned was a messaging format that was becoming useful, but that was by no means complete.

At some carriers, the inability to instantly integrate everything quickly translated into 'ACORD doesn't work'. That's a drastic oversimplification; the truth is that ACORD was simply expected to be a silver bullet, and as we learn, time and time again, there are no silver bullets.

The lesson here is that there will never be a substitute for seasoned technical professionals who understand your business. Also, these professionals will never be free or cheap. The insurance technology industry processes the most complex financial products ever conceived, often in astronomical volumes. No technology - rules engines, industry standards designed by a committee of competitors, or whatever silver bullet comes along next - is going to replace professional software development in our industry in the near future. Bet on it.

The ACORD standards provide the best industry-standard messaging today. They can be very useful. They are not magical.

Distribution Channels of the Immediate Future, Part 2

As demographics shift, and as $41 Trillion passes between generations, you, the insurance carrier, have a serious shot at a lot of that money. The wealthy in this country will be looking for ways to protect their assets. Mortality and morbidity products are the answer in many cases, and you understand them better than the rest of the financial services industry. Now you just need to reach the customer. Here's how.

First of all, you will need new products with new features. An Annuity-LTC combo product would be nice. Then you'll need some leadership so that inter-silo sniping doesn't wipe out your initiative (you've seen it, I've seen it, don't let it happen this time). Then, you need to make it easy to buy.

Here's the cold, hard truth about the next generation of financial services clients... it's not that we don't like to wait, it's that we simply WILL NOT wait. You need to find a way to make buying your products as easy as buying a mutual fund, or your customers will just go buy something else.

Yes, I understand the regulatory environment. Yes, I realize the complexities of state regulation. What I'm saying is that our industry needs to DEAL WITH THESE THINGS NOW, or be swept aside by clients who will be starting with a total asset base of $41 Trillion.

Make buying a VUL as easy as dropping a ticket for a stock. Your new customers expect it. Do it now, because the clock is ticking.