June, 2012

Dear Friends and Clients:

Within the past few weeks, interest rates have found new lows.  The Ten-Year Treasury Rate even fell below 1.50% for a while.  Turmoil in Europe and the continued snail’s pace economic recovery has driven investors back to the comfort of U.S. Treasuries, lowering yields.

These latest rounds of interest rate declines feel like it has sent the life insurance industry beyond a Tipping Point.  Insurers are re-calibrating expected returns to “risk-free plus a margin”.  More carriers have dropped products or entire lines of business, and M&A activity is going full throttle.  Such actions seem appropriate in light of the financial environment.

My hope, however, is that carriers will consider even bolder moves to address some fundamental problem areas that the industry has lived with for too long.  The low interest rate environment has simply shone a brighter light on these challenges.  These are:

Distribution risks – too much business sold by reps whose loyalties and interests diverge from that of the carrier.

Sales compensation – Sales compensation patterns encourage new sales, but not persistency and servicing – some levelizing is needed.

Protection focused – The life industry generally has shown little to no ability to outperform the broad investment markets with its asset portfolios, whereas the industry excels at recognizing, quantifying, and managing mortality and longevity risks.

My hope is that a return to basics stemming from the ugly interest rate environment will include closer alignment with true distribution partners, more levelized sales compensation, and more emphasis on protection-oriented products.

Tim Pfeifer
President