A dozen years ago I was heading back from Los Angeles on a late afternoon flight. The restless gentleman in the adjoining seat asked for a pre-takeoff scotch and water, followed by two subsequent drinks once airborne, and then he wanted to talk. He told me he was a vice president for General Motors (GM) and his job was to fly around and testify in court proceedings in which GM was being sued over some alleged failure of their braking system—he was the GM expert witness on GM brakes; apparently this required quite a bit of travel.
The gentleman was proud to work for GM. He was a third-generation GM employee, was a graduate of General Motors Institute, and had earned his MBA on a GM fellowship. The media buzz at the time was that GM’s market share had slipped below 30 percent for the first time ever and that other domestic car makers were also losing ground, so I tried to say something supportive, such as, “I know these are challenging times, but I’m sure you all will meet the challenge.” His response was, “What challenge? Everything is great.” Sure, their market share was under 30 percent, but when the Buick Rendezvous was launched sales would soar and in no time at all GM would have more than half of the new car market, as they did in the mid-70s. I remembered this plane conversation when GM filed for bankruptcy in 2009.
General Motors’ problem was not falling market share; falling market share was the result of the problems. General Motors had: systemic challenges—the way they did business had not evolved with the times; competitive threats—other car makers were making better built cars that people wanted to buy; and societal/demographic threats in that they failed to see that the up-and-coming generation was not into cars like their parents were. Ultimately, the reason General Motors failed was not high labor costs or foreign competition, but a culture that refused to see what the world had become and simply stuck to the status quo.
The insurance industry is not the auto industry, nor does any carrier out there look like GM. However, just like the auto industry, the insurance industry works as a complex adaptive system—meaning it too faces systemic, competitive and societal/demographic threats. The difference is that this industry recasts itself to meet these threats. When captive agency costs became too big a drain, the industry redid distribution to rely on managing general agencies and marketing organizations to train and manage agents. As consumer financial needs broadened beyond life insurance and annuities, many agents became securities registered so they could offer more solutions, and carriers added broker/dealers. In recent years index annuity and life carriers have adapted by making products leaner and adopting new interest crediting methods that work in low interest times. Many agents have shifted to a more profitable mix of business—some deconcentrating on health insurance and putting those efforts into more profitable life and annuity sales. These adaptations are not universally true for all. There are carriers, agencies and agents that cling to the status quo because that is what they know and, sadly, many will suffer the fate of GM. What one needs to do on a regular basis is to imagine a challenge has happened and whether the business model can be adapted. Here are three very real current threats—how would you deal with them?
• It is ruled that all financial products must be sold using a fiduciary model; one consequence is commissions are no longer paid on annuity or life insurance sales.
• Interest rates spike by 5 percent within the next four years, causing existing bonds to incur big losses and making both annuity and life insurance renewal rates uncompetitive, leading to mass policy surrenders.
• The cash buildup within both deferred annuities and cash value life insurance is made taxable; the federal tax advantage is taken away.
While none of these events is likely to happen, they could. It is human nature to resist change because the status quo is comfortable, but threats like these to the status quo are ongoing. Fortunately, unlike GM, the insurance industry has adapted and faced past challenges, but it must be ever-vigilant. The recommendation is to look at every possible threat and react to challenges—even if seemingly unrelated—and ask, “If this happens, what would be the effect on my business, and what can I do about it? This task is not simple, but it is necessary.
