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The Future of Final Expense

By Jeffrey S. Shaw, Executive Director, Life Insurers Council.
From the LIC Bullet, September 2014

They say that predicting the future is a fool’s game—so I guess that makes me eminently qualified. But in a world where transformational technologies emerge every five years or so, it seems equally foolish to merely wait to see what’s coming.

Seventy five years ago, a lot of life insurance was sold door to door with premiums collected monthly by the agent. This high-touch, labor-intensive, and highly expensive debit insurance business model would be considered fairly quaint and grossly inefficient by today’s standards. That’s why so few companies still employ this business model today. Instead, a more efficient means of providing modest income folks with small face life insurance begat final expense products—simplified issue contracts sold during a single interview sale with premiums collected monthly via automatic check deduction rather than collected in person by the agent.

The lower costs associated with improved efficiencies were intended to result in a better and more affordable product for the consumer, but the reality hasn’t quite lived up to the expectations. Without exception, every final expense carrier struggles with managing its mortality, persistency, and expenses. Not surprisingly, these are exactly the same areas most affected by the trade-offs made in the interest of improved efficiencies.

For example, while automatic withdrawal from a checking account is far superior to sending monthly invoices, in terms of encouraging premium payments, the advantage of having an agent show up at your door every month is pretty hard to beat.

In the same way, sophisticated tools such as prescription drug databases and rules engines that automate the underwriting process contribute a new level of efficiency and specificity to the risk selection process but fall far short of the level of information contained in a single Attending Physician’s Statement (APS).

Surprisingly, while carriers obsess over improved efficiencies and expense management, the one area they have exercised almost no discipline is in terms of first-year commissions. It seems as if every year a new carrier elevates the commission war by raising their maximum first-year compensation to a new highest level, forcing other carriers to eventually respond in kind.

Certainly, it’s easy for me to look askance at this trend—I’m not the one tasked with growing sales and maintaining distribution. On the other hand, it’s also indisputable that we experience the type of behavior that we reward. Shifting so much of the compensation into the first year provides little incentive for persistency and plenty of motivation for adverse mortality. Combine skimpier profit margins with increased surplus strain that is further exacerbated by annualized commissions, and pretty soon only the most financially solvent carriers will be able to afford to sell final expense—and it’s doubtful that any of them would still want to.

From the agent’s perspective, higher compensation is certainly warranted. Declining direct response rates and increasing lead costs have made it more expensive to find suitable prospects. Furthermore, managing a qualified final expense field force requires a complex coordination of training, motivation, recruiting, and compliance. Large IMOs today are staffed in many ways like the debit companies of old, with regional offices and layers of management that also add on additional costs.

But change is coming. As increased commissions inspire higher sales of lower quality business, more carriers are experimenting with selling final expense direct to consumers. Since final expense sales are primarily driven by a direct mail lead, this is a relatively easy adjustment. Rather than send the lead to an IMO to parse out to an agent, the prospect can simply call the home office directly. Almost all final expense carriers incorporate a point of sale telephone interview in their new business process, and many carriers have already made this process paperless and highly efficient. Incorporating a call center with a licensed sales representative into current practices is logical and intuitive enough to almost be a no-brainer.;

I know. Insurance is a product that needs to be sold in order to be bought. Nothing will replace the benefits of having a professional insurance agent motivate a prospect in a face-to-face meeting. But direct sales aren’t intended to be a replacement. They are just an alternative—and they are an alternative with changing demographics on their side.

As more Baby Boomers reach the target age of a final expense prospect, they usher in a new generation that is comfortable with all things internet. How many of us have visited a brick and mortar store to get information about a product only to purchase it later from Amazon to save money? As companies continue to improve their direct selling experience, it’s likely that the agents may do the heavy lifting in terms of educating and motivating consumers, while the actual sale takes place after the agent has left the home.

Another area that Baby Boomers have become more comfortable with is reliance upon on-line reviews and ratings. Amazon’s customer ratings have become one of the defining advantages of its shopping experience, turning some private consumers into highly valued product experts. The level of thoroughness, objectivity, and thought that some—but certainly not all—reviewers put into their reports has created a level of transparency and detail that elevates customer satisfaction to an exalted status.

The visibility and prominence of consumer ratings is a double-edged sword for both carriers and agents. Poorly regarded agents or carriers may be unfairly characterized, given how misunderstood our products and processes are among the general public. For example, upstart car service companies Uber and Lyft use consumer ratings as the basis for contracting with their drivers. Uber drivers with average ratings of less than 4.6 out of 5 stars get decommissioned; Lyft decommissions if they fall below 4.8. Imagine if consumers started rating their agents—and carriers imposed licensing parameters that were defined by consumer satisfaction?

Rescission ratios may also assume sudden marketing significance as every denied claim becomes indignantly broadcast regardless of how justified the reasons. Consumer ratings will just as likely involve insurance companies as they will insurance agents.

So what does all of this mean for the future of final expense? It’s time for me to don my fool’s hat and prophesize!

The pivot point between changing demographics and current final expense processes is commissions. Technology has improved the risk selection process and reduced the cost to issue a new policy. Improved public health has led to longer life expectancy and better mortality expectations. The only area that continues to become more expensive is the cost of distribution. At the very least, this provides more incentives for carriers to consider alternative methods. It also inspires carriers to begin questioning what they are receiving in return for these higher commissions. We’ve already discussed the rationale from the IMO’s perspective, but what about from the carrier’s? A few final expense companies have experienced even better mortality on policies they’ve sold with an in-house call center than they have with agent sales. I’m not sure if this says a lot or a little about the value of field underwriting but either way the message is not a positive one.

It’s also difficult to make a case for ongoing customer service when carriers are paying close to 150% in first-year compensation. This doesn’t leave a lot for renewals or service fees. It also places carriers in the position of distinguishing themselves from their competition by their commission schedules rather than the quality of their products or their service, even though their distribution often maintains the unrealistic expectation that they should do both.

Regardless of how necessary these compensation levels may be, they are not sustainable or supportive of Baby Boomer expectations. IMO distribution is funding its own competition by making it more attractive for carriers to pursue alternatives. IMO’s are also making it too capital intensive for many carriers to even afford to implement a long-term final expense growth strategy.

Final expense came about in response to home service becoming too expensive. It’s reasonable to assume that we are on the cusp of an equally dramatic change to the final expense business model as a new generation matures and technology and social media continue to redefine consumer expectations.

And just as the home service model is now considered to be quaint, final expense agents may want to rethink their focus on sales and adopt some of the old-fashioned personal service that defined the debit business. Carriers would be willing to pay for improved mortality and persistency that came from superior field underwriting and high touch personal service that continued well after the sale was completed. Consumers might also be less likely to turn to their computers to buy online after an agent convinced them of the need for insurance if the agent were providing more than merely assistance in completing an application. Bottom line—it’s difficult to make an argument for carriers to pay 150% in first-year commission if there are cheaper alternatives and the quality of business remains the same.

Yes, predicting the future is a fool’s game—but then again, I am eminently qualified! On the other hand, predicting that things will be different in the future is a fairly safe bet today.