From Resource, July 2004 
Copyright by LOMA

Golden Years Ahead for Industry

The life insurance & financial services industry faces several challenges, but the future is very promising, says Jon Boscia, chairman and CEO of Lincoln Financial Group.

By Ron Clark

The life insurance and financial services industry is "navigating through rough waters" right now, but the future is extremely promising, says Jon A. Boscia, chairman and CEO, Lincoln Financial Group.

In fact, the industry may soon be entering its "golden years," he believes. This will be due to the impact of the huge Baby Boom generation as it enters its peak years of asset accumulation in preparation for retirement. These Boomers will demand solutions and this demand "creates huge opportunities for financial service providers," if they do it right, Boscia says.

Boscia spoke at the recent Life Insurance Conference, sponsored by LOMA, LIMRA, the ACLI and Society of Actuaries.

In Boscia’s view, the industry must navigate through several "icebergs" to reach future opportunities. These "icebergs" include regulation, rating agencies, industry consolidation, product complexity, and public perception.

The debate over regulation is heating up, with some companies calling for an optional federal charter. Boscia says he is a proponent of an optional federal charter, but recognizes that many companies prefer state regulation. "We want the insurance industry to have the same opportunities the banking industry has had."

Boscia says the P&C industry has one view on a federal charter, the life industry another view and the health insurance industry yet another. "Yet, the public, Washington and the regulators do not differentiate among us very much."

The absence of a federal regulator "may be the single most significant risk we face as an industry today," Boscia warns. This is because our industry is exposed to many different committees and subcommittees inside the Washington Beltway that consider and introduce legislation. "I can’t imagine that any committee in Congress would look at any impact in the banking industry and they would not call in the Controller of the Currency."

"Could you imagine anything happening in the securities industry where the chairman of the SEC would not be involved as the policy is being formed?"

"Now switch over to the life insurance industry, and where is our counterpart? There is none. We have trade associations that are very good, but politicians do not call in trade associations when behind closed doors for policy considerations," Boscia says.

"Annuity taxation, second to die, split-dollar insurance … all these are being chipped away one piece at a time by well-intended policy makers that don’t know the ripple effect of the decisions that they are making. The result of all these actions, if they were all to occur, is that the insurance industry would become a term operation. That’s all that would be left.

"Washington does not realize, since there is no one there to bring it to their attention, how important the insurance industry is in providing long-term capital to fund economic growth in this country," he adds. "When we talk to people in Washington, their response is the same, ‘why aren’t we hearing this?’ Because we don’t have a federal voice in Washington, that’s why they’re not hearing this. It’s a huge issue."

"I think rating agencies are currently looking at yesterday’s concerns," Boscia says. "The three-year bear market, credit cycle deterioration, bankruptcy, inability to service debt and realized losses on general account portfolios are many of yesterday’s problems that are still top-of-mind for the rating agencies."

As a result, insurers are required to hold equity far in excess of what is necessary to hold. Actuaries’ calculate future liabilities, but risk-based capital requirements force companies to hold 300% of liabilities calculated by actuaries. These funds are invested in 3.5 – 4% bonds. The life insurance industry is sitting on billions of dollars that could be invested in the U.S. economy – which is detrimental to our economic growth, Boscia says.

Turning to consolidation, Boscia says there are three main branches of the financial services industry–the life insurance industry, the banking industry and the securities industry. He says the banking industry has more excess capital than the insurance industry and the securities industry combined. "The insurance industry has more excess capital than the securities industry has total capital so we’re very well positioned…My own view is that we will more likely see insurer-to-insurer consolidation than we will insurer-to-external consolidation."

Boscia says a huge iceberg in the industry is product complexity. "There are a lot of allegations of misselling, though there are minimal and isolated examples of intentional misselling. Often, a consumer can read product literature, view illustrations and discuss product features, but still feel uninformed when something goes wrong. What do we as an industry need to do to make our products clearer and easier to understand to alleviate pressures on planners to defend his or her own integrity for sales?" asks Boscia.

Public perception is another iceberg. "The public does not differentiate us from health insurance and the property-casualty market. They put us all in insurance–and Hollywood and television think insurance is bad," Boscia says.

He refers to a study done by the ACLI that queried the public about each insurance sector. "People didn’t like health insurance because they had a claim denied," or they didn’t like property-casualty because they thought their car was valued wrong.

However, "Life insurance came out pretty positive." He says the industry needs to do more to differentiate itself to the public.

He also believes market conduct is a perception issue. "As an industry we are only as strong as our weakest link. Anytime we pick up a paper and read about a market conduct problem, it blackens all of our eyes. We need to understand that if we don’t self-police ourselves and do everything in our power to uphold ethical standards, we all pay the price."

Although these "icebergs" do present challenges, Boscia is confident of the future. He says the 81 million people in the Baby Boom generation have changed every aspect of American society they have touched. "The leading edge of the Boomers is turning 59 and moving towards retirement. They will create a financial services experience the likes of which will be hard to imagine, the likes of which there will be winners and losers, and the likes of which there will be opportunities we have never seen before."

The U.S. has the most robust personal financial services sector in the whole world, Boscia says. During the next 10 years, the amount of after-tax profits created in personal financial servcies in the U.S. will increase by more than $62 billion, he predicts.

Because Baby Boomers are 38 to 59 years of age, they are in their peak years of assets. That has allowed thousands of financial services companies to proliferate and do well, Boscia says.

What are Baby Boomers going to deal with when they get to retirement? They will see parents suffer through long-term care and disability, maybe their kids will suffer financial problems, Boscia says.

What worries the Baby Boomers? Boscia says the number one concern of those nearing retirement "is maintaining their standard of living in retirement." Health care is number two, long-term care is number three.

"We are the only financial services sector to have the absolute right to take their mortality and morbidity concerns and transfer them to products," he says. "We have the skills and technical expertise to do that, we are the ones positioned to provide them the type of retirement that they are looking for."

The end game however, he says, is to make sure that all the aspects of life insurance, annuities, etc. come together in a way that people can understand and rationalize.

Boscia says "formidable competition" comes from the silos inside our industry that prevent us from linking the features and assets of different products and wrapping them with understandable marketing.

Also, "In order to be successful in this future, we have to understand that people have existing relationships by the time they reach retirement. They’re not looking for a new relationship." Some of these relationships may be with bankers, stockbrokers and agents. "We have to be where these people are. We need to go to them; they don’t need to come to us. We need to understand what manufacturing does, we need to understand what distribution does, these two are partners."

"It’s a complex job. We need to invest in people and we need to make sure that if someone recommends our companies, the person does not say, ‘I haven’t heard of that company, who else do you suggest, because I’m putting a lot of my future in your hands.’"

"Boomers are going to demand solutions, they don’t want products."

"We absolutely are in the crosshairs of success," Boscia concludes. He explains that the years after World War II were great for the insurance industry, due to the thousands of returning GIs that started families and had financial responsibilities. However, he says, "In my opinion, what we will have in the future will make that golden age of life insurance pale in comparison – when, not if, we deal with it correctly. Navigating rough waters? You bet, but when you see the opportunity for success...all that navigation and dealing with icebergs will be well worth it." q

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NOTE: The 2005 Life Insurance Conference is scheduled April 4-6, 2005, at The Westin La Cantera, San Antonio, Texas. For information, see the Meetings/Events section of the LOMA Web site, www.loma.org.

Lincoln Financial Group is the marketing name for Lincoln National Corporation (NYSE:LNC) and its affiliates. With headquarters in Philadelphia, Lincoln Financial Group has consolidated assets of nearly $110 billion and had consolidated revenues of nearly $5.3 billion in 2003. Through its wealth accumulation and protection businesses, the company provides annuities, life insurance, 401(k) and 403(b) plans, 529 college savings plans, mutual funds, managed accounts, institutional investment and financial planning and advisory services.

Jon A. Boscia is chairman and CEO of Lincoln Financial Group. He has served as CEO since 1998 and also was named chairman in 2001. He joined Lincoln in 1983 and has held several positions in the company. Before joining Lincoln, he held several positions at Mellon Bank, Westinghouse and CNG.

Contact Resource at resource@loma.org