America stands out, however, in its limp response to the scandals. Everywhere else, public disclosure of the industry’s cheatin’ heart changed how business was done. New and lower-cost competitors entered the field. Better consumer protections were written into the law.
Here, however, the industry clings to the same old incentives to missell. The states, not the federal government, regulate insurance companies, and the states show no collective interest in reform. They’ve levied big fines on some high-profile malefactors. Then they’ve yawned and walked away.
Life insurers are quick to say that they’ve learned how to police themselves. Many have revamped agent training and beefed up internal controls. Others weren’t predators in the first place. Still, a vision of foxes and chicken coops swirls in my head. ““We can see lots of problems in the U.S.A.,’’ says Frank McGhee, an executive of the Australian Mutual Provident Society (AMP), who recently addressed U.S. execs at an international meeting. ““But we don’t get a feeling of “Hey, we’ve got to get in and fix this’.’’ Even now – as letters to this column show – some agents continue to spin the same misleading tales that have cost MetLife more than $100 million in reparations and fines.
one ““reform’’ that U.S. companies talk is cutting their big upfront sales commissions, to dampen an agent’s incentive to pitch anything that moves. Under such a system, commissions rise in later years – encouraging better long-term customer service, perhaps, but also increasing the total cost that clients pay.
Contrast this with the laws in effect in Norway, Australia and the U.K. There, insurers can charge any fees and pay any agent commissions they want. All they have to do is disclose them, along with the investment yield that the policy pays. Competition (not law) has also forced price disclosure in France.
Surprise, surprise – open pricing pushes fees and commissions down. Australia’s first-year commissions used to run about 80 percent of the policy’s premium cost. Now many firms are offering 45 percent, plus sweetened compensation in later years.
To evaluate life-insurance prices in the U.K., consumers have only to turn to the list of each company’s costs, published by the Personal Investment Authority (PIA), an industry regulatory group. The numbers aren’t perfect, the PIA concedes, and the system is only 17 months old. Still, under the glare of publicity, it appears that costs are coming down. Norwich Union, a big insurer embarrassed by aggressive sales, shrunk its in-house sales staff, took it off commission and now pays salaries instead. ““You lose the flamboyant but you retain the quiet professional,’’ says NU executive Colin Dennis. The U.K. and Australia also require agents to document their advice, so auditors can see if they’re selling suitable products.
In France, price disclosure was spearheaded by the banks, which hired salaried staffers to sell low-cost products over the counter. Banks now dominate the business, but their presence has aided insurers, too. ““Insurance agents had a bad image,’’ says Jean-Pierre Daniel, director of CAPA, a Paris-based industry trade association. The widespread acceptance of bank insurance enlarged the market and gave the product a better name. To meet the competition, however, insurers have had to cut commissions. Agents today might get 30 percent, down to as little as 3 percent, Daniel says.
Price disclosure, along with those lovely cuts in cost, ain’t gonna happen here. The states won’t require it, the industry won’t volunteer it and banks can’t force it by introducing cheaper products (the banks aren’t allowed to compete with insurers head-to-head). Rotten life-insurance policies prosper alongside the good, because consumers cannot ferret out their price.
With term insurance, the price is the premium you pay. But cash-value policies combine life insurance with an investment, and there’s no way to know what you’ve paid for each. Around 10 years ago, the American Academy of Actuaries came up with the following average cost for the policies known as ““universal life’’: 128 percent of your premium cost for the first year of coverage, plus 10 percent in later years. But this finding says nothing about what your personal policy costs. An agent could sell you a high-priced brand and you wouldn’t have a clue.
consider the options of an agent selling for Jackson National Life. One version of JNL’s so-called ““ultimate’’ policy pays high sales commissions while another version pays lower commissions. A healthy client might qualify for either. But the agent could offer you only the high-cost, high-commission plan, and who’s to know? A disgruntled customer who got stuck with the higher cost has sued the company for fraud. Bill Gray, a senior vice president, says, ““The lawsuit is not meritorious. We’re pursuing dismissal.''
America does have a low-cost choice: the so-called ““low-load’’ carriers, whose cash-value policies cost a fraction of those sold by the mainstream firms. If you’re interested, call Ameritas Life at 800-552-3553, USAA Life at 800-531-8000 or the Wholesale Insurance Network, 800-808-5810. The discount broker Charles Schwab just entered the market with policies from Great-West Life. The existence of low-loads proves that U.S. insurers could give you more for your money. But without price disclosure, they’re never really going to try.
