The insurance industry is rather old and stogy in its practices and “relationship management” approach. The industry continues to rely on an agent based sales force with proprietary company agents and independent brokers. It is one of the few sectors of the financial services industry that has failed to respond to consumer demand for independence, transparency and self-directed options.
Financial professionals can argue that progress in the financial services industry has made it more difficult to transact business; companies like Etrade, TurboTax and the host of robo-advisors available online and through the app store have empowered clients to the DIY model. While this may have increased competition for advisors, it has also created an opportunity for advisors to differentiate themselves and make the industry stronger. These DIY options have created a demand for advisors to provide transparency on fees, open architect for portfolio design and value added services. All of these changes indicate progress; meanwhile, the insurance industry has failed to advance in any of these areas.
Commission disclosures are fiercely fought on Capitol Hill by insurance lobbyists as the fear of the consumer reaction is terrifying to agents. Explaining to a client that you make 50% – 100% in commission is jaw dropping, especially when you compare it to the 1% charged by investment advisors on AUM. Granted the continued revenue is far less with insurance, but the sticker shock is enough for the insurance industry to fight for the status quo.
Independence is also a gray area in the insurance industry. The evolution of the “career agent” has allowed for insurance agents to offer open architecture, while being employed by and incentivized for selling one carrier. The agent can legitimately say they represent multiple carriers, but steer the sale in one direction or another. Clients have no idea because most agents do not have to disclose this information and most clients are not astute enough to do their own due diligence.
Lastly, in terms of ease of doing business, the insurance industry continues to lag in terms of technology and consumer friendly options. The traditional sale includes 25-30 page illustrations, another 25-30 page application, physical signatures, an invasive medical exam, weeks of back and forth questions from the carrier/agent, and finally after 6-8 weeks an approval you have to send in a physical check to pay for the policy. Compare this to opening a brokerage account or having your taxes filed with online options, e-signatures and electronic billing and the insurance industry seems archaic.
While I bash the industries lack of progress and innovation, there are some silver linings to this gray cloud. Most carriers are starting to see the light and realize that they are desperately behind the times. We’ve started to see some progressive movements from carriers on all sides of the process. For example;
- Principal Financial recently announced this year an accelerated underwriting program that allows clients under the age of 60 who are in good health to obtain up to $1,000,000 in coverage without a medical exam.
- Guardian has been offering electronic applications with e-signature for some of their disability insurance products for the last few years.
- Thanks to iPipeline and their iGo e-application, many carriers are adopting electronic applications (some with e-signature capabilities) for life insurance product lines as well.
The challenge will be the adoption rate as many carriers fear the unknown and have to deal with a host of compliance issues before they can jump on the technology band-wagon. It takes time to turn a big ship. The current state of the industry and the murky experiences many registered investment and independent advisors have experienced, have left many with a poor perception of the insurance industry and challenged for finding solutions.
When we speak to advisors, many have a small list of agents they refer out to for insurance. They maintain these relationships until the agent inevitably tries to upsell/oversell at which point they are blacklisted. Other advisors attempt to handle the insurance themselves which often leads to excess workload, additional compliance and frustration. The most disheartening solutions are the advisors who review the insurance and recommend clients to find their own agent to work with. The advisor may be protecting themselves from any insurance backlash, but they are exposing their clients to sharks in the water.
So with a lagging industry and limited solutions, what should an advisor do about insurance?
First, most advisors would be well served to find an expert to handle their client’s insurance needs. Being a jack-of-all-trades and a master of none is not an effective business strategy. Just as advisors elicit help from CPAs and attorneys, insurance is no different.
Second, advisors need to vet relationships and find an expert who fits their own insurance philosophy. If you believe that term insurance is the only type of life insurance for your clients, it would be quite silly to work with an agent who believes whole life is the solution to all insurance needs.
Third, advisors need to complete due diligence. While vetting an agent or insurance expert, determine if they have any carrier affiliations (they are listed in their disclosures), check their FINRA broker report for any complaints, and discuss their compensation and their service models.
It is important for advisors to recognize the need to include insurance in their planning. Most advisors and clients do not have anything against insurance, as much as they do insurance agents and the practices involved within the industry. Set yourself apart by having a solution and clients will be much more willing to participate in the conversation. Focus on the relationship and the experience rather than the product and the transaction. In time, we hope the industry will align with this mentality as well.
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