Thursday, January 14, 2010

(No.74) Banks, insurance & other emails to RickardsRead

Since the inception of RickardsRead a bit more than a year ago a number of columns have offered my comments on aspects of business generally, financial services and insurance particularly.

I receive emails in response to my columns from people in or associated with the financial services business. Some are known to me, some are not. I published 2 columns of excerpts from selected emails from insurance people previously (see column Nos. 63 & 64 in

In the column below I have selected excerpts from still more emails to sent in response to various opinion columns. For reasons of privacy I have withheld the writers' identities. However in order to provide context for the views expressed I have preceded each email excerpt with a brief reference to the writer's role or industry connection.

Words within square [brackets] and italics are mine.


1. Lapse-supported Term to 100 policies & Mutual Life

from a very senior life insurance company executive in Canada:

I just read your recent blog on T-100 ( No. 71 "Betting against your clients") and the closely related issue of companies' interests vs policyholders' interests. I agree with your points.

I believe that the principle of alignment of the interests of stakeholders (which is how I articulate the principle) is extremely important. With respect to individual insurance the primary stakeholders are of course the policyholder, the advisor and the company. If the interests of these parties are not aligned that is a recipe for problems. Of course, and somewhat unfortunately with respect to life insurance, these problems may not materialize for many years and accountability for their creation is rarely directly with those who created them.

Going back to the time when T-100 was developed I think there were both philosophical and practical considerations in the decision [by the Mutual Life of Canada] not to follow the crowd [and sell T-100]. Certainly there was the recognition that the company's [very low] lapse rates would not lead to profitable and competitive products.

However I also believe that risk was a consideration (i.e., a recognition of the risk of lower lapse rates than expected by industry pricing and the consequences) but very importantly a philosophical recognition that it did not make sense to misalign interests [policyholders' & company's]. This was highlighted by the move [by Mutual Life in 1989] to level commissions which of course had the opposite effect of better aligning interests for all parties.

2. Betting against your clients: an American perspective

from an American with long experience with the life insurance business:

Good article (No.71 "Betting against your clients"). The purpose of Nonforfeiture Laws is to make sure that the policyholder receives an equitable part of the asset share backing the policy upon surrender. There are good reasons why an insured might not be given the entire asset share but company profitability is not one of them.

Lapse-supported profits (beyond a reasonable contribution to surplus that every policy should make) are inconsistent with the spirit of Nonforfeiture Laws and should not be permitted.

Unfortunately it is difficult to regulate fairness and in this area anything but the crudest measure of fairness really depends on the ethics of the insurer.

3. T-100 & the secondary market

from an Ontario MGA:

Fantastic article [ No.71 "Betting against your clients"].

What's your position on a secondary market for cashless insurance policies?

Why should a client only have one choice of buyer for his policy when he no longer wants it?

I was once threatened for advising a charity to transfer its T-100 policies to another charity when it could no longer fund the premium obligations.

4. Not lapsing T-100 policies

from a leading Canadian professional financial planner:

Thank heaven ... you called it exactly on target [No.71 "Betting against your clients"]. I only hope you have lots of blog readers or that your messages are passed on to many others.

One of the things I learned at CALU [Conference for Advanced Life Underwriting] was that there was a cottage industry of sorts in pairing life annuities (with zero years guarantee) with T-100 policies to protect against lapse, as many brokers well understood that the pricing was slanted in the customer's favour -- in effect the smart brokers were making the policies virtually lapse-proof ( to their benefit clearly as well as to their clients').

Pairing one disadvantageous product with another to make something that was perhaps greater than the sum of its constituent parts. And virtually all of those are still on the books, except for those (of course) where the insured annuitant has since died.

While the companies may have intended to benefit themselves in the long run, to the medium-term detriment of clients and advisors -- although they would not look further than their own noses when assessing benefit and detriment -- it seems those clients and [life insurance] brokers are actually the ones who may benefit.

And I encountered [Mutual-Clarica agents] who, when seeing that their client had such a T-100 policy with company X, would tell their clients point-blank to NEVER cancel their policy as they would never get a sweeter deal.

And at least one company that did not offer a pure T-100 product did offer T-100 based premiums for its UL policies, mimicking a true T-100 policy. The main differences [were] that the client could always choose to add to that amount to fund it more permanently and the risk charge was waived after age 100. Even there the policies are frequently paired with a life-zero annuity, either to secure the premium payments into the future or to maximize after-tax cash flow by using insurance to replace the annuity purchase price. And so it continues. ...

It seems the corporate motto has been a variant of "might makes right", in this case "prospects of profits makes right". Now that mutual companies have mostly disappeared the life insurance industry seems to have lost clear sight of the customer ....

I know there will be a few key industry execs who read your blog AND take heed, and also that some of those will be south of the border. If you keep their feet to the fire, maybe there is hope for the [life insurance] industry yet.

5. Banks and insurance

from a retired Canadian insurance executive:

Greetings from Florida. I was recently introduced to RickardsRead so I shall be following your musings with interest.

I really enjoyed the one about the banks putting their foot in it [No.69 " Banks & insurance: shooting off another toe?".

I enjoyed [your Canadian Journal of Life Insurance] and I enjoy RickardsRead.

6. Banks & insurance: seizing the opportunity?

from a former life insurance company executive:

Thanks for the commentary [ No.69 "Banks & insurance ..."] and the suggestion to concerned communities to seize the opportunity.

7. Quebec -- banks & insurance

from a lawyer in Quebec:

Extremely interesting! [ No.69 "Banks & insurance ...."].

I would imagine the same principle would apply here regardless of the jurisprudential differences. In fact I would think that the Quebec courts would inspire themselves from these decisions.

8. the U.S. -- the fight there

from an industry person in the U.S:

Many thanks for this valuable insight into the federal-provincial tussle in Canada (No.69 "Banks & Insurance ...). Glad things are moving in the right direction and the courts are backing provincial regulation of agencies and crypto-agencies.

I'm sharing this with my good friend [name deleted] who is the [position deleted] for the [state name deleted] Insurance Department. I'm sure he will be glad to hear that things are going well north of the border.

The fight down here is deceptive and nasty. The Fed-lovers are using AIG as a weapon against state regulation when AIG's state-regulated companies are doing fine, thank you. It is the holding company, supposedly regulated by the Feds, that caused the problem. As my attorney friends say, if you don't have either the law or the facts on your side, malign your opponent.

9. Ontario -- what to do now?

from a lawyer working in the financial services industry:

[Ref. the the Ontario Superior Court decision cited in No. 69 "Banks & Insurance...]
Ontario won't know what or how to handle this now!

10. Call them agents not financial advisors

from a former chief compliance officer for a life insurance company in Canada:

I thought you might appreciate this true series of events that occurred during my tenure as chief compliance officer of [company name deleted].

I had prepared a series of market conduct policies that had been approved (some reluctantly) by senior management. One of them discouraged the use of the designation 'financial advisor' (and other derivatives) on business cards or other materials used by life insurance agents who were under contract with [my company], unless agents holding themselves out in this manner could back up its use with appropriate qualifications. At the head office level I vetoed any [company] attempt to address the field as 'financial advisors' in marketing and product materials.

You will recall that LUAC [Life Underwriters Association of Canada] was in the process of changing its name to CAIFA [ Canadian Association of Insurance & Financial Advisors, since changed again to Advocis - the Financial Advisors Association of Canada]. I was contacted by London Life who had heard of my stance on the use of 'financial advisor' and collectively we challenged LUAC on the revised CAIFA Code of Conduct where all of the wording that had previously referred to 'life insurance agent' or 'life underwriter' suddenly became 'financial advisor'. There was a series of definitions at the front, one of which was the definition of 'financial advisor': a financial advisor is a member of CAIFA.

A couple of months later I was called out of a meeting for an 'urgent' telephone call. It was from someone at LUAC who told me he was about to go into a board meeting and one of the agenda items was the finalization of the name change to CAIFA. He had heard about my position that disallowed 'financial advisor' to be used and challenged my right to do so.

I informed him that [company name deleted] had the right to formulate policy on how it wanted its agents to hold [themselves] out to the public. He asked why I was opposed to the term 'financial advisor'. I told him I could not support broad use of the term, especially since it meant that the newest agent on the block, having just picked up his life insurance agent's license from FSCO [Financial Services Commission of Ontario], could jump in his car, drive over to LUAC's(CAIFA's) office, join the Association and walk out calling himself a financial advisor.

The last time I was in the CLHIA website, and specifically the Compliance Section, I was dismayed to notice that they had a link for 'financial advisors'. Shame on you ....

Alastair Rickard