NY Life ex-Chairman Sy Sternberg on trust in the life insurance business, Pt. 1
By Charles H. Green
Trusted Advisor Associates
Seymour “Sy” Sternberg served as chairman and CEO of New York Life from the late 1990s until 2008. New York Life is a Fortune 100-sized company in existence since 1845. It is the largest mutual life-insurance company in the U.S., and one of the largest life-insurers in the world.
I recently spoke with Sy in his offices atop the New York Life building on lower Madison Avenue in Manhattan.
Charles H. Green: Thank you very much for taking time with us to talk about trust, an issue that I understand has some resonance for you. Let’s start with the company. New York Life goes back over 150 years. Are there some principles or values that have stayed with the company since its beginning?
Seymour “Sy” Sternberg: When I took over, we decided on a very simple set of values for the company; not that the values were new, in fact they represented values we had always had — I just wanted a shorthand for it. Those values were financial strength, integrity and humanity. Implicit in the integrity component, the way I see it, is trust.
Rich Sternhell recently showed me an interview from about 40 years ago with our then-CEO. Let me quote a bit of it:
“These days, we’re being constantly reminded of how important are honesty, integrity and dependability. We were founded in 1845 on a remarkably similar premise: Trust us, we said then as we say now, and we will keep our promises… The guarantees we make last a lifetime.”
One of our more recent ads shows an old desk with an old quill pen on it; the text says, “Our promises have no expiration date.” My point is simply, these are themes that have been around for a long time. [Note: the three values are engraved on a plaque inset into the wall on the ground floor of the NY Life headquarters building, across the hall from the company museum].
We’re trying to emphasize this in other ways, too. The industry has for a long time sold immediate annuities. We’ve renamed that product to emphasize our values: guaranteed lifetime income. Same product, but it emphasizes we are insuring not mortality risk, but longevity risk.
It also uses the word “guarantee,” which again reinforces the promises we’re keeping. We’re not emphasizing your risk of dying; we’re insuring your risk of living, making sure you’ve got enough money. That’s the current market need; but it’s also a simple rephrasing of our basic values that have always driven us.
The word “guarantee” is important in that rephrasing too; just like our guarantees have always been there for life insurance. We paid every claim in the ’29 crash. We paid claims under a flag of truce in the Civil War. During the San Francisco earthquake, we were the first to provide loans to survivors. During 9/11, when I chaired the American Council of Life Insurance, we waived all of our war provisions in our policies, and did not enforce clauses on proof of death. We led that drive. That is all values-driven. Do what is right. And that’s where trust comes in.
CHG: How did you, Sy Sternberg, happen to join New York Life? What brought you into the fold?
SS: I got an electrical engineering degree from City College of New York, then went to work for Raytheon in Massachusetts, and got a master’s in Electrical Engineering at Northeastern. At that time, electrical engineering was the one place where you could pursue computer science. I switched from hardware to software, and helped design Raytheon’s first automated drafting systems. We did a purchasing system, and then I was hired away by a consulting firm that had a contract with MassMutual, in Springfield, to automate the entire agency network. It was a great job, so I joined up, and in 1975, MassMutual hired me directly.
I rose up the ranks in information systems, and the president then asked me to take over the health insurance business. I didn’t realize at the time that they figured that business was dying and there was nothing to lose in handing it to me; fortunately, I was able to turn it around. I left MassMutual for New York Life in 1989, then rose up the ranks and became vice chairman in 1995, and president in 1996, and — on April Fools’ Day 1997 — CEO.
CHG: What role does the concept of trust play in the life insurance industry? Is that role distinct from the role trust plays in business in general?
SS: I think people expect trust in all businesses. The need is always there. But I think it’s distinct in life insurance, for several specific reasons.
One reason is complexity. Few people really understand insurance, and they cloud over when you get into it. It means you end up having to trust the person who sells it to you.
Another reason is that it’s a high stakes product: There are big consequences. If we don’t get it right, and it doesn’t pan out, that not only hurts you the customer, but the family involved, as well. Consequences extend beyond the customer to his or her most important relations.
The third area of trust is that this is a business where it’s fairly hard to switch providers or vendors. You can’t just redo your insurance policy like you can switch restaurants or bank accounts because the rates have gone up as you’ve gotten older. You may not even be insurable any more. So, the consequence of changing vendors is much more severe in this business.
So, there are three big reasons why trust is even more important in insurance than in others. And one more: We say in our ads, what we sell is promises; that’s it. If people can’t trust your promises, you’ve got a serious business problem.
CHG. Let’s go back up to big picture for a minute: What does the notion of “trust” mean to you in the world of business?
SS: To me, trust means operating honestly. There is no agreement that can substitute for honesty in this world. There are bad people — those are people without a conscience.
Most of us, we do what’s right because it’s right — because you wouldn’t be able to sleep otherwise. So, how could Madoff do what he did? Because he has no conscience, that’s how. I’m not saying you shouldn’t have formal agreements, but the relevant question is: if you didn’t have a formal agreement with someone, would the same thing happen? And if the answer is yes, than that’s someone you can trust.
Most people live by those principles, or at least try to; they may have less of a fine ear about it, but they’re not without a conscience.
CHG: So what’s happened to that “fine ear” out there? How have we gotten less attuned to doing what’s right?
SS: The world lives cyclically, not linearly. We move from overly done self-interest to the opposite. Under certain environmental conditions, one’s behavior becomes more self-interested.
The insurance industry in the 50s and 60s was a Father Knows Best business — the Robert Young character was a life insurance agent. It was not dog-eat-dog, it was civil. At that time, no life insurance company had a CMO or a CFO because, honestly, you couldn’t easily lose money. You invested at 5 percent, and provided an IRR of 2 percent, so who needs a CFO? And you only changed your products every five to 10 years, so who needed a Chief Marketing Officer?
Until about 1980, that is, when Jane Bryant Quinn wrote, “Do you know what the internal rate of return on your life insurance is?” Suddenly you had to get a CFO, because suddenly the products and markets all became a lot more complex. Product series started changing twice a year. It became a more competitive market, and some agents took shortcuts.
In the mid-to-late 80s, the whole industry got caught up in promising dividends. Now, we all had small print saying dividends weren’t guaranteed, but agents would say you know, they’ve always grown. Well, interest rates had gone up for 30 years; that was the truth. It was a huge secular rise in interest rates. But then the 80s came, and suddenly — and for the last 20 years — they’ve gone down.
But because of what the agents said vs. what really happened, we now have compliance departments. At New York Life, we have over 100 people now in our compliance department, making sure that nothing gets said that’s wrong. At first, the agents hated that stuff. The morale of the agent was very low in the 90s. We had to learn to operate as a much more rigid business required by regulations.
So, was that a time of low integrity? I don’t really see it that way. I see it as more circumstantial. Thirty years of rising rates, that’s long enough you begin to forget things could be otherwise.
CHG: However, people who get wrapped up in compliance, they end up doing things not because they’re right — because of their conscience — but because of compliance. Aren’t compliance rules in some sense the cause of a decline in conscience?
SS: There’s definitely some truth to that. It goes to the role of principles. Let me give you an analogy. How do you determine what’s a liability on your balance sheet? There’s a whole set of accounting literature to answer that. Well I’ve got a simple definition: you put it on the balance sheet when it is, or could be, a liability of the enterprise. That’s a principle.
PricewaterhouseCoopers came out some years ago in favor of principles-based accounting, rather than rules-based accounting. This relates to compliance — when you work from principles-based accounting, not rules-based accounting, you don’t focus on ways to get around the rules; you focus on the principles.
So, you focus on principles, because of exactly what you said: Focusing on rules compliance doesn’t exercise the conscience.
The second part of this two-part interview series will include Sy's views on the financial crisis and mutual insurance companies.