Orphaned policies and the future of the life insurance industry
By Ken Godfrey
Life Insurance Financial Evaluations, LLC
As the number of active agents in the individual life insurance market decreases as agents retire and fewer individuals enter the industry to replace them, there will be fewer agents to sell new policies to the underinsured and to service the ongoing needs of policyholders. If the remaining insurance agents are unable to pick up the slack in selling and servicing the products, this will result in an increased number of orphaned life insurance policies in the coming years and possibly an increased number of lapsed policies.
An orphaned life insurance policy is one where the original agent who sold the policy is no longer responsible for servicing it and no other agent has been assigned. Estimates vary widely for the number of orphaned life insurance policies, but some suggest the number is 50 percent or more.
If these estimates are accurate, is there any wonder why policy lapse rates are high, fewer Americans are buying life insurance coverage and the public has a negative perception of the life insurance industry?
I contend that these issues will get worse for the life insurance industry before they get better.
Let’s take a look at some pertinent life insurance industry trends and statistics from The American Council of Life Insurers’ “Life Insurance Fact Book” and Life Insurance Marketing and Research Association that support this theory.
In force life insurance policies
The total number of in force individual life insurance policies is declining. According to ACLI, the number of in force individual life insurance policies has declined from 197 million in 1970 to 153 million in 2009. Similarly, according to a recent LIMRA study, ownership of life insurance recently hit a 50-year low and only 44 percent of U.S. households own individual life insurance.
Life insurance policies sold
The total number of individual life insurance policies sold continues to decrease. In 1970, there were over 18.5 million individual policies sold. In 2009, the number declined to 10.1 million, a 45 percent decrease.
High lapse rates continue to decrease the number of individual life insurance policies in force. According to ACLI, the voluntary termination rate (lapse or surrender) of individual life insurance policies was 6.9 percent in 2009.
Decrease in number of insurance producers
The number of licensed life insurance agents is on the decline. In 2008, there were approximately 310,000 licensed life insurance agents across the country and LIMRA predicts that the number will continue to decline as more agents retire and fewer people enter the industry. Agent age demographics increasing
While the number of agents doing business declines, the average age for the remaining active agents is increasing.
According to LIMRA, the average age of life insurance agents has increased from age 38 to age 53 over the past 30 years, and it continues to increase. In addition, LIMRA estimates half of the active producers today will retire over the next 10 years.
Increase in employer types
Insurance agents are now employed by an increasing variety of firms. In the past, most insurance agents either worked for or owned their own agency, or worked as a captive producer for an insurance company. Today, more and more financial advisers from banks and securities firms (e.g., broker/dealers) are selling individual life insurance products.
Gone are the days where employees stick with the same company throughout their career. In today’s mobile society, many insurance agents switch jobs or companies and are not allowed to take their book of business with them.
Many captive insurance companies, banks and broker/dealers have restrictions on taking blocks of business (including life insurance policies they wrote) to new employers, so the client and the policy remain with the original company. The original company typically reassigns the client and policy to another agent, but the newly assigned agent likely doesn’t have a strong relationship with the client.
Banks increase life insurance sales
Banks continue to increase their life insurance sales. During the second quarter of 2010, banks received $483 million in total new life premium revenue according to Kehrer-LIMRA. This is an increase from $328 million in 2009.
More and more life insurance is being sold via the Internet. Internet sales of life insurance are commoditizing the product and include minimal, if any, ongoing service commitment from the seller.
So what does all of this mean?
As the number of active agents in the individual life insurance market decreases as agents retire and fewer individuals enter the industry to replace them, the issues identified earlier are compounded.
There will be fewer agents to sell new policies to the underinsured and to service the ongoing needs of policyholders. If the remaining insurance agents are unable to pick up the slack in selling and servicing the products, this will result in an increased number of orphaned life insurance policies in the coming years and possibly an increased number of lapsed policies. High quality policy service is vital to the success of the life insurance industry. The industry as a whole can make significant improvements in this area. Agents, financial advisers and insurance companies should place more emphasis on policy service. However, to achieve this may require a few changes to existing practices. These may include:
- Insurance companies providing current in force illustrations and alternative illustrations with various premium and death benefit levels directly to their customers.
- Insurance companies designing products with commission structures that encourage ongoing insurance agent involvement (e.g., more levelized compensation as opposed to heaped commissions)
- Insurance agents taking a more proactive role in managing their client database and data mining for term expirations, term conversions and permanent policies in danger of lapsing.
- Banks and broker/dealers redesigning their transactional based business model to cater to the long-term nature of individual life insurance products.
- Improving the education provided to consumers on products and alternatives so the client can become more active in the ongoing service obligation.
If not, the industry will suffer and the burden will be left to the policyholders and trustees to fend for themselves.
Policyholders and trustees should consider the previously described trends affecting the industry when buying life insurance. They should also be prepared to educate themselves or possibly outsource the servicing requirements when the time comes.