Life Insurance Companies Take Risks Too

"Not a single week passes where someone does not ask me about the prevailing trends that are having an impact on today's insurance products," says Rene Lacape, Marketing Manager for eQuote Life Insurance. "Increasingly, I have been answering by focusing on the risks that bear upon these products, including their marketing, their design and their implementation as well."

Insurance is inherently a business that is meant to bear risk, but it is also a risky business by nature, at least when there are products concerned. This is because there are a variety of different factors that can affect the sale success of a product, or its viability, service or profitability.

Anyone who has anything to do with financial products and the insurance industry is already aware of this. Even when the products come with guarantees, there are still risks involved, such as how strong the company is that is issuing the guarantee in question, or how long the guarantee will last, or even how rich the guarantee actually is. Industry developers and marketers do their best to manage product risks on a daily basis. Look at the stampede that occurred a few years ago in hopes to lower the guaranteed minimum interest rate when it applied to fixed annuities.

That particular initiative involved a great amount of regulatory interchange, along with a long and tedious process of tweaking, pulling and refilling products. The risk management aspect found itself at the front and center, and moves had to be made against the adverse effects that were associated with interest rate risk that the low interest rate environment posed. “Risk always has been and always will be a factor in the life insurance industry, says Rene Lacape.

Some people prefer to deal with financial product risk simply by avoiding it. This may not be all bad, but it really is not a practical way to handle things. Most people cannot completely avoid some level of risk associated with buying and selling financial products in this industry.

For example, if a particular consumer wants to purchase an insurance policy for universal life insurance, he or she is going to have to assess the interest rate risk that is implicit in purchasing a product like this. His or her financial advisor will have to do the same thing, also determining the risk tolerance involved as well. Developers also need to price their universal life insurance policies with the interest rate risk in their mind, and marketers have to position the universal life policies in view of that task.

"The name of this particular game is simple: risk mitigation," indicates Rene Lacape. Risk mitigation has to do with reducing the level of risk along the entire product food chain." At the very least, this is going to mean identifying risks associated with the policy and creating an action plan accordingly.

So what are the product risks that are appearing to be the most pressing in recent years?

Advisory Risk - the risk that the product related advice may not necessarily be suitable, or that the advice recipients may not be using the advisory services correctly

Complexity Risk - providers of multi option and flexible products risk misunderstanding or improper usage

Interest Rate Risk - this is part of interest sensitive accounts and products. Even providers of products that are not interest sensitive can be affected because of the way trends normally impact buying preferences

Longevity Risk - because people are living so much longer these days, the product risk increasingly falls on the ability of a product to adapt to longer life spans

Market Risk - firms and clients with variable products can risk the downturns that are associated with fall offs in the securities market. People who are involved in alternative markets can feel these market shifts as well, though not directly

Morbidity Risk - because people are living longer, the risk will rise that older people can experience disability periods

Pricing Risk - can the prices of today continue to be supported for the next 20 to 40 years? The industry for long-term care insurance has dealt with this risk in the past.

Reserving Risk - this is both a constant risk, and a constant concern for actuaries and regulators that are charged with making sure that reserves are both sound and at adequate levels

Reputation or Headline Risk - any product risks damage to its reputation if any controversy should happen to rise around it, even if the allegations have no validity.

Underwriting Risk - underwriters for life and health policies always face the risk of making unprofitable selection decision, but they are consistently finding themselves pressed to get it right even though it is impossible to do so.

This list is by no means exhaustive, but it should be enough to make the point that everyone faces product risks. This means that risk mitigation should always be on the front burner if it is not already there.

"Insurance is more than simply a risk bearing business, but it is also inherently a risky business, at least when it comes to insurance products," adds Rene Lacape, “That is because there are varied factors that can affect the sales success, profitability, viability and service of a product."