The way that insurance is sold needs to be changed. Fees and pricing are opaque, which leads to conflicts of interest and a less efficient market than should be the case, argues a figure involved in a new business model.

If there is a thread connecting some – if not all – of the reforms and changes to the wealth management business models since before the 2008 financial crash, it has been an attempt to manage or even remove conflicts of interest.

An area ripe for such a push is the $1 trillion-plus life insurance sector, not least because it is used as part of the wealth management toolkit when it comes to mitigating certain risks. An associated question is the quality of the data that is used for decision-making so that buyers of life insurance know from an unconflicted source whether they are getting a good deal. If there can be independent research for investments from organizations such as Morningstar, then where is the equivalent for insurance?

The way that insurance is sold is ripe for change, argues Steven Zeiger, who is senior director, wealth management at KB Financial – a OneDigital Company. He recently spoke to Family Wealth Report. KB Financial is a business based in Princeton, New Jersey.

The US life insurance industry suffers in the main from low trust (as with used car sales, for example). There are confusing illustrations which can be misleading according to industry regulators. The sector is marked by a lack of transparency, Zeiger said, arguing that Americans are spending too much on insurance internal costs because of such problems.

“One of the fundamental problems in the US is that life insurance salesmen/women may have a conflict of interest and are incentivized to promote a particular product, not necessarily to think of the best interests of the end client,” Zeiger said. “They may think they work in their clients’ best interests, but they don’t have a prudent process for doing so.” 

“The business evolved and today we find ourselves where we are. Now it’s time to make the insurance world mirror the investment world,” he continued. 

Zeiger said he has come up come up with a business model for life insurance that mirrors what fiduciary wealth managers do. 

“Wealth managers use independent research from Morningstar, Ibbotson, Value Line, Lipper. We utilize independent research for life insurance from Morningstar, EBIX, Veralytic and Ethical Edge. Wealth managers use Monte Carlo simulations, and we provide prospects with Monte Carlo sims to see the sequence of return risk,” Zeiger said. 

“Wealth managers use benchmarks like the S&P 500 index or the DJIA, we use multiple life insurance benchmarks from Veralytic Research,” he said.

The stakes are high. According to Statista, the market size (gross written premium) of the US life insurance market is slated to reach $1.22 trillion in 2023. Gross written premiums are expected to show an annual growth rate between 2023 and 2028 of 3.80 per cent, producing a market volume of $1.47 trillion 2028. Even if a small fraction of that amount is spent excessively, because of conflicts of interest and lack of research/due diligence, that’s a lot of money that can be saved.

An example can illustrate the wider point, Zeiger said. “Let’s look at an example: a 50-year-old male wants to purchase a $10 million life insurance policy. The average life insurer will charge $6 million in costs over the life of the contract. In the marketplace, those costs vary by 40 per cent from the mean, a total swing of $4.8 million. Without independent research and proper due diligence, this average purchaser will have the same odds of overspending by millions of dollars as the millions of consumers who purchased insurance before them."
 

Business model
“KB Financial addresses the needs of UHNW clients by assembling a team into an innovative ecosystem to drive better outcomes. KB takes a deeper, more integrated view across the complete financial landscape to understand how key elements can work synergistically – and identify opportunities that impact outcomes,” Zeiger said.

“A team of family office, wealth management and corporate finance professionals increases our ability to add significant value to UHNW families,” he continued. “This model creates superior outcomes – for example income tax efficient and estate tax-efficient M&A transactions.”

Family Wealth Report asked Zeiger about how difficult reform is when there has already been a struggle to establish a fiduciary rule in the US wealth sector.

“The industry seems against it, people worry that it will affect their earnings, but earnings actually rise when you are transparent,” he said. 

At present, Zeiger said very few firms are doing what he does. It would help such a business model if more became involved.

Zeiger is not alone in flagging the issue. In a paper on June 15, Robert J D'Anniballe, Jnr, wrote the following in an article from Pietragallo Gordon Alfano Bosick & Raspanti, LLP: "The legal and regulatory scheme is set up in favor of life insurance companies to the detriment of the agents and customers. The imbalance of duties imposed upon a life insurance agent in the sale of life insurance policies and annuities to a client presents a potential conflict of interest. Life insurance agents owe a fiduciary duty to the life insurance company as a result of their appointment as an agent. State laws provide for a fiduciary duty by agents to their principals. In this case, the life insurance companies are the principals of their agents.

“In most states, life insurance agents in the sale of policies and annuities owe a greater duty to the insurer/principal than to their client,” the writer said.

Zeiger added that only in New York is there a client’s best-interest regulation for life insurance, Regulation 187.