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It's about the cost of distribution for life companies

Finally, the big strategic challenge for life companies is about the cost of distribution - not regulation. Regulation has now settled down the level of a tricky implementation, but has a timeframe that is within one year, and although may have some multi-year impacts, that's only really as a contributor to a longer term problem that life companies in New Zealand have not dealt with: they do not have control over the cost of getting a policy sold. Few companies have been able to develop any meaningful alternative to participating in a highly liquid market for a limited number of experienced distributors. Almost any significant project within a life company right now includes a high distribution cost component that is substantially constraining their ability to act against other problems - such as poor administration systems, lack of consumer engagement, product design, promotional limitations, reputation-related issues, almost everything - even, the ability to implement solutions for regulation.

A central plank of life company strategy should be a major multi-year project to reduce the costs of distribution by about a third.

Life Expectancy

Life expectancy - mortaility - is a key variable in most major financial decisions - it should be explicit in almost all the big ones, and is implicit in most. Likewise, morbidity - the risk of becoming unwell. Let me give you some examples:

Saving and investing - do you expect to live long enough to enjoy your savings? People who believe that their lives will be shorter, don't tend to save. People who believe that they will never have a period where they can't work don't tend to save either. This explains a lot of so-called 'irrational' saving decisions by many very young people and very old people. It also explains the spending behaviour of those with chronic illness or near death.

"De-cumulation" the process in retirement of consuming assets is one which must take into account both mortality and morbidity. Rarely is this the case. Increasingly, however, it is being done. The trick, of course, is not just to use age-adjusted mortality, but to overcome your fear and talk about specific circumstances which might affect the individual. For example, the presence of chronic disease that is likely to substantially shorten lifespan.

Of course, taking on any major financial liability also includes elements of risk - because of the assumption that for the likely actual term of the loan the person will actually be able to work and make payments.

The shift in actual mortality has probably been larger than the shift in attitudes. Nowhere is this better demonstrated than in the fixation with retirement ages at 60 or 65 and the reality of longer and longer lifespans, this graphic demonstrates it so well: It's part of an article by the Economist, and I recommend you follow the link and read it all.


Charlie Wilson, Rest in Peace

Here's your digest of Charlie Wilson Obit links. Love him or hate him - the story is worth running down if you've got five. Don't you wish we had politics like this over here?

Economist Obit - "party animal and saviour of afghanistan". 

Wikipedia entry "drug and alcohol use" - got to love an entry with a whole section headed up thus

Charlie Wilson's War - "serious subject, treated lightly, intelligent, but light".

Washington post - "he changed the course of history"

Boston Globe - "we messed up the endgame" - I'll say...

Risk and Outcomes in Health

If you spend more on healthcare, you do tend to get better quality outcomes. There isn't always a linear relationship, and the purchaser does matter. If the purchaser is unrelated to the consumer (translated, that's government and patient in a national health service) there is a risk of a disconnect. This is illustrated to a point with this great chart from a recent survey of European health systems. This seems to underline the idea that if you want more money spent on health, raising at least some of that through insurance makes sense - rather than having the state guess how much health cover you would like, through a kind of lowest common denominator national lottery. Link.

Corporate Restructuring May be Needed

Depending on the outcome of the QFE provisions in the patch up Bill that is now open for submissions corporate restructuring may be required for many companies hoping to use a QFE to enable it to sell products offered by group companies through nominated agents of a QFE. It's a challenge that has not been identified by most people considering QFEs and would have a fairly short timeline attached to it - as one would need to have the process substantially underway before putting the QFE application in. This has some significant implications.

Moral Hazard or Not?

Hank has a bee in his bonnet about stranger-owned life insurance - the opposite of what was once a requirement in any insurance application: "insurable interest". While there is no longer such a requirement in law, many life insurers still look for it as good underwriting practice - particularly for disability income products. Leaving aside whether stranger owned life insurance is ethical or not (the agruments are property rights versus moral hazard) the situation Hank outlines in this fascinating post are, to my mind, unpleasant at best, and probably worse...