MacDonald Warns Life Insurance Industry That Commoditizing Its Products May Relegate it to the Bottom of the Financial Services Barrel

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Bob MacDonald, former CEO of Allianz Life and a frequent commentator on the insurance industry, today warned that life and annuity insurance companies that commoditize their products are in a race to the bottom that could spell disaster.

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If commoditization continues unabated, then life insurance companies will be reduced to nothing more than an appendage of the overall financial services industry

Bob MacDonald, former CEO of Allianz Life and a frequent commentator on the insurance industry, today warned that life and annuity insurance companies that commoditize their products are in a race to the bottom that could spell disaster.

Writing in his blog, bobmaconbusiness.com, MacDonald offered a taste of what he will tell the annual symposium of NAFA’s Insurance Marketing Advisory Committee when it meets (Oct. 19-21) in Boca Raton, Fla. The IMO Summit is the largest gathering of insurance marketing organization principals and executives in the industry, and addresses issues on which MacDonald is a nationally recognized expert.

MacDonald charges that the life insurance industry is inexorably shifting – both its products and distribution – from a traditional value-oriented system to a commoditized, price-sensitive business model. “If this process continues unabated, then life insurance companies will be reduced to nothing more than an appendage of the overall financial services industry,” he warns.

“A commodity,” said MacDonald, “is a product for which there is a demand, but one that is sought without qualitative distinction as to either the product provider or the benefits to the consumer. “When that happens, price and convenience drive sales—not value of the product. And that is what is happening in the life and annuity industry.”

Leaders of the life insurance industry, MacDonald charges, are frustrated by stagnant growth and cowered by the competitive intrusions of banks and investment firms. Now, in a desperate search for short-term gains, these companies seem willing to surrender the very strength of the industry to the ill-perceived simplicities of product commoditization. This is a race to the bottom that can only be won by losing.

The product provider that operates in a commodity business environment is pushed into a relentless reduction in costs, benefits and service, combined with the need for increased efficiency in accessing the commodity product. “This is all designed to win the race to the lowest price, even at the expense of profits and long-term viability,” said MacDonald.

Commoditization triggers industry consolidation that puts more and more market control in the hands of fewer and fewer providers. The result is a loss of innovation, competition and a further degradation of customer service. “Worse,” said MacDonald, “consumers ultimately suffer a double-whammy in the form of declining product value coupled with increasing prices.”

MacDonald pointed to the airline industry as the archetypal example of an industry that has moved from a value-oriented approach to one based on price, and has suffered the consequences of its shortsightedness. The airlines have been buffeted by the turbulence of consolidation, bankruptcy and illusive profits, along with loss of customer respect and loyalty. The only reason the airline industry survives is because they offer a product the consumer needs and demands.

The life insurance industry, said MacDonald, is on that same flight path as the airlines, but without the benefit of offering a “demand product.” Life insurance and annuities are sold not sought. By commoditizing its business model, the industry is switching to a “spread-sheet” mentality that emphasizes price at the expense of value. Product individuality becomes as irrelevant as buying a quart of milk at the Qwiki Mart or a 7-Eleven. When that mentality invades the insurance industry, the results are widespread and often devastating. Industry competition is stifled, cost margins shrink, companies consolidate, investment in agent recruiting and training declines, and commissions paid to those agents become thinner and thinner. And it’s all happening right now.

“If the life insurance industry is to retain a dominant role in the financial services sector, it is essential for the industry to create new products that offer the best value for living well, rather than the cheapest price for dying,” said MacDonald. “The history of the life insurance industry is a clear demonstration that ‘value sells.’ If the life insurance industry can remain true to the value oriented, long-term essence of its products, it will once again lead the parade to the top, rather than be mired in a race to the bottom.”

Bob MacDonald was formerly CEO of ITT Life, wholly owned by The Hartford. He founded LifeUSA, which he sold to Allianz SE in 1999 for $540 million and became CEO of Allianz Life of North America. Since 2002 MacDonald has headed CTW Consulting, LLC, a vehicle for offering his experience and unique approach to management and corporate culture development. He is the author of several popular books on business management, including Cheat To Win: The Honest Way to Break All the Dishonest Rules in Business and Beat The System: 11 Secrets to Building an Entrepreneurial Culture in a Bureaucratic World.

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