There is an interesting article on Investment News this morning regarding how the insurance industry has largely dodged a regulatory  bullet in all of the financial services regulatory overhaul. Now, I say “interesting” kind of how most English folks will nod and politely say that whatever your hitting them with is “interesting” when what they really mean is that you don’t know what you’re talking about.

Point the first: the article repeatedly notes how insurers got out of stronger regulations despite the central role AIG played in the financial crisis. No duh. Anybody who knows anything about the crisis and AIG knows that their insurance operations had nothing to do with it. They have always been solid, even if linked to a larger parent done in by hundreds of billions of dollars in bad bets. Frankly, this point has been made so many times, I wonder why it’s coming up now. It does support my cynical theory that anybody not in the insurance business has not the faintest clue of how it really works, however. Oh, how I wish this could change.

Point the second:  A couple of different comments on the nature of the Federal Insurance Office, which as we all know has been relegated to a largely advisory role without any real teeth to it. Jane Cline, West  Virginia’s insurance commissioner and the current head of the NAIC gives a predictable quote about how great the state-based insurance regulatory system worked, especially in the financial crisis, and Joel Wood, senior VP of government affairs for the CIAB also notes that the FIO, in its current form, is a pretty good deal, all things considered. Maybe so. But I would feel a lot more comfortable with all of this if the NAIC had not lobbied so hard to kill the FIO. There are plenty of insurers for whom the NAIC model of regulation is overly burdensome, complicated and inefficient. Morever, a strong federal system doesn’t necessarily ensure that regulation would be done any better. It’s not like the Fed has a great track record with this stuff. But at the same time, the various state insurance regulators couldn’t come together and see that something was going seriously awry with AIG. Sure, AIG’s problems weren’t insurance-related, but state regulators had access to all the numbers they needed to see that AIG was headed into oblivion. That they could not coordinate in time to stop AIG from doing what it did reminds me of the failures of the FBI, NSA and CIA to stop 9/11. There, I said it.

But what puzzles me most about this article was a quote from NAIFA president Thomas Currey, who hailed an SEC decision to study the impact of the fiduciary standard it is trying to make law. The ficudiary standard is a big, big deal for anybody in the financial advisory business, especially broker-dealers, so I can appreciate any effort to hold back the SEC, especially given that agency’s expansionist agenda as of late. (151A, anyone?)

But with that in mind, Currey makes a curious statement about how a universal fiduciary standard would overburden the already over-regulated broker dealer, and would render broker-dealer services too expensive for the low- and middle-income market. Now middle-income market, I can see. But low-income market? Maybe I’m missing something, but the last time I checked, the very best investment advice anybody in the low-income market could receive is for them to pay down their consumer debt. I simply cannot believe there are a lot of folks scraping by out there who have a big investment plan in the works that won’t come together without the help of a broker-dealer. To say that these folks will get left behind by a fiduciary standard seems a little overblown, especially since the threat of a global double-dip recession has not yet been ruled out.

I can appreciate where NAIFA is coming from, I really can. And likewise, I can appreciate the various viewpoints of the other groups noted in this story. But there is just an air of hollowness to a lot of these comments that seem to contribute more light than heat to some very serious movements underway that could change the face of how we use financial services for many years to come. Now isn’t really the best time to be throwing out arguments that are, upon examination, a little wobbly.

If you have been following the retained asset account situation – and I can’t imagine many readers of this blog who have not – then you’ll know that Prudential is at the heart of it. Not that Prudential is necessarily doing anything wrong, but the Bloomberg article that touched this whole issue off did so by using military policyholders as the story’s dramatic fulcrum. Surely if one wishes to make the life industry look bad, there can be no more sympathetic group of victims than our men and women in uniform. And in that, Prudential finds itself squarely in the crosshairs, being the company that sells more life insurance to military personnel than any other.

New York AG Andrew Cuomo has gone back and forth in the intensity with which he has pursued this issue, initially acting almost as the Bloomberg ink dried and subpoenaing companies with no time to think better of it. Apparently, sometime later, after consulting with industry sources (an industry has received political contributions from, mind you) Cuomo appeared to soft-pedal his investigation, but things are moving ahead once more. This proves two things: 1) like many politicians, Cuomo sure enjoys biting the hand that feeds him and 2) like many politicians, he simply cannot turn down such an easy opportunity to score points as an AG (attorney general or aspiring governor? You decide) for the people as when he does it at the expense of the insurance industry.

Hi, I'm Andrew Cuomo. I heard you bought some life insurance.

Meanwhile, the RAA issue has hit the Web-based freelance writing grist mill, with basic information hub pages describing for the average person what retained asset accounts are, and typically doing so from an anti-industry point of view. Whether this is because of a bias on the part of the writer, or because the writers themselves are primarily informed on RAAs by mainstream media coverage of the issue, remains to be seen. But what we are witnessing, as an industry, is the mainstreaming of a concept that RAAs are bad, that the industry knows it, and that the industry is too busy profiteering off the bodies of dead soldiers to care. This is a reputational crisis in the making. No…scratch that. This is a reputational crisis right now. And unless the industry’s best and brightest step forward and boldly address this issue, then things are not likely to tail off any time soon.

So far, we have seen precious little from Prudential, MetLife or any of the other industry giants that have a clear stake in this issue. I have spoken with some of these companies, and there is a  earnest belief that RAAs are not just good business practice for the insurer, they are honestly good for the beneficiaries. Personally, I would not have a problem with receiving a RAA voucher, but I can see why somebody might. The trick here is education. Pure, simple, honest, open communication between life insurers and their policyholders on what an RAA is, why it’s a good thing, and why nobody is out to screw them. We have not seen that yet from the life industry. And I’m not talking about making easy talking-point statements to friendly press. I’m talking about straight talk. Companies willing to accept how their critics perceive them, willing to address the political, legal and reputational fallout we’ve seen from this issue so far, and talk openly about why they feel the way they do about RAAs and how to move ahead with this practice.

Is it over yet? We're not coming out until it is.

Here’s the thing. We all know that barring some kind of crazy legislation (which isn’t entirely out of the realm of possibility), RAAs are not going away. They make too much sense from the standpoint of funding life policies themselves and for providing beneficiaries with a method of payment that actually earns them a few bucks while they are in the most acute phase of their grief. After all show me a weeping mother who cashes a life insurance check before her dead son’s funeral and I’ll show you a pig with wings. In fact, had RAAs never been invented, I’ll bet somebody would have filed a class action against the industry for not having some interest-bearing instrument in place to take care of beneficiaries’ money while they are too grief-stricken to cash their checks.

But the unfortunate reality is that the industry is being villainized for this. I can appreciate companies not wanting to follow the lead of, say, Lehman Brothers, which went after its detractors in public and made itself even more unliked in the public eye. But there is a difference between defending what’s right and being a bellicose jerk. The life insurance industry is too busy hiding under its shell to even think about the difference, let alone put it into practice. And the longer it does, the worse this thing is going to get, especially for agents everywhere who, when selling, must bear the brunt of ant anti-industry feelings.

Life insurance is all about playing the long game, and politics and media today are all about the short game. Fine. I get it. But even if this all eventually blows over without directly causing the industry any harm, episodes like this are best thought of as a kind of reputational bioaccumulation – that process by which toxins in the environment slowly leach into the food chain and gradually build up in one’s own body over a long time of continual exposure. That’s what’s happening to the life industry right now, day by day, article by article, sound bite by sound bite. And maybe not today, and maybe not tomorrow, but someday it will result in something catastrophic for the entire industry. I just hope the industry will have the foresight to do something about it before it is too late.

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Note: There will be no updates to this blog over the Labor Day weekend. Posts will resume next Tuesday. Until then, have a great holiday weekend!

I came across two bits of interest on the Web yesterday that tied together our obesity epidemic with national security.

The first was this bit of grotesque food reporting that highlighted five of the most ridiculous platters being served in our nation’s restaurants. For those of you without the courage to hit the link – and I cannot blame you; I think just going to this article left me with gravy on my fingers – it spotlights the kind of extreme food being served today that a generation ago would have been thought impossible. Heck, just 10 years ago, meals like the IHOP New York Cheesecake Pancakes, Friendly’s Grilled Cheese BurgerMelt and Applebee’s Provolone-Stuffed Meatballs with Fettuccine—all of which clock in at upwards to 1,500 calories apiece—would have been written off as either a joke or a bizarre form of torture, the kind of thing you don’t eat because it’s enjoyable, but because you might win something if you can get it all down.

Your arteries called. They were begging for mercy.

After reading that, the second item I encountered came as little surprise. According to the New York Times, because the U.S. Army is receiving record numbers of unfit recruits, they are modifying their basic training to accommodate a much lower level of personal fitness among new soldiers that what was experienced in years past. Sit-ups are virtually a thing of the past, as are the traditional five-mile runs. Now, to be honest, part of these changes reflect changing fitness requirements of our soldiers. In the urban battlefields of today and tomorrow, our troops generally don’t need to run miles at a time, but they do need to be able to sprint short distances all day long. Likewise, sit-ups are fine, but total core strengthening is even better. That said, the latest Times article follows other reporting about the general unfitness of our recruits, who are members of what is becoming known as the “Pepsi generation,” millennials raised on a steady diet of no exercise, lots of sugary soda, and nonstop sedentary entertainment.

This reminds me of an article I caught about 10 years ago (from the Wall Street Journel, I think) that noted how Army training in general was getting easier, and how some recruits likened it to summer camp. I suppose that’s fine during a decade of relative peace. But fighting and endless war against terrorism requires fit soldiers and right now, the obesity of young Americans has reached such a high level that it is now being considered a security threat. Nearly 25% of potential recruits are turned away for being overweight at a time when recruiting needs are acute.

"What is this in your footlocker, Private Pyle? A jelly donut?"

If there is one group that is taking the threat seriously, it is Mission Readiness, a group of senior retired U.S. military leaders that is working to raise awareness of the impact that American obesity is having on the nation’s ability to defend itself. It is focusing on childhood obesity, which has tripled in frequency over the last decade. Between 1995 and 2008, according to the Mission Readiness report entitled “Too Fat to Fight,” some 140,000 people signed up for military service, but were turned away because they were too fat. Being overweight is the number one reason for recruit rejection. Between 1995 and 2008, the number of potential recruits who failed their annual physical exams due to excess weight rose by 70 percent. This is not just reflective of those who wish to serve in the military, but American society itself.

The health insurance industry already knows this, but some facts bear repeating. Like if obesity rates are not reigned in, according to the American Public Health Association, it will add some $344 billion to U.S. health care costs by 2018 and account for some 21% of all health care spending. Just imagine what $344 billion less in claims would do to claims administration costs and pricing.

Mission Readiness is focusing on changing childhood nutrition as a long-tail way of defeating obesity. (On a more grim note, one might suspect it is because these senior generals have given up on the current generation’s ability to slim itself. What is a crippling health insurance problem looks likely to become a life insurance problem.) One way to do this, Mission Readiness suggests, is to improve the food in schools. Get rid of vending machines, and improve the lunches being served, and kids might not become so overweight so quickly.

It is a sound idea, but here is an even better one: let’s end federal school lunch and breakfast subsidies altogether.

Now I know that sounds like a crazy, even un-American idea. After all, isn’t getting a school lunch a rite of childhood? Isn’t it up to our schools to provide our kids with a good breakfast to tackle a day of lessons? It is, but when you face the facts of school food programs, it becomes clear that they are not serving the function for which they are intended. And the reason why I’m bringing it up here is because what’s going on in our schools has a clear and present impact on the health insurance results of tomorrow.

For starters, the federal lunch program was instituted to address the fact that a lot of WWII recruits had to be turned away because they were undernourished. (Jimmy Stewart is a notable example, though he “fattened up” and managed to serve with distinction.) The idea was to make sure American kids have enough meat on their bones to fight. And for a generation that lived through the lean years of the Great Depression, that made sense. We don’t live in that world anymore. We live in a world of constant access to food and super-saturation of high-fructose corn syrup in almost every manufactured foodstuff there is. The last thing we need is to make sure kids are getting enough calories. All evidence shows they already get too many of them.

Part of the problem.

More importantly, according to the Department of Agriculture the average federal food subsidy given to schools was about $2.50 per meal, with the intent that $2.50 should cover the entire cost of the meal. However, some 75% of the schools that get $2.50 per meal don’t even spend it all, pocketing the rest to offset other operational costs. Even more distressing is that the cost of the meal breaks down to 45% cost of food, 45% cost of labor, and 10% other costs. The means the actual cost of the food in most school meals is about $1.13. If you’ve done any studying on the nutritional value of food relative to its cost (go check out Freakonomics, if you haven’t), you’ll know that not only does $1.13 not buy a lot of food, the food it buys is the worst possible kind of stuff you can feed to a growing child. On the front line against obesity, our schools have been infiltrated by the enemy, and you, dear health insurer, are the ones paying for it.

The National School Lunch Program cost some $6.1 billion in 2000, and all it did was help triple our childhood rate of obesity, to the point where even our military can’t whip our own kids into shape. What disaster does this spell 20 years down the road, when these same people will be expected to contribute to a society crushed by the weight of its own health care costs? I don’t even want to know. But I do know this: $6.1 billion could do an awful lot to raise obesity awareness. It could buy a lot of organic apples and bananas. It would buy a lot of playground equipment. It might even help prevent a war.

Think about it.