The birth of Unit-Linked insurance
In March 1962 a small, prematurely grey, former lieutenant in the U.S. Airforce arrived in London and took offices in Dover Street in the West End. His mission was to establish a “pyramid” direct sales force on behalf of Investors’ Overseas Services (IOS) – founded by a man called Bernard Cornfeld to sell mutual funds around the globe.
IOS had enjoyed great success over the previous few years mainly selling their products to U.S. servicemen who, twenty years after the second world war were still based in foreign countries earning decent money with not much on which to spend it. The product was a regular or single payment into a U.S. based fund with a panel of third party fund managers. It was called. “The Fund of Funds”. Sounds familiar?
Unfortunately for IOS there were a couple of unexpected challenges in the UK. First, the Prevention of Fraud (Investments) Act 1958 stipulated that only people that could sell mutual funds were stockbrokers and they were unlikely recruits, to say the least. The second challenge was that due to the weak pound and a weak economy there were financial penalties when moving money out of the UK. But IOS had met and avoided or actually evaded unhelpful regulation before. They called their approach “Blue Sky Law”. In other words, there was always a little bit you could find if you looked hard enough.
Freshfields were engaged and came up with the solution. It was described as “insurance linked to equity growth” And it had solutions to both problems. First, insurance could be sold by anybody at all. Second, re-insurance premiums were exempt from the financial penalties imposed on other payments to the U.S. The IOS lawyer, Ed Cowett said later: “We had very imaginative and very sound advice in Britain through Freshfields. I must give them full credit” And then IOS hit an unexpected jackpot which led to huge sales for some years. The company they formed was called International Life Insurance. It was my first employer. The product was called the Dover Plan.
So, what was the jackpot? To their astonishment and delight, IOS discovered that income tax relief was allowed on any single or regular payments into any life policy. This meant that investment into a Dover Plan cost substantially less that a direct investment into a unit trust. And that was after the unsurprisingly high commissions and other charges. I think the pyramid paid out 10% upfront on a single premium. Incredibly, the actual charges were not spelled out. The policy documents referred to “a percentage” but the amount was not specified. In spite of that, sales soared and the sales force – described as “Associates” – grew exponentially. My recollection is that their training revolved around a tape recording entitled: “Eight ways to close a sale”. I distinctly recall one of the eight described as “The Winston Churchill Close”. I wish I could remember the script.
In 1966, equity markets in the US and UK fell by about 20% in a few months. And ILI policyholders of all shapes and sizes starting complaining, with letters to the press and their MPs. As if that wasn’t enough, regulation was passed that removed most of their USP. The 1968 Budget decreed that policies issued from March 20th of that year would need to be “Qualifying” to get tax relief. Many experts forecast this would be the end of unit-linked products. Maybe something to think about on the 50th anniversary of that regulation this March.
In spite of the bad publicity that ILI received, and the removal of the huge tax advantage, over time the unit linked insurance proposition was adopted by almost all of the traditional life companies and about thirty new entrants; most of whom were distributing through direct sales forces. Almost all of these closed to new business when regulation started to demand higher standards of referencing, training and disclosure. The network model then emerged, providing a home for sales people that enabled then to increase commissions and offer a broader service to clients.
So, here we are; approaching fifty years of regulation starting with the invention of qualifying policies and continuing with MiFID II and PRIIP implementation. The interesting thing from my point of view is that, on balance almost every constituency has benefited – though I’m not too sure about MiFID and PRIPPs.
Most of the salespeople in the 60s’ 70’s.and even 80’s joined an industry devoted to pushing products and the vast majority didn’t make it past year one. Now, for most but sadly not all, we have a profession delivering excellent, fee based, financial advice and investment solutions to thousands of people every week; changing their lives for the better. It’s a different world. And it’s encouraging to see that the number of advisers is increasing slightly.
As for IOS; it listed on the Canadian Stock Exchange in 1969 at which point Bernard Cornfeld gained about $14m in cash and about $90m on paper. The question asked of potential sales recruits to IOS in the interview was often: “Do you sincerely want to be rich?” The answer was usually “Yes!” And some successful sales people became very rich indeed. For others, the opposite was true. Persuaded to borrow money to buy a “privileged allocation” of shares, salespeople and staff were under water rapidly as questions started to be asked about accounting principles, asset valuations and dealings which did not survive the scrutiny to which a listed company is subject. In the end, IOS share were worthless. I think my attitude to risk stems from this event!
Happily, international Life Insurance survived. And who knows, they may still have a Dover Plan on their books. The company is now called Lincoln and is owned by Sun Life of Canada
“Do You Sincerely Want to Be Rich? The Full Story of Bernard Cornfeld and I.O.S”. Authors: Charles Raw, Bruce Page, Godfrey Hodgson. (Available on Amazon)