Primerica Inc., which has the country's largest life-insurance sales force, Primerica Inc. had another strong recruiting year in 2010 with about 230,000 people signed up to become agents, but it also had a huge drop-out rate.
According to filings and interview, about 80% of Primerica recruits don't actually become insurance agents, often because they flunk state licensing exams. That's a problem for the company, which, more than any other insurer of its size, depends on agents to sell policies. As the number ofPrimerica agents has declined over the past four years, so, too, have sales of life insurance.
So Primerica recently came up with a novel solution: Make the tests easier. It asserted to state regulators that the exams aren't only too hard in some places, but might also be racially biased, putting African-Americans and other minorities at a disadvantage.
The quiet campaign has potentially far-reaching consequences. It could help the industry increase sales in middle-class and minority communities, where agents are in short supply. Insurers and some consumer groups say such communities are lacking the crucial safety net life insurance can provide and that wealthier Americans are more likely to have.
But it also raises questions about whether Primerica is trying to boost its own business by pushing for wholesale changes in the way one of America's most ubiquitous financial services is regulated.
Some regulators worry that simplifying the tests could open the door for unqualified people to sell complicated policies. They say the problem isn't necessarily the tests—which some other big insurers haven't faulted—but Primerica's own recruiting program. While some companies require candidates to have college degrees and even securities licenses, Primerica is different. It lets almost anyone sign up, so long as they don't have a criminal record and can pay a $99 fee to cover training and licensing costs, among other minimum standards.
Over the past five years, some 900,000 people passed through the company's license-training program, 43 times as much as New York Life Insurance Co., one of the country's largest insurers.
"I'm not judging their [business] model, but if you use a certain model, it will affect the pass rates," Keith Kuzmich, a senior insurance regulator in California, says of Primerica. He calculates that Primerica's recruits dragged down the overall pass rate in California by 15 points, to 58% from 73%, from April 2010 through September 2010. "If you aren't selective and you go for the numbers, you'll get a lower pass rate."
California is one state that has decided to collect demographic data from its test-takers, and recently said it would periodically review exam questions to ensure that they are relevant and "free of cultural biases."
Brian Gaudiose, a deputy insurance commissioner in Virginia, notes that Primerica's 825 recruits passed the state's exam at a 38% rate in the two years through June 2010, compared with 51% to 83% for hundreds of test takers from other training programs.
Still, Primerica's concerns led his department last year to re-examine its licensing test. The conclusion: It was fair to all racial groups but harder than it needed to be for sizing up entry-level knowledge. "We did make it easier," Mr. Gaudiose says, and since November, the state's overall pass rate has jumped to more than 60% from the mid-40s. Mr. Gaudiose says the state doesn't yet have updated company-specific results.
A handful of other states have also responded to Primerica's push, made under the auspices of a trade group, the American Council of Life Insurers, to re-examine testing. Statistics gathered by the group show that pass rates vary widely across states, with about 80% of test-takers passing the exam in Illinois, for example, compared with 43% in Louisiana and 49% in Maryland.
Different races also score differently. Florida, New York, Texas and Virginia showed 20-point gaps or more in pass rates between blacks and whites. In New York, nearly 75% of white test-takers passed in 2009, while 48% of blacks did. The gap persists when taking education into account. In Texas, 86% of white college graduates passed in the year through August 2010, compared with 62% of college-educated blacks.
Texas regulators say they are doing a "deep analysis" to assess gaps. Like Virginia, Florida and New York concluded the gaps weren't a result of their exams being unfair to minorities, and said there could be flaws in the data. Florida nevertheless says it removed about a dozen questions that
Primerica was concerned were harder for minorities to answer correctly.
Primerica's chief administrative officer, Peter Schneider, says the results of the demographic surveys suggest "that the licensing process can be an unfair barrier to entry and may undermine the insurance industry's ability to reach the middle-income market."
Regarding Primerica's lower pass rates in California and Virginia, spokesman Mark Supic says the company takes pride "in giving people from all walks of life an opportunity to succeed and build a business."
Few, if any, companies have as much to gain from easier licensing exams as Primerica does. The giant insurer has some 92,000 agents, most of whom are part-timers selling basic "term" life insurance, which pays out only if the insured dies within a set time period. Other insurers sell a mix of products, including pricier "whole life" and "universal life" policies—both of which combine insurance with savings accounts and are popular with the wealthy. Primerica, though, depends almost exclusively on middle-class consumers.
That group has been buying less insurance in recent years; the number of individual life policies sold annually in the U.S. dropped 45% over the past 25 years, even as the number of households with children rose more than 25%. Meanwhile, the number of $2-million-plus policies, typically sold to affluent households, has been rising.
"Millions of middle-income households in this country are dangerously underinsured or have no life insurance," says Primerica's Mr. Schneider. The problem is "even more pronounced" in minority communities, in part because residents don't come into contact with agents they trust, he says.
The private-sector vendors who write the insurance-licensing exams say they meet fairness standards set by national associations. But Mr. Schneider says some states may set the bar too high by testing more than entry-level knowledge. He says questions are often written in complex ways so they end up measuring an applicant's test-taking sophistication, rather than specific knowledge about insurance. For example, sentences might have an excessive number of clauses and double negatives, or vague wording that can be open to interpretation.
"The test is really tricky," says David Benjamin, 51, an African-American who has flunked Louisiana's exam about a half-dozen times. He says he doesn't want to use racial bias "as an excuse," chalking up his failures in part to his inexperience taking tests since he graduated from Grambling State University in 1983. "For one thing, when you walk in the testing center, you're so nervous, you feel like you're going to rob a bank," he says.
Mr. Benjamin, who over the years has run a restaurant, sold shoes, taught school and coached sports, but was recently jobless, says he has gotten close to a passing score and intends to keep trying. "It's the only thing out there" amid high unemployment, he notes.
Founded in Georgia in 1977 by a former high-school football coach, Primerica popularized term life insurance. When Arthur L. Williams Jr. started the company, his "termites" helped spread the philosophy of "buy term and invest the difference," meaning consumers should combine basic term life with steady savings in other instruments.
Mr. Williams would fire up his troops by blasting traditional insurers for ripping off the middle class with pricey policies, such as whole life and universal life. Agents were encouraged to talk policyholders into switching to term life with Primerica. This enraged other agents who had long flourished on fat commissions from costlier policies, typically a percentage of the premium. Trade publications dubbed Primerica a "pariah."
Primerica joined the mainstream after deal-maker Sanford Weill acquired it in 1988, ultimately merging it into Citigroup; it went public in early 2010, and Citigroup now holds a 23% stake. Over the years, the company expanded its product offerings to include pre-paid legal services and long-term care policies, among other things.
But term life remains its core, and that makes it unusual in the industry. Also uncommon is its multi-tiered compensation system, under which agents get a cut of commissions from sales made by agents they recruited, and of sales by agents recruited by those recruits, and so on, for several levels.
Primerica's agents say they are constantly on the hunt for recruits: mothers, fathers, sisters, friends or strangers befriended on Facebook or through chance encounters. Recruits are invited to an "opportunity meeting" at a field office where they're told that highly successful agents can make thousands of dollars per month.
Even if people drop out or fail the test, Primerica can still make money, since during the training process recruits will often buy policies for themselves and get their friends and relatives to buy policies, too.
Charity Finister, 25, of Baton Rouge, La., was brought into the fold last year by her mother, another recruit. She says her sponsoring agent pushed her to find more prospects. She says she got two people to sign up, and bought a Primerica policy, as did at least one of her friends. But the heavy recruiting focus "left a bad taste in my mouth," and she quit the program after a few months.
Carol Hall, of Redlands, Calif., was recruited in 2009 by her son, Peter, who'd been snapped up by a Primerica agent after he complained online about his custodian job at a fast-food restaurant.
Mrs. Hall, who also has a son with medical problems, says she "kept getting side-tracked" from studying for the licensing exam. Her son Peter got his license, but quit within a year because he didn't have a car and thus had trouble getting his business under way, he says. Mrs. Hall, her husband, Peter and another son all bought Primerica policies. She and Peter say they don't regret racking up recruiting expenses, since they got value out of the motivational tips.
Questions of bias in insurance-licensing exams date at least to 1976, when Golden Rule Insurance alleged in a state-court lawsuit that the test in Illinois discriminated against blacks. In 1984, the Educational Testing Service settled by agreeing to develop new Illinois test forms, without admitting wrongdoing.
Under the pact, the ETS, which is no longer in the insurance-exam business, agreed to reduce the test's reading level to 11th grade, use questions that had the least difference in results between blacks and whites, and release previous versions of the test as study guides, according to FairTest, a nonprofit group that monitors the standardized testing industry. The pass rate for African-American test-takers in Illinois is now within 13 points of whites—about half the gap during the lawsuit years.
Some other big insurers say the tests are fair and don't need to be overhauled. In general, New York Life's minority agents "haven't had problems passing the exam," says Mark Pfaff, a senior executive at the insurer. MetLife Inc. says the main impediment to selling insurance isn't the licensing exam, but rather, the often lengthy and complex process of issuing policies, which can turn consumers off. A MetLife spokeswoman says the company is trying to simplify that process.
Still, regulators are concerned enough with the first wave of demographic results from states that the National Association of Insurance Commissioners in early March agreed to work up best practices for the tests. "Our goal is not to dumb down the exam, but to be sure the exam is geared toward an entry-level position and is culturally sensitive," says Anne Marie Narcini, a New Jersey regulator who will help lead the effort.
Ron Henderson, a senior insurance regulator in Louisiana, says that in response to results showing low pass rates in his state, he's having some employees—those who don't work on life insurance—sign up for the training programs. Depending on how many pass the exam, he'll consider making some changes. He believes his state's exam is fair and, for now, is wary about changing it.
"Primerica's desire to boost the number of agents is admirable," he says. "But should a middle-class, or lower-middle-class, or poor family have a less-prepared agent than a rich one?"