The success of electrofinance will be driven by the immense potential benefits to the insurance industry and by the fact that baby boomers increasingly fear that they will not have the funds needed to continue enjoying the same standard of living.
To recapitulate the benefits:
In terms of baby boomers as a driving force, consider that:
With 76 million baby boomers born from 1946 to 1964 and approaching retirement,72 the lack of preparation for the "golden years" represents a potential national crisis in the not-too-distant future. Failure to address this in the short term will only provide fewer options in the future when the bills comes due.
Some investment firms, such as Merrill Lynch, are positioning themselves for the "mature" market by hiring gerontologists as well as establishing a board of depositors aged 5278 to advise them on the needs of older investors. In doing so, it has been noted that "companies with relationships with AARP have a potential gold mine. The Hartford, which has an exclusive license to market insurance to AARP members, got 67% of its premiums paid by individuals paid by AARP members in 1996, totaling $1.3 billion."73
While such firms might be more easily able to offer an electrofinance plan, by itself electrofinance will not entirely solve the retirement crisis. What it can do is make a meaningful contribution for millions of people who can use it to supplement other resources they may have, including social security. In some instances, due to its one-stop shopping simplicity, it may provide the impetus for many who have never previously invested for their retirement to take their first steps in that direction, since the funds will not compete with other current expenditures.74 With additional enhancements to include other savings from sectors such as heating, hot water, and transportation, it has the potential to build a nest egg far in excess of what just savings from electricity could provide.
As enthusiastic as we are for the potential of electrofinance to reduce the risks of climate change through a market-driven mechanism that drives renewable energy, we realize the weaknesses that might prevent this from ever evolving beyond the concept stage. These weaknesses take numerous forms and include many institutional and technical barriers as well as business considerations.
First, lack of deregulation in the electric industry on a nationwide basis could limit the "critical mass" required by insurers to proceed with electrofinance plan development. The limited number of states that have deregulated may not hold a large enough population or concentration to make electrofinance profitable. This does not mean that a national deregulation plan is preferable to state-by-state action, since certain plans offered at the federal level do not offer system benefits charges that could be used to leverage consumer action to promote electrofinance savings.
Second, market research may not reveal that a market exists for such an integrated product as electrofinance, since most people do not think about buying such dissimilar products as electricity and financial products from the same source. Any research with focus groups must be carefully crafted in order to explain fully what is proposed without unduly influencing responses. Indeed, this research may find that there is a total lack of interest by what might be characterized as a "spend for today" instant gratification generation that has little interest in the consequences of not saving for tomorrow.
Third, resistance from regulators, of both insurance and electricity, may place insurmountable walls between the sale of these products. This opposition might be on the grounds that the products are too dissimilar and open to abuse, since it would be difficult to monitor the distribution of funds from the energy sector to the annuity/PV system without sophisticated oversight. Delay in either federal or state financial services reforms that allow insurers to offer more than their traditional services could prevent implementation.
Fourth, even if market research determines that the product is marketable, estimates of start-up costs may indicate that this market might not evolve rapidly enough to provide rates of return as high as other products competing for internal funds. This is particularly true if profit margins are low and transaction costs are higher than anticipated.
Fifth, the penetration of this concept at a mid-level manager position would probably doom it to failure, since few if any mid-level managers in the risk-adverse insurance industry would gamble advancement of their careers on selling such an unconventional product up the line. To have any chance for success, the electrofinance concept must be introduced at high management levels. But even there the risk is that managers may believe that electrofinance is too far from their core business.
And last, even if all the other regulatory and internal company support pieces are in place, the inability of a company's information technology system to handle the multiple billing requirements of electrofinance might become the economic weak point in actually implementing the plan.
Nevertheless, in spite of these weaknesses and barriers we believe that electrofinance—successfully targeted to the highest level of decisionmakers—can succeed in some form. That, however, will take time and money for further research and development of a program that appeals to consumers as well as offers profits to plan providers.