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200901 loma resource-industry_forecast

  1. 1. world insurance future Page 1 of 19 From January 2009 Resource Forecast for 2009 Insurance industry leaders predict what’s ahead for product sales, information technology, customer service, government regulation—and more. By Jennifer C. Rankin What a difference three months makes. During the first nine months of 2008, consumers, corporate execs, and media pundits felt uneasy about a wide variety of economic indicators, but hopeful. That all changed in September, when the credit crunch ballooned into Wall Street’s biggest crisis since the Great Depression, setting into motion an astonishing chain of financial failures and exposing the vulnerable underbelly of the world’s financial infrastructure. On December 1, America’s bi-partisan National Bureau of Economic Research confirmed the U.S. is in a full-blown recession (and has been for a year). Stock indexes continue to yo-yo wildly. And venerable financial institutions are reaching out for federal financial aid, reinventing themselves as commercial banks, laying off tens of thousands of employees, putting themselves up for sale, and more. It’s against this backdrop that Resource asked insurance industry leaders to share their thoughts on what the year ahead holds for sales, profitability, technology and customer service. The executives who participated in our annual forecast included a cross-section of members of the LL Global board of directors plus several industry analysts. They included: Rachel Alt-Simmons, research director, Insurance, TowerGroup Steven Callahan, ChFC, CLU, FFSI, FLHC, FLMI, senior consultant and practice development director, Robert E. Nolan Company Robert W. Clark, president and CEO, Shenandoah Life Insurance E-MAIL CompanyThis page to a friend Al Meyer, CLU, ChFC, executive vice president, American FamilyEnter recipients e-mail: Insurance Group L. John Pearson, CLU, chairman, president and CEO, Baltimore Life Send this page Insurance Company Eric S. Rubin, FSA, senior vice president of Strategic Planning, New York Life Barry Stowe, chief executive, Prudential Assurance Company Susan D. Waring, CLU, ChFC, COO, executive vice president and CAO of Life Affiliates and vice president of Health, State Farm 1/2/2009
  2. 2. world insurance future Page 2 of 19 Insurance Craig W. Weber, senior vice president, Celent John W. Wells, senior vice president of Long-Term Care, Conseco/Bankers Life and Casualty Company Here’s what they had to say: 1. SALES What is your prediction for sales, premiums and profits for our industry as a whole in 2009? What products look particularly strong or weak? CLARK: I believe sales will be flat, total premium will increase slightly and profits will be lower. If the stock market volatility remains high, then variable products will continue to be weak. Term and Medicare supplement products should post some increases. MEYER: We are in the multiline business so my answer will be very different from the life companies. We expect revenues to continue to be relatively flat in the industry with a small increase in the mid to low single digits. WELLS: Sales and premiums should grow modestly in 2009, with profits showing considerable improvement assuming the financial markets stabilize and improve over 2008. It is my belief that the volatility and financial challenges of venerable financial institutions in 2008 will cause consumers to move to more fixed products with guarantees. Combination products will gain share to address the long-term care needs of Middle America. With a change in the White House, Medicare supplement sales should rebound relative to MedAdvantage. STOWE: In 2009 I would expect to the see the aggregate growth rates for Asia moderate somewhat relative to the last few years. Nevertheless the fundamental drivers for our industry in Asia remain very compelling given the demographic changes already underway, increasing levels of personal wealth and low penetration rates of insurance products. With respect to products, there is already a high proportion of regular premium business in Asia relative to single premium and in the current environment this is a real strength. I expect this proportion to increase. With their direct exposure to fluctuations in market valuations, it’s reasonable to presume that unit linked products will come under some pressure in the current market, but there are some mitigating factors; for example, at Prudential Corporation Asia, we have a wide range of funds supporting linked products including some very conservative options. Also the concept of ‘dollar cost averaging’ is well understood. I believe there will always be a high demand for protection and health related products—particularly in Asia, where there tend to be high levels of ‘out of pocket’ expenses associated with medical bills. RUBIN: On the life insurance front, we expect overall industry sales to hold steady. Following the trend in the last two bear markets, variable universal life (VUL) will continue to be flat for the next two to 1/2/2009
  3. 3. world insurance future Page 3 of 19 three years. Whole life from strong companies will do well. Large universal life (UL) cases may pick up if estate taxes are increased under the Obama administration. For annuities, fixed sales will be strong reflecting a normalized yield curve that provides a rate increment on fixed deferred annuities over bank CDs. Variable annuity sales are likely to show weakness with investors concerned about market volatility. We expect continued strength in immediate annuities as people’s desire for safety and guarantees outweighs concerns about the level of interest rates. Profits will continue to be strained for companies with large concentrations of their business in variable products. As a result, we may see traditional variable product players refocusing their efforts on fixed products. PEARSON: ‘Unprecedented’ may be an overused term, but it’s a very fitting word to describe the current economy. Because the industry finds itself in uncharted waters, it’s difficult to predict what lies ahead. However, we can be fairly certain that 2009 will bring lower than expected sales and premiums, resulting in reduced profits. Baltimore Life serves a middle market that requires the guarantees and stability we provide. Many of our customers are feeling financially strained, and they need assurances that their future remains secure. Our business will remain intact by continuing to provide these assurances. On a product level, we’re likely to see more term insurance sales in the coming year. During the time leading up to the recovery of the economy, we will probably see an increase in products that offer premium and cash value guarantees and a reduction in the sale of equity-based products. WARING: It is likely that life insurance sales will be relatively flat for 2009 and fixed annuity sales will be up. There may be slight increases possible in premium. Policy count will continue its long term decline. Variable universal life (VUL) will continue to see significant decreases due to market volatility and recession. Policies with guarantees such as no-lapse guarantee universal life (NLG UL) should perform well. The increasingly price driven nature of term insurance may pose a potential threat to industry profitability. Term insurance will continue to perform well as customers look to keep expenses at a minimum. ALT-SIMMONS: The economic events of 2008 have caused rapid changes in consumers’ behavior and the attractiveness of life and annuity insurance products. These changes impact the ways products are both sold and used, and they highlight the difficulties insurers have in keeping up with and anticipating changes in product demand. For multiline insurers, refocusing distribution channels on the most appealing products in a given market environment is a huge challenge. Rapidly shifting product mix and equity volatility create opportunities but also can create additional long-term risks for insurers. Changes resulting from the financial turmoil of 2008 have affected insurers in the life and health segment in multiple ways, depending on consumers’ ability to pay premiums and maintain policies. As U.S. consumers are squeezed by inflation, rising gas and heating costs, troubled mortgages, deflated retirement plans and savings, lost jobs, and a general lack of confidence in the economy, they will take a 1/2/2009
  4. 4. world insurance future Page 4 of 19 closer look at household spending. Life and health policies formerly seen as must-haves now become nice-to-haves. The result is that insurers will see more individual life policies lapse as consumers direct their spending to other necessities, and the number of new policies issued will decline. For policyholders with significant cash values in their life insurance policies, TowerGroup expects two outcomes. First, policyholders will tap into their policies for loans. Although the outcome for insurers will not necessarily be bad, policyholders will reduce the death benefit amount if the loan is not paid off or will lose the policy’s cash cushion used to pay policy premiums if they do not make premium payments. The second outcome is an increase in life settlements. A life settlement is a transaction between an insured (generally over age 65) and a third party to sell the insurance policy to the third party for a higher value than the policy’s cash surrender value. The third party continues to make premium payments and becomes the policy’s beneficiary. In other words, the third party is an investor that bets on the original insured’s life expectancy. For insurers, this practice increases the potential for disruption to pricing models and lapse assumptions; it also triggers compliance and suitability risk. Fixed annuities are solid. These low-risk investments lock in a guaranteed income rate for the duration of the product (anywhere from one to 10 years) and are an alternative investment to CDs. Fixed annuities are regulated insurance products guaranteed by the insurer, but are not insured by the Federal Deposit Insurance Corporation (FDIC). When fixed annuity interest rates exceed CD rates, as in the current environment, the products will receive a greater percentage of sales. Banks are the primary distribution channel for these products and remain a bright spot for sales as investors seek risk-free investments. However, the turmoil of the life insurance industry is contributing to policyholders’ fear, leaving many potential investors on the sidelines. Indexed annuities are in play. The summer of 2008 created turmoil for indexed annuities as the U.S. Securities and Exchange Commission (SEC) sought to reclassify these insurance-regulated products as securities products, bringing them under the jurisdiction of the SEC. Despite significant backlash from insurance companies, industry trade groups, and distributors, the SEC quietly closed the comment period on September 10, 2008, less than two months after the original proposal, denying industry requests to extend the comment period. Under pressure, the SEC reopened the issue for comment. As of mid- November, the SEC is in the process of reviewing comments. The proposal has some broader industry implications. In light of the economic crisis and perceived lack of regulation—particularly lax enforcement by the SEC throughout this crisis—insurers should expect more regulation and less participation in the regulatory process. Also, the battle will intensify between federal and state regulators over who regulates insurers. New sales of variable products have been slowing month over month for the past year as rocky equity markets keep investors on the sidelines, although existing investors of variable products with guaranteed minimum withdrawal benefits (GMWB) or principal protection features are seeing limited downside. Insurers can run into trouble if the product account values fall below the guaranteed amounts. Insurers utilize hedging strategies or reinsurance treaties to mitigate the risk. The first guarantees were launched in the early 2000s, so these mitigation strategies have not been tested in an extended down market. 1/2/2009
  5. 5. world insurance future Page 5 of 19 Insurers hedge GMWB risk exposure through strategies that use derivatives and futures to offset long-term risk exposure to the guarantees. Hedging costs increase with market volatility, reducing product profitability. There are also increased risks of ‘hedge breakage’, in which a mismatch between assets and liabilities renders the hedge ineffective. With insurers on the hook for variable annuity product embedded guarantees, and the gap between the guarantee and the actual account value widening as equity markets decline, insurers must find ways to shore up their capital base. Several insurers, including Hartford, Genworth, Lincoln and AEGON/Transamerica, are attempting to reorganize as bank holding companies in order to tap into the U.S. government’s Troubled Asset Relief Program (TARP), in part to gain access to additional capital. Also, as market volatility increases, the cost of hedging increases as well. Many insurers are bringing their variable annuity product designs back to the drawing table. Expect to see products in the very near future with reduced guarantee benefits at a greater cost. CALLAHAN: Total life and annuity premiums tend to track to the U.S. gross domestic product (GDP). In recessions, they dip along with the GDP and are likely to continue to track in the same relative direction over time. New sales volume for individual life insurance in terms of application count will likely continue the 20+ quarters of quarter-on- quarter downward trending, with group life trending up as voluntary workplace markets improve. Annuities continue to represent a tremendous opportunity for material growth as Baby Boomer retirement rates accelerate, and will became a major focus of carrier marketing and product efforts. As companies work to penetrate the underserved middle market employer group, sales will reflect a positive shift to increased voluntary benefit programs. Near term, total inforce premium will probably shrink. Trends indicate a material spike in lapses during recessionary times and that, combined with an increase in withdrawals, loans, and partial surrenders will all take their toll on investable assets. Profits are likely to remain lower than prior years for the next few years as portfolios are washed clean of any association with the current financial crisis and the recession runs its course. This will bring attention once again to expense management and the associated value analysis of a company’s operational environment, with the goal being to improve efficiency and nondestructively reduce costs. As the economy recovers and companies start to aggressively roll out new products and capabilities, profits should start to trend higher, returning to pre-recession levels somewhere near the latter part of the five year horizon. Term life and annuities—fixed, immediate and variable—are likely to continue their growth based on the maturing Baby Boomer market segment that is shifting its money from accumulation, or protection, to decumulation, or income, opportunities. Variable annuities have had a good run since 2006, yet they and other equity-based products are likely to experience a bit of a sales hiatus during the market instability. Fixed and immediate annuities hold appeal that should be sustained as the retirement market continues to grow, despite the market performance. In addition, universal life products carrying competitive guaranteed minimum benefits should continue to hold appeal, especially if the guarantees outperform current higher-risk market investments near term. Those who ride the downturn without material investment into new capabilities and products will find themselves lagging their 1/2/2009
  6. 6. world insurance future Page 6 of 19 competitors once the economy turns. Those companies willing to invest during this down cycle will be better positioned for the improving economy, gaining a competitive advantage. 2. FINANCIAL CRISIS How do you think our industry will be affected in 2009 by the current financial crisis? CLARK: Increase in consolidations and lower earnings. MEYER: There will be some fallout, but nothing like we saw in the banking industry. There will be a product impact with some companies rethinking the guarantees built into some products. WELLS: The industry will need to restore consumer confidence while working with regulators and the accounting authorities to address the issue with fair value and accounting for other than temporary investments. I see insurers building capital and liquidity in 2009. STOWE: I believe there will be renewed emphasis on getting the basics right. This means ensuring businesses have a thorough understanding of the risks on (and off) their balance sheets, more rigorous profit testing of products, a sharper focus on sound, long term investment strategies and greater emphasis on the quality of advice to customers. I would also expect to see some consolidation within the industry as some of the smaller or financially challenged players look for an exit. Fundamentally, though, I believe our industry will emerge from the current situation in better shape than ever before. There will always be strong demand for good savings and protection vehicles that meet customers’ needs. RUBIN: Carriers with strong reputations, strong balance sheets, and high ratings will benefit. The risks associated with irresponsible and aggressive pricing will finally get the attention of rating agencies. We believe rating agencies and regulators will look more deeply to uncover risks previously ignored. WARING: The current financial crisis will present many challenges and opportunities for the industry. Many companies will encounter credit losses that are above normal, variable product lines will suffer from a reduction in asset-based revenue and financial management will be a challenge for some. However, these challenging times have also given rise to a ‘flight to quality’ that can be an advantage to highly rated companies. There is no doubt that we will be facing an unfavorable environment in 2009, but the majority of the industry is well positioned to be able to survive the current financial crisis. Past economic recessions and downturns have been shown to have little to no impact on life insurance industry trends. I expect that premium trends will continue to rise while policy count will continue to decline. Specifically for 2009, premium will probably increase only slightly, while policy count will continue to decline modestly. A couple of charts from LIMRA illustrate this trend (see chart at end, Will History Repeat Itself?). ALT-SIMMONS: Close ties with the financial services industry mean 1/2/2009
  7. 7. world insurance future Page 7 of 19 that insurers are not immune to the impact of the financial implosion of 2008. Across the insurance industry, losses to insurance investment portfolios for life insurers are resulting in higher than anticipated investment losses. Fortunately, the industry remains highly capitalized, thanks to strong earnings and regulatory capital structure implemented over the past decade. Despite having capital in excess of regulatory requirements, insurers are looking to solidify their capital bases and investor confidence through stock offerings and private equity investments. Some U.S. insurers are also considering tapping into the U.S. government’s financial bailout package to shore up their capital positions. Many insurers around the world have written down investments in financial firms that have collapsed, such as Lehman Brothers, Fannie Mae, Freddie Mac, and AIG. These toxic investments are causing significant write-downs, negatively impacting earnings. In the life insurance industry, market volatility keeps potential customers and investors on the sidelines. For existing blocks of business, especially variable insurance products with lifetime benefit guarantees, a major decline in equity performance will cause product assets to fall below guaranteed levels as well as reduce the amount of asset-based fee income, which is crucial to life insurers’ profitability. The battle over state versus federal regulatory control of the U.S. insurance industry will reach fever pitch in 2009. Because of the power of the various opposing factions, there will be more talk than substance. Although the initiative will be adopted, implementation will not likely take place until 2010. However, carriers cannot wait for the dust to settle before taking action. When decisions are made, the time frames for compliance are likely to be very short. In Europe, the 2012 implementation of Solvency II guidelines is weighing heavily on insurers. U.S. insurers should expect similarly structured solvency initiatives to be proposed in the next year in the United States. An even more compelling reason for immediate action is that existing regulatory agencies will strengthen their review activities in an effort to prove they are the appropriate point of governance. Carriers will have to consolidate data at the enterprise level so they can prove they understand their risk vulnerabilities and where they have exposure to financial uncertainty. CALLAHAN: Regulatory oversight is likely to increase as greater focus turns to monitoring solvency information. New York State’s plans for increased focus on insurers’ stress test processes is one of many actions to come as states work to show diligence in fiscal oversight. For those that are acquiring bank holding companies or thrifts, their access to TARP will result in even more oversight, potentially in unsuspected areas, at the federal level. The potential reduction in solvency requirements advocated by the ACLI and under consideration by the NAMIC would increase the demand for greater oversight and increase risk as the cushions for market variability are reduced. The momentum for a national charter is likely to increase, although the passage of the charter remains questionable in the immediate future and will depend upon how well companies handle the crisis in terms of solvency. Obviously, investment strategies will have to be adjusted, driving an increased focus on expense ratios and efficiency. Closer attention to distribution channel costs and effectiveness will also increase, as the gradual decline in the total agent population over the last few years drives additional investigation of alternative, or supplemental, channels and products. Economies of scale will create a number of 1/2/2009
  8. 8. world insurance future Page 8 of 19 structural shifts from an increase in mergers and acquisitions to the reduction, sale, or elimination of marginally profitable (or unprofitable) product lines. Activities such as agent conventions and other incentive events are generally misunderstood by people outside of the industry and will come under closer scrutiny as industry watchdogs are now looking to expose these types of events as a sign of continued unnecessary spending while the taxpayers bail out failing companies in general. This may force companies to reward their top producers in a lower profile than usual. WEBER: We’ve all been in ‘duck and cover’ mode for about a month now, but things seem to be settling down. While there are bad news stories out there, particularly for Tier 1 insurers who were aggressive in their investments, there are also some smiles of smug satisfaction on the faces of CFOs who steered clear of the problem investments. As a result, a crop of winners and losers will emerge out of the fog shortly, and we believe that the winners are well positioned to make selective acquisitions, or to simply drive into new markets that the less fortunate companies don’t have the time or resources to defend. 3. TECHNOLOGY What new technologies have the greatest potential to help our industry, and how can they help? CLARK: Straight through processing (STP) on simplified issue products saves time and improves customer satisfaction. MEYER: Mainly the ability to capture and use data for product and pricing differentiation. WELLS: We are finding that advances in voice call recording analytics are helping us to identify opportunities to improve the training of our associates, the implementation of new procedures and the identification of policyholders who need additional help in order to better understand and use their insurance policy. We have implemented a system that records and analyzes all calls—we believe that this will be a very powerful tool for improving our call center operations over the next few years. STOWE: Advances in electronic data collection and transmission continue to improve the efficiency of our business. For example in Malaysia around 70 percent of our proposals are now completed and submitted for underwriting electronically. More generally, the significant increases in the quality and quantity of information available and the advances in computing power mean we are better able to model and understand risks than ever before. We are also better able to collect, store and analyze data relating to individual customers so we can give them more personalized and relevant services. For example, although the risks around data protection and its integrity cannot be underestimated, I believe we are not too far away from people’s medical records and history being stored electronically and being directly accessible by underwriters via the Web. This will considerably improve the efficiency and effectiveness of the process. Looking further ahead advances in our understanding of genetics and the related ability to predict and manage diseases will have a 1/2/2009
  9. 9. world insurance future Page 9 of 19 profound impact on our abilities to predict life expectancies. RUBIN: We believe the Internet is still underutilized by the industry as a whole. This is particularly true when it comes to education about our products; specifically, the value that life insurance and annuities play in one’s financial security. In addition, self-service technologies are vital for companies to develop as more and more customers seek this type of service platform. Automated workflow is a technology that is critical to keeping costs down for carriers. Straight through processing (STP) is also important for carriers that do business with third parties. PEARSON: Newer technologies have the potential to dramatically change the buying experience. They will offer a shorter enrollment process and faster policy issue while greatly simplifying the buying experience. At some point, we expect that buying a life insurance policy will be as easy for middle market consumers as purchasing a mutual fund. WARING: Nanotechnology and biotechnology combined show the greatest promise to impact the life insurance industry. Innovative new treatments for many diseases such as cancer and diabetes show enormous promise and may greatly impact mortality over the next decade. This in turn will impact the cost of life insurance and potentially the customers’ perceived need for our products. The price decreases will be beneficial for the industry; however, lessened perceived risk of death in the mind of the customer may make it more difficult to get consumers to obtain appropriate amounts of coverage. Underwriting technologies that eliminate the need for invasive procedures or streamline the process for obtaining pertinent information will speed up the underwriting process. Data mining will be an important component of how to determine which non-invasive procedures can effectively replace current invasive procedures. Web 3.0, or semantic web, will also have significant impact on the industry. As the software that drives the Internet gets better at understanding language, search results will improve. It is not long before the search for ‘term insurance’ will result in your browser presenting you with a page of information and prices, rather than a list of links. Combining this with improved wireless and handheld computer devices has the potential to dramatically change the way insurance of all types is bought and sold. The consumers of the future will clearly go to the Internet first to research life insurance. This will hold true even if they later decide they would like to speak with an agent. Technology will quickly allow these customers to request to ‘speak’ with an agent via a wireless device using videoconferencing or instant messaging. Our next generation of consumers will be very comfortable with this sales model and will likely demand it of the companies they do business with. Further, the expanded use of electronic signatures and use of biometrics for customer authentication will simplify the sales and servicing processes and help ensure customer privacy. ALT-SIMMONS: An industry trend that will expand in 2009 is the industrialization of insurance operational processes. Insurers are applying methodologies, technology solutions, and best practices from other industries, such as manufacturing. Applying a supply chain management approach to operations shifts manual work from employees to automated business processes. The current focus on 1/2/2009
  10. 10. world insurance future Page 10 of 19 process automation, including the automation of workflow between employees and dataflow between systems, is evolving toward a model in which the work tasks themselves are automated, allowing for the optimization and reallocation of staff resources. Sourcing also continues to provide an alternate cost containment approach for insurers and can result in industry business transformation. Outsourcing takes advantage of the sourcing partner’s economies of scale. The outsourcer services not just one insurer’s process needs but those of other insurers as well—all on a single platform—by delivering common business process services. This scale allows the outsourcer to identify best practices and drive industry processing standards, which in turn reduces transaction turnaround time and decreases cost. Rapid growth in the marketplace for software as a service (Saas) as well as hardware and computing as a service is causing insurers to take a hard look at both applications and infrastructure. These functions often require significant internal expertise to manage and maintain and therefore significant cost. Insurers now realize that they don’t have to keep building on their infrastructure just because they have it, especially if the existing infrastructure fails to meet business requirements. By allowing external providers to take over either application maintenance, storage, or computing power, insurers free up internal IT resources and create scalable capacity. CALLAHAN: The industry is still faced with legacy applications and traditional processing environments to a great extent, which will make investments in improving operational effectiveness a continued focus. Platform enhancements ranging from systems replacement to straight- through processing will remain areas of attention. For the more forward-thinking companies, an investment in predictive analytics for consumer segmentation along behavioral and cultural lines will increase along with the leveraging of this intelligence in managing distribution channel dispersion and demographics. Product design will continue to shift from the mass market chassis to one that allows greater modularity and customization to match diverse customer needs. Improvements in quality and timeliness of service will continue to be an important area of investment. Expanded use of web servicing for agents and policyholders will also grow as companies recognize the efficiencies of these technologies as well as their necessity for benefiting from the future potential of Gen Y. The need to provide electronic servicing and product acceptance and delivery will not replace the more traditional methods, adding complexity to the operational environment as both infrastructures will be required. WEBER: There are all kinds of new technologies out there with potential. But it’s the concepts of modern technology themselves that will drive positive change, rather than one specific technology. Empowering business users, using SOA to increase automation and decrease the pain of integration—those are the sorts of things that will make a real difference. And they’re already well underway today. The revolution began several years ago and is in full swing. 4. CUSTOMER SERVICE How important is customer service to our industry, and how can it be improved? CLARK: Very important. The goal is to provide service 24/7 in a variety of ways—Web sites, voice mail, customer contact centers, video and so on. 1/2/2009
  11. 11. world insurance future Page 11 of 19 MEYER: There is a lot of information available on customers and what they want for products and services. Using metrics in the proper places and driving results in each organization is the way to improve customer satisfaction. WELLS: During these difficult economic times, our customers need to be assured that the insurance protection they have purchased from us is easily accessible and relevant to their needs. That can’t happen without a focus on customer service at all levels of the organization. At Conseco, we have accomplished that focus by consolidating customer service for our two major business segments. With a larger, focused organization in place, we have improved all of our customer service metrics. Of course, technology makes a difference, too, and we have also made significant 2007 and 2008 investments in our call center and customer service representative technologies to accomplish our goal of having superior customer service. We believe that high quality customer service is a fundamental goal for any insurance carrier and we intend to continue improving how we provide it. STOWE: Trust and confidence underpin our industry and a poor customer experience doesn’t only impact the company responsible, it can tarnish the whole industry. Good customer service is absolutely essential to our continued success. Improving customer service is continuous journey that’s shaped by changes in technology and customer behavior. For example, many customers now like, indeed expect, to be able to manage their insurances directly online. However, the key driver for improving service is to ensure the business really makes the effort to listen to and understand what customers tell you they want. At Prudential Corporation Asia we conduct a number of customer focus groups throughout the year and these are incredibly enlightening. Fundamentally though, the key to success in customer service is attitude. Everyone in the business must genuinely care about how their actions impact customers. RUBIN: Critical. In many respects customer service is the clear differentiator. As products become commoditized, customer service will set competitors apart from one another. The development of user friendly, visually appealing statements continues to be an improvement opportunity for many carriers. Moving toward a customer-centric model can make improvements. One stop service shop will be critical to providing top-notch service to consumers. PEARSON: The importance of customer service is a given in our industry. Getting to know customers is the key to success for any business, and the life insurance industry is no exception. Our customers want to feel like we know them personally, so it’s important for all areas of an organization to make customer contact as seamless as possible. This can be accomplished through database integration at all levels, resulting in more efficient customer transactions. WARING: Customer service is seen as critical to most industry executives but is not seen as a differentiator among consumers, according to recent research done by the Insurance Advisory Board. Having said that, it is critically important to offer customers the options they require for self service via the Web and a key component of service is time related. Customers have clearly indicated that when it comes to purchase and renewal decisions, 1/2/2009
  12. 12. world insurance future Page 12 of 19 price and product outweigh customer service (see Pricing Pressure). ALT-SIMMONS: Customer- and broker-facing initiatives continue to be top priorities. For insurers, they include enhancing online servicing capabilities and investing in processes and systems that make it easy to do business. Advertising and marketing dollars will increase as insurers seek to reassure their customers and distribution partners of their stability. They will back up that reassurance by continuing to modernize business and customer service processes. A change in market and consumer demographics is leading to a shift in the way business is done. This dramatic change will continue as the next generation of users turns to the Internet more and more for access to quotes, policies, and advice. This new breed of consumer will force carriers and distributors to respond more quickly, pushing out products and information at a faster rate than they are accustomed to do. Insurers must create automated straight-through processes to facilitate the buying process through many of these new mediums. Insurers that ignore this mandate will find themselves lagging far behind their competitors. As social networking platforms and mobile devices become the standard, having an information-based portal is no longer the minimum required. Interactivity and 24/7 support structures will replace the cobbled together Web portals and functionality that many carriers currently have in place. To achieve this end, carriers must adopt systems that not only create a personal experience but automate that process as well. Distributors must mirror these capabilities to facilitate customer acquisition and service. Increasingly, insurers are using intelligent routing in their call centers to ensure that customer needs are appropriately routed to the right customer representative. Analytics are used to create needs-based solutions, enabling the insurer to offer the right product to the right consumer at the right time. Within the organization, knowledge management systems provide another advantage by providing a forum to capture and disseminate information effectively throughout the enterprise. As a large number of experienced insurance workers reaches retirement, the strain will increase on insurers as decades of knowledge go out the door. The automation of core business and underwriting processes will ease some of the stress, but tools exist that can facilitate the collection of information and collaboration between employees. The pervasiveness of collaboration features in software solutions will help insurers capture and manage knowledge throughout the organization. CALLAHAN: Products are approaching a commoditization status where new benefits and features are quickly matched by other companies—especially those that have recognized the criticality of speed to market and adaptability. This makes the delivery of customer service—where, when, and how the customer wants it— the primary source of sustained competitive differentiation. In other words, customer focus will be the foundation of future growth, particularly as the market becomes more segmented and demanding. Improving customer service will require systems that are designed for individual customer awareness and service tailoring. These technologies must deliver timely service in a manner that is understandable by the customer and in the method preferred—in person, by phone, by the Web, by mobile device, by mail, or all of the above. The need for customer-focused service will also increase 1/2/2009
  13. 13. world insurance future Page 13 of 19 tension with distribution channels as the importance of representing the first impression and the most persistent impression of the carrier continues to escalate. The demand for customer-driven service will drive technological changes that require fast adoption curves, flexibility, and diversity for service enablement that is in sync with the reality that service staff play a critical role in customer relationships and customer satisfaction. This last item will make talent management of service staff a critical focus for aspiring companies. WEBER: The real question is whether insurers are raising the bar on service or not, because their agents and customers certainly are. I would say we’ve made decent progress in the past couple of years, especially in understanding customer expectations and starting to deliver on them. But we’ve got a long ways to go, and companies that don’t get it right will suffer. I would argue that for most lines of business you can’t compete on product and price anymore. You’ve got to compete on service, and the delivery tool to get there is modern technology. 5. PROFITABILITY How can our industry increase its profitability over the long- term? CLARK: Effectively manage all costs, especially distribution costs by responding to customer needs in a variety of ways. MEYER: Responsible assumptions and pricing are a start. Customer retention also has a positive impact on profitability. WELLS: Managing risk margins will continue to be a focus — carefully selecting risks, managing expenses, and controlling claims costs to ensure that we can be successful in the marketplace for the long-term. Key drivers of improved profitability will continue to be product innovation and speed of delivery to the distribution channel. Companies that can efficiently bring disease prevention products with an emphasis on reducing expenses and premium to the market will be best poised to capitalize on increased sales and profits. Focusing on relationship-building strategies with policyholders will also result in increased profits. Enhancing service and communication will increase customer satisfaction, improve policy conservation, and provide opportunities to cross-sell other products to the household. A solid technical infrastructure that facilitates appropriate automation and minimizes timely and high-cost manual processes will make a strong contribution to long-term results and profitability. Expense reduction as an unrelenting focus can contribute by outsourcing functions or tasks that are not core competencies, including data entry activities, certain high-volume back-office transactions, and mailroom activities. STOWE: Obviously sound expense, claims and investment management are important, but I believe good persistency is equally if not more important and this comes down to the quality of sales advice. It’s essential that our industry continues to do all we can to ensure the people get the best products, ones that really do suit their long term needs. 1/2/2009
  14. 14. world insurance future Page 14 of 19 For international businesses, there are opportunities to deliver economies of scale through judicious expansion and also to leverage learning and experience in one market to another. For example for us as part of UK’s Prudential plc we can take product and other expertise from Europe and US and apply this in Asia, enabling us to leap frog stages of the development cycle. RUBIN: First and foremost, appropriate pricing. The industry needs to look beyond the spreadsheet mentality and value the quality of the promise that backs the products we offer. Long term profits and industry financial strength require use of realistic and conservative long-term assumptions. The industry must do a better job at resisting the pressure to use rosy long term assumptions to drive short term sales. PEARSON: Incredible opportunities exist to grow our revenue base. In particular, the upcoming retirement of the baby boom generation and the vast number of uninsured and underinsured support this assertion. The younger generation continues to present an untapped opportunity, and our industry needs to work harder to reach this market segment. We need to account for the unique way that the younger market segment processes information, and create products and practices to take advantage of the opportunities this segment provides. WARING: The industry has a chance to embrace certain technologies to substantially improve acquisition expense. On-line medical records, prescription checks, and other electronic record and data sources will allow for automated underwriting. These same data will provide for improved and increased numbers of underwriting classes as new kinds of data become available. We foresee some companies automatically placing 80% of all business without human expense. Expenses can be held level or lowered by aggressive expense control, outsourcing and managing risk. Alliances may be able to provide access to products more cost effectively than self manufacturing. While we foresee agents being an important part of the process for the next five years, we feel consumers will be comfortable working remotely or virtually with these agents—there will be far fewer agents relative to purchasers and this will also lower expenses. Organically, improving mortality will improve profitability absent some catastrophe such as a flu pandemic or wide-scale terrorist attack. ALT-SIMMONS: The insurance industry will be tested in the upcoming year. Carriers that have been investing in technology to manage risk, optimize price, and be the carrier of choice for the most profitable distributors will come out significantly ahead of carriers who have ignored the calls to adopt. Carriers with the discipline and executive leadership to focus resources, both financial and human, at an enterprise decisioning level will come out of the current economic crisis ahead of the pack, many of their competitors having simply pulled inward and done nothing to manage the external and internal pressures. Operational efficiency and enterprise risk management must become ingrained core competencies. Executives who are able to maintain a long-term vision despite the short-term economic imperatives will be able to accomplish these objectives, but doing so will be a balancing act that will challenge all but the most innovative. 1/2/2009
  15. 15. world insurance future Page 15 of 19 CALLAHAN: Companies must focus on more flexible operational environments that are able to individualize products and service delivery to an increasingly segmented marketplace. Economies of scale, the discipline of focused strategies, and investments in a staged replacement of traditional systems with modularized and more efficient technologies is required. There is a concurrent need for investment in service talent via training, tools, and empowerment combined with new compensation systems that reward differentiating service at the team and department level. Innovation, speed to market, flexibility, efficiency, and value-added service will all be required in order to optimize the opportunity. The rigors of true strategic planning ala’ Michael Porter must be reintroduced and institutionalized. Also needed is a stronger focus on corporate overhead and the benefits of rightsourcing non-value-added services where economies of scale or leading edge platforms cannot be cost effectively achieved in-house. There is an increasing need for innovation and fundamental change in order to succeed in the new age. Industry leaders will therefore be challenged to rethink industry paradigms and bring new approaches to the corner office. n Forecast Highlights Key decision makers from a cross-section of insurance industry companies participated in the 2009 forecast. According to participants: U.S. Sales, Premiums and Profits: In 2009, life insurance sales will hold steady, premium growth will be modest, and profits will decrease. Stock market volatility and the implosion of venerable financial institutions in 2008 have made consumers wary; consequently, variable products will be vulnerable as consumers move to more fixed products with guarantees. On the upside, whole life products from strong companies will do well. Term insurance will continue to do well as consumers look to keep expenses at a minimum. Immediate and fixed deferred annuity sales will be strong. Variable annuity products with guaranteed minimum withdrawal benefits (GMWB) or principal protection features will weather the storm, but expect to see new products in the very near future that offer reduced guarantees at a greater cost. Large universal life (UL) cases may pick up if estate taxes are increased under the Obama administration. Regulatory and Legislative Issues: The battle will intensify over who should regulate insurers—the feds, the states or both. On the product front, the Securities and Exchange Commission (SEC) wants to reclassify indexed annuities as securities products, which will bring them under SEC regulatory control; despite significant backlash from the insurance industry, the SEC is, thus far, undeterred. Financial Crisis: Most insurance companies are well positioned to survive the current financial crisis. Nonetheless, companies will rethink the guarantees built into some products and we will see some industry consolidation as smaller and financially challenged players look for an exit. The risks associated with irresponsible and aggressive pricing will finally get the attention of rating agencies and regulators, who also will monitor solvency information more closely. Technology: The technologies with the greatest potential to help the industry include straight through processing (STP), voice call 1/2/2009
  16. 16. world insurance future Page 16 of 19 recording analytics, self service technologies, nanotechnology, videoconferencing, semantic Web (also called Web 3.0), wireless devices, electronic signatures, and biometrics (for customer authentication). The industry’s biggest roadblocks are legacy applications and traditional processing platforms. Customer Service: Service is seen as critical to most industry executives, but is not seen as a differentiator among consumers, according to recent research. One study found that when it comes to purchase and renewal decisions, price and product outweigh customer service. Long-Range Forecast: Participants also commented on what they think the insurance industry will be like in 10 years. Their views on this will be featured in the March issue of Resource. Chart 1 Pricing Pressure Insurers believe customer service drives differentiation, but customers rank service last. 1/2/2009
  17. 17. world insurance future Page 17 of 19 Chart2.jpg Chart 2 1/2/2009
  18. 18. world insurance future Page 18 of 19 Will History Repeat Itself? Here’s a look at the impact recessions have had on insurance sales and persistency. Source: LIMRA Premium Chart1.jpg Contact Resource at resource@loma.org 1/2/2009
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