200612 nolan life&annuity-surveyfindings

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200612 nolan life&annuity-surveyfindings

  1. 1. Robert E. Nolan CompanyManagement Consultants Strategies for a Changing Industry Life & Annuity Industry Survey Findings
  2. 2. Life & Annuity Industry Survey Findings Executive SummaryIncreased regulation. Aging systems. and the effective use of technologyChanging demographics. Product remains a challenge, even with 85% ofcommoditization. Intensified competition. respondents saying their companies have aCompressed interest rates. Distribution clear vision, goal, and strategy.consolidations. Life and Annuity insurers arefacing increasingly complex and challenging 3. Leveraging sales and marketing invest-conditions as demands for returns and ments for optimal returns stands out,profitability magnify the pressure on growth. particularly with respect to (1) optimizingIn this turbid realm of an industry in the existing distribution channels, (2)transition, it is not a lack of strategic options enhancing product features to provideso much as the often conflicting diversity of competitive advantage and meet marketchoices available that today’s senior demands, and (3) expanding the tools,executives are faced with sifting through. techniques, and training of the existingWhere to best apply the limited available field force.resources of time, money and people is nowmore than ever a decision process requiring 4. Utilizing service as a competitive advan-the greatest of care and focus. tage to offset the convergence of product features and pricing stands out as one ofThe Robert E. Nolan Companys Life & the key differentiators of forward-thinkingAnnuity Industry Survey Findings suggest companies, with almost unanimousthat strategic priorities are starting to shift respondent agreement that speed offrom an internal, operational focus to an service will be a strategic imperative.external, market driven one. With this shift, Timeliness was closely followed by theexecutives are challenged with the need to need for access methods from phone, Web,balance the tradeoffs between service, e-mail, and voice response to traditionalsupport, product features and returns. Within written requests.this context, five strategic trends stand out asdifferentiators in the years ahead: 5. Intensely focused technology strategies encompassing key service platforms like:1. Shifts in demographics paired with chang- (1) e-signatures, (2) document manage- ing customer expectations demand intensi- ment, (3) Web self-service, (4) multi- fied attention for growth-oriented compa- product common front-ends, and (5) nies, with 95% of respondents profiling consolidated commission systems. On the the aging of America and 88% the expan- other hand, while it remained a limited sion of ethnic markets as each demanding strategy, only 16% of respondents felt they attention. were likely to outsource any key functions within the next three years.2. Translating strategy into action specifi- cally in the areas of expense management Robert E. Nolan Company
  3. 3. Life & Annuity Industry Survey FindingsTable of Contents Page• Breakdown of Survey Respondents ................................................................. 1• Company Self Assessment ................................................................................ 2• Industry Trends .................................................................................................... 5• Competitive Landscapes ................................................................................... 8• Sales and Marketing ........................................................................................... 10• Operations ........................................................................................................... 13• Technology .......................................................................................................... 16• Outsourcing ........................................................................................................ 20• Next Steps: Strategies in Transition ............................................................... 22• Background & Acknowledgements ................................................................ 23 Robert E. Nolan Company, Inc. Management Consultants 17746 Preston Road 90 Hopmeadow Street Dallas, TX 75252 Simsbury, CT 06070 (877) 736-6526 (877-RENOLAN) www.renolan.com info@renolan.com Robert E. Nolan Company
  4. 4. Life & Annuity Industry Survey Findings Breakdown of Survey RespondentsBased on answers to our self-classification A broad diversity of business line blends, with aquestions, we see that respondents repre- solid majority Life and Annuity, followed bysented a healthy mix across levels, roles, and Single Line companies and then Propertybusiness size. Casualty, is represented.Responses received represent a broad mix of Allocation of Responsesall key functional areas... by Business Line PC Primary, Allocation of Responses Multi-line by Department 14% Single Sales & Operations Line Only Marketing18% 23% 12% Life/Annuity Blends IT 16% C-Level 5% 7% 7% 5% 24% Execs 69% U/W Finance Staff Life/AH Blends...with almost all respondents in senior leader-ship positions (51% at EVP or higher andalmost 80% at the officer level). Stock and mutual companies were equally repre- sented. Based on annual premium revenue: Allocation of Responses by Officer Level • A little over half (54%) of the respondents were under $500 million a year, Other AVP/ C-Level Director 15% 7% 29% • Just over a quarter (25%) were in excess of VP 27% EVP/SVP $2.5 billion, and 22% • Leaving the remaining fifth (20%) between $500 Million to $2.5 Billion. Stock and Mutual Companies Company No. of Home Under $500 $500 Million to Over $2.5 Grand Type Office Staff Million $2.5 Billion Billion Total • 500 or fewer 27% 2% 29% • 501 to 1,000 2% 2% 4% Mutual • 1,001 to 2,000 2% 2% 4% • 2,001 or more 2% 12% 14% Subtotal 29% 8% 14% 51% • 500 or fewer 17% 3% 20% • 501 to 1,000 5% 3% 8% Stock • 1,001 to 2,000 3% 3% • 2,001 or more 6% 12% 18% Subtotal 25% 12% 12% 49% Grand Total 54% 20% 26% 100% Robert E. Nolan Company 1
  5. 5. Life & Annuity Industry Survey Findings 1. Company Self-AssessmentWhen asked about the strategic direction of would not decrease. The eye-opening statistictheir company, respondents gave a reassuring is almost 20% of respondents are not aware ifresponse. Eighty-five percent (85%) of the their company has a strategy.respondents said their companies have a clearvision, goal, and strategy: Insight: The competitiveness of the marketplace, driven by both consumers N Has clear vision, goal and strategy for and investors, continues to demand where it wants to be in three years focused management of expenses. This 3% requires a clear understanding of the current situation, desired results, and 85% 12% actions to be taken. Absent a connection between expense ratio, action plan, goal, Strongly Agree / Agree and strategy, companies are susceptible to Strongly Disagree / Disagree higher costs, noncompetitive prices, and, Dont Know ultimately, a gradual erosion of market share and/or profitability.At least for the companies involved in thesurvey, the importance of clarity in purpose In the same vein, only slightly more than halfand direction is apparent. However, answers to the respondents (54%) felt that processthe follow-up questions showed that trans- improvements were being used effectively tolating strategy to action in areas such as generate measurable results. Twenty-sevenexpense management and the effective use of percent (27%) said their companies were nottechnology remain a challenge: using process improvement effectively to reduce expense, compared to the almost 20% N Effectively uses process improvement who had process improvement projects but to generate measurable results did not know if they were effective. 54% 27% 19% Insight: The use of continuous improvement, especially in operationally intense environments like insurance N Expense ratios will decrease measurably over the next 3 years companies, plays a key role in improving cost-effectiveness. With no continuous revalidation and redesigning of processes, 50% 31% 19% the overhead associated with services provided can grow significantly. Strongly Agree / Agree Strongly Disagree / Disagree Dont Know Given the competitive environment, in three years would you rather be leading a companyWhen asked the same question in 2001, 75% that has been consistently reducing expensesof companies felt that expense ratios would and improving processes or one that hasn’t?decline significantly for successful companies For the half of the companies without clearover the next three to five years. In the current expense and service strategies and goals, thissurvey, that percentage dropped to 50% while might be the time to reconsider yourmore than 30% believed their expense ratios priorities.2 Robert E. Nolan Company
  6. 6. Life Annuity Industry Survey FindingsResponses to questions about technology while slightly fewer (57%) stated that ITstrategies profiled a similarly interesting generates measurable results. However, 38%inconsistency: either did not know or felt that their IT departments were poorly aligned with theN Uses technology effectively as an business strategies. Equally troubling is that enabler of competitive advantage 43% either did not know or did not believe IT 45% 24% 31% generated real results. Even more dramatic is the gap when it comes to technology as an enabler of competitive advantage, with onlyN Effectively uses IT to generate measurable results 45% agreeing and 55% either not knowing or not believing that IT is an effective enabler of 57% 23% 20% competitive advantage.N IT Department is well aligned Insight: Aligning IT with the busi- with the business ness continues to remain fundamental to effective realization of marketplace and 61% 12% 27% operational benefits. Strategic alignment requires significant information sharing, broad-based involvement, and, above all,N Plans on making significant tech investments to remain competitive common goals and rewards. 65% 21% 14% !!! When asked What long standing Strongly Agree / Agree Strongly Disagree / Disagree practices do you believe are likely to Dont Know require revision in the next 1 to 3 years? ..............Almost two-thirds (65%) of the respondents How we price, underwrite and service ourplan to continue their investment in products…changes have caused us to re-technology, offset by a significant percentage think the services we offer.(35%) who are uncertain or do not plan to VP of Underwritingcontinue their technology spending. This is a ..............surprising finding given the investment and Growing shift to direct / retail for salesresults of the past few years. When we asked a and service, further impacting brokersimilar question in 2001, more than 90% compensation practices. Head of Product Managementpredicted that successful life companies ..............would invest in new technologies to remain Product-focus will begin to change tocompetitive. solutions-focus...change may be very rapid once it takes hold.A good majority (61%) said that their IT Sr. Manager, Sales/Marketingdepartments are aligned with the business !!! Robert E. Nolan Company 3
  7. 7. Life Annuity Industry Survey FindingsConclusion: The existence of a clearly communicatedGiven the importance of information tech- vision, goals, and strategy helps a companynology as an enabler of growth, profitability, focus on a collaboratively adopted and cost-and competitiveness, this disparity of results effective transition to their future businessconcerns us—it represents a potential model. Translation of these concepts intodisconnect in a critical business component. actionable plans with measurable results is at the crux of growth and profitability. Given theThis is especially true considering the opinions competitive nature of the industry andexpressed in the Technology section of the tightening profit margins, managing expensesurvey. Respondents expressed a strong need ratios must be a key goal of any strategyfor IT to act as the foundation upon which implementation, which means a high-profilecompetitive advantage is built going forward. linkage to actions and their impact across theThis need becomes extremely acute as company. Failure to tie, in some way, theproducts become more commoditized and impact of strategy execution to expense ratioprofit margins narrow. Companies should could easily constrain paybacks and limitconsider investing in the necessary structure future opportunities. Along these same lines,and communications to ensure that they are the use of technology and process improve-clearly identifying, communicating, and ment to enhance service delivery and cost-supporting the link between IT, results, and effectiveness must play a core role in anycompetitive advantage. ongoing strategy. Life Industry Strategy Map Customers Customer Market Market Market Market Market Focus Segment Segment Segment Segment Segment Distribution Independent Alternative Global Strategies Producers Channels Alliances Integrated Systems Marketing Niche Relationship Integrated Strategies Focus Management Financial Services Better Service through Process Innovation Technology Service Strategies Expense Reduction through Process Improvement Technology Enterprise Organization Structure Management Structure That is Accountable, Responsive, Agile4 Robert E. Nolan Company
  8. 8. Life Annuity Industry Survey Findings 2. Industry TrendsOverwhelmingly, respondents indicated that An almost equally significant trend is thedemographic change was the one trend that growth in diversity of ethnic markets, eachstands above all others. Each demographic bringing language and presentation require-change shown was rated highly as a significant ments that span distribution, call center,opportunity for growth: correspondence, and all other major functions involved in selling to and servicing insuranceN Low- to middle-income markets buyers. Hispanics are the group that respondents pointed out as the fastest growing 63% 18% 19% underserved population, followed closely by Asians. With more than one foreign languageN Work site and bank sales will be a involved, the complexity of the situation is significant opportunity for growth compounded. 68% 10% 22% Insight: The importance of the ethnic diversity trend is clearly recognized, yet the industry as a whole has made onlyN Ethnic markets slight progress in improving its ability to service the various segments. Solutions 88% 7% 5% range from significant internal IS investment or outsourcing on the high endN Aging U.S. population as an industry 2% to minor translation of marketing impact driving change materials without supporting multi-lingual service capacity on the low end. The 95% 4% most successful companies will be the ones that offer the full spectrum of multi- Strongly Agree / Agree lingual materials and service capacity. Strongly Disagree / Disagree Dont Know While lower- and middle-income segments have been recognized in the past as Insight: Changes in national demo- underserved markets, more companies are graphics resulting from the aging U.S. viewing them as a viable source of new population are bringing significant oppor- customers. This recognition of opportunity, tunities and challenges to the industry. The though measurably behind that of the aging payout and maturity stages of products, as and ethnic markets, is significant. For lower- well as features and benefits tailored for an to middle-income customers, respondents older population, should be key areas of recognize distribution through work site sales concern in product design. Furthermore, channels and sponsored groups each represent with the diminished value of government- a cost-effective opportunity for growth. sponsored programs like Social Security, the need for privatized wealth creation, Insight: The margins available in protection, and management will provide these markets, however, are so low as to tremendous opportunity. Successful insurers require extremely efficient distribution will need to have available a diverse suite and service, bringing additional chal- of products covering the full range of lenges to the table. However, for the most retirement concerns, such as cash manage- part, the same basic product structure and ment, lifestyle protection, wealth transfer, features can be leveraged across these and inflation protection. markets. Robert E. Nolan Company 5
  9. 9. Life Annuity Industry Survey FindingsThe second most significant industry trend Even less known is the potential impact ofidentified involves compliance-related items: class-action lawsuits. Litigated contentionsN Class action suits will significantly have centered on a range of issues, from fee change how companies market disclosures to agent compensation agreements. Historically, there has been a 36% 19% 45% sense of comfort in the industry’s ability to self-regulate, but this has changed with theN Tax reform (estate or flat) and lifetime frequency and size of penalties in recent savings accounts major impact class-action lawsuits. In 2001, 70% said that class-action suits would change the way 44% 21% 34% companies market and sell products. Today, while a third of the companies are concernedN Privacy issues will require increasingly about the risks these lawsuits represent, the larger investments largest percentage (45%) are unsure what the outcome will be. 84% 4%12% !!! When asked the most important trend(s)N Cost of compliance with regulations will continue to increase facing the industry over the next three years, there were some varying 88% 5% 7% responses. .............. How to make life insurance more Strongly Agree / Agree Strongly Disagree / Disagree affordable and reduce the cost of Dont Know processing insurance claims, new business and service. CIOGiven the formality and structure of the ..............regulatory environment, it is easier to estimate Affordable and simple to understand Lifethe impact of compliance with regulations and Health Insurance Products that meetsuch as SOX, the Patriot Act, anti-money the needs of an aging population.laundering, and privacy laws. The result, it is Medical Director ..............agreed, will be that compliance will cost more Will consumer driven healthcare resolvein systems, staff, and processes. Less clear is inflationary healthcare expenses? willthe impact of possible tax reform, where employers get out of providing healthcarerespondents are spread across “agree,” to employees?“disagree,” and “do not know.” VP Sales/Marketing !!! Insight: The lack of consensus regarding tax reform may be due to diver- gent marketing strategies, with some concentrating on wealth protection, others on basic income re-placement products, and so on. In general, tax reform remains on the radar but appears too unpredictable to motivate any significant near-term product design or marketing strategies.6 Robert E. Nolan Company
  10. 10. Life Annuity Industry Survey FindingsConclusion: changes in processes and associated increasedThe survey identified three significant costs will be incurred as companies move todemographic opportunities that companies satisfy the new requirements. Less clear areshould act on: potential changes in the estate and income tax 1. The graying of America, arenas, where potential changes are too 2. Growth in ethnic populations, and uncertain to drive product changes at this 3. Lower- and middle-income markets. time.While not new, the aging of America is a !!!trend that companies need to address quickly. Across all company respondents, thereProduct features as well as distribution and was one very consistent messageservice techniques need to match the needs of regarding future marketing and productthe senior market. considerations that had to be taken into account – the words were written aLess clear is the impact of ethnicity, clearly a number of different ways, but all pointed to the same situation:large and growing market, but one fraught ..............with high sales and support costs and complex population aging...growth of lifechallenges. A careful demographic evaluation settlements...aging of the population...of this market should be part of every aging of U.S. population...retirementcompany’s plan; the evaluation should look income management as baby boomersfor a match between capacity, distribution, retire...aging U.S. population and theservice, and segment. market opportunities it creates...aging population and wealth transfer...agingRegarding compliance, careful cost manage- population...boomers aging andment is required to ensure that overhead does retiring...aging population with longer lifenot grow inappropriately as a key element in spans and better health...fulfilling regulatory obligations. Growth in !!!regulatory based compliance will drive Common Drivers of Value Improvement Cutting or containing Cutting or containing Enhancing channel Enhancing channel the tail of the product the tail of the product profitability and profitability and portfolio portfolio throughput throughput Managing expenses Managing expenses Tapping the hidden Tapping the hidden Life and Life and through automation through automation value in current value in current Annuity Value Annuity Value and process and process customer // channel customer channel Improvement Improvement redesign redesign relationships relationships Manage financial Manage financial Profitable growth in Profitable growth in performance on an performance on an premium premium ongoing basis ongoing basis Source: Nolan presentation to LIMRA Marketing Forum on Risks and Challenges in our Industry Robert E. Nolan Company 7
  11. 11. Life Annuity Industry Survey Findings 3. Competitive LandscapesOn the competitive front, most respondents The impact of merger and global expansionsee industrywide refocusing as likely: trends is less clear: Niche companies will be more Target mergers and acquisitions will successful than full financial services improve economies of scale 17% 31% 24% 59% 49% 20% Strongly Agree / Agree Dont Know Strongly Agree / Agree Dont Know Strongly Disagree / Disagree Strongly Disagree / Disagree About half (49%) of respondents believe Divestitures, discontinued products will grow as companies focus on returns mergers and acquisitions will improve economies of scale and the other half are either unsure or believe the opposite—that 29% 66% bigger is not necessarily better. 5% Global expansion of U.S. companies will be a major source of growth 33% 37% Strongly Agree / Agree Dont Know Strongly Disagree / Disagree 30%The message here is that many companies willbe concentrating their efforts on their bestlines and eliminating marginally profitable Strongly Agree / Agree Dont Knowancillary lines. For those companies, a back- Strongly Disagree / Disagreeto-the-basics approach supersedes the goal tobe a financial supermarket. A majority also Another interesting and unclear response isstate that niche companies will be more the almost completely even split on the impactsuccessful than companies offering full of globalization, despite the continuedfinancial services. Two factors probably incursion of non-U.S. companies into the U.S.underlie this response: the company’s current industry. This response seems to be a result ofposition in the market (specialized vs. broad) the surveyed company’s strategy, with about aand its distribution system. third of respondents working on global expansion (possibly with a partner company), Insight: Companies with career chan- a third content to remain domestic, and a third nels (and particularly those covering small still uncertain whether it’s necessary to expand towns and rural areas) may need a broader into international markets. product portfolio than those marketing mostly through brokers, whether they man- ufacture all lines or private label a few lower volume lines to enrich their product sets.8 Robert E. Nolan Company
  12. 12. Life Annuity Industry Survey FindingsTwo long-standing competitive threats now Banks and other non-insurance entitiesseem more uncertain than they used to. will become major threats 19%In 2001, 50% of respondent felt that the 34%Internet would not destabilize the profitability 47%of life companies’ traditional distributionchannel. Today, this has dropped to 22%believing that the Internet will not have adestabilizing effect. Strongly Agree / Agree Dont Know Strongly Disagree / Disagree Internet sales will destabilize traditional channel profitability Today, only 19% feel this is a threat and 15% almost half (47%) do not see these businesses as major threats. 63% 22% Conclusion: From a marketing perspective, companies need to make a strategic decision between Strongly Agree / Agree Dont Know being either niche-focused or broad market Strongly Disagree / Disagree based, possibly even international. Respondents are split between the impact ofA majority (63%) remain uncertain of whether globalization and merger and acquisitions.traditional channels are threatened by online That said, the majority of companies will bedistribution, a concern that’s existed since most successful by focusing on their coreweb-based sales first arrived on the scene. competencies with a clearly defined marketThe ultimate impact remains to be seen. and strategy, eliminating marginally profitable ancillary lines. A majority also state thatWe see a similar shift in attitude regarding the niche companies will be more successful thanentry of banks and other non-insurance companies offering full financial services.companies; compared to the Internet, Interestingly, there is less concern over thehowever, respondents are less concerned with impact of banks and Internet on distribution.this development. In 2001, about 50% ofexecutives believed banks and other non-traditional competitors would be a majorstrategic threat over the next three to fiveyears. Robert E. Nolan Company 9
  13. 13. Life Annuity Industry Survey Findings 4. Sales and Marketing StrategiesAnswers to questions about product strategy N Build private label products foroffer both consistency and an interesting distribution by other carriersdisparity between market trends and likelystrategies. In interpreting the results, keep in 40% 43% 17%mind the changes in market demographicspreviously discussed. Very Likely / Likely Not Somewhat Likely N Increase marketing of variable Dont Know investment-related products 41% 51% 9% As a strategy, manufacturing products for other carriers to distribute had split results in the survey. The 40% of companies who N Increase focus on retirement/lifestyle reported being likely to do this was offset by products (annuities) the 43% that said they were not likely. 73% 16% 12% Insight: While the virtual tie is a little surprising, the overall result indicates that N Enhance existing products with unique some companies are pursuing product features and/or reduced charges manufacturing as a core strength and others might follow another core strategy, 83% 3% 14% such as distribution. Very Likely / Likely Not Somewhat Likely Dont Know N Expand into PC or AH lines either directly or with private labelsLeveraging existing products takes advantage 24% 68% 9%of market presence, distributor expertise, andoperational infrastructure. Increasing theemphasis on retirement and lifestyle products, Very Likely / Likely Not Somewhat Likelyparticularly products like annuities which Dont Knowmeet the payout needs of seniors, indicatesadaptation to changes in the marketplace. Theinteresting disparity involves the caution For those carriers not already in the business,shown with respect to variable investment expansion into Property and Casualty orproducts, a recent core element in the rapid Accident and Health lines was not a supportedgrowth in annuity product portfolios. strategy, with 68% saying “not or somewhatAlthough over 40% indicate a likelihood of likely.” Most of the supporting votes (24%)increased marketing of variable products, the came from companies already in this business.“not likely” answers are over 50%. Insight: Consistent with the overall Insight: Significant barriers to entry theme of staying focused on core of variable products, including a higher competencies and leveraging existing cost of entry, intensified regulatory expertise and infrastructure, expansion scrutiny with associated distribution risks, into an entirely new line falls low on the and greater investment management and list of preferred strategies. servicing complexity, may keep carriers out of the market.10 Robert E. Nolan Company
  14. 14. Life Annuity Industry Survey Findings N Pursue aggressive investment The three primary distribution strategies practices - shorter duration and hedging indicated by respondents were: 1. Providing online access to production 24% 55% 19% (84%), 2. Web conferencing and e-learning (81%), Very Likely / Likely Not Somewhat Likely and Dont Know 3. Expanding the existing field force (74%).Another strategy related to product perform- These strategies build on current resources andance, aggressive investment practices, core competencies while leveraging currentreceived only 24% “likely” votes, with the technologies, infrastructure, and expertise tomajority (55%) saying “not or somewhat drive growth.likely.” Overall, investment strategy remains N Increase Internet-basedconservative for the time being. products and salesA at distribution strategies further sup- Insight: It is likely that these changes 46% 42% 12% look will be gradual, selective, and very closelyports the leveraging of existing resources as watched as their impact on product,the main direction for companies to pursue. N Increase direct marketing efforts pricing, and profitability is measured over (inbound and outbound phones, mail) time. 52% 28% 21%A look at distribution strategies furthersupports the leveraging of existing resources Very Likely / Likely Not Somewhat Likelyas the main direction for companies to pursue. Dont Know N Expand existing field force When asked in 2001 about Internet sales, only a quarter of respondents (25%) believed that, 74% 8% 17% as need-based products, Life, Annuity, and 85% Disability would sell well over the Internet. N Integrate use of web conferencing and Today, 46% of respondents plan to increase e-learning into field mgt. practices Internet-based products and sales. That is almost balanced by the 42% not likely to 81% 10% 9% follow that strategy. Companies are still almost as likely to use direct marketing (phones and N Provide distributors access to web- mail) to reach new customers (52%). based prod., commission client info. Insight: Companies show a willing- 84% 7% 9% ness to continue to supplement their sales 12% efforts via these alternative distribution Very Likely / Likely sources, although responses indicate a Not Somewhat Likely stronger preference to support their field Dont Know forces. Robert E. Nolan Company 11
  15. 15. Life Annuity Industry Survey Findings N Incorporate full commission disclosure companies. Inevitably, these strategies force a into sales practices choice between being ‘leading edge’ versus ‘fast follower’ in deploying these technologies, 41% 22% 36% because not providing equal or better functionality will erode a company’s com- Very Likely / Likely Not Somewhat Likely petitiveness from a distributor’s perspective. Dont Know As a result of the graying of America, there isMore surprising is the response on the need to also a recognized shift to retirement andincorporate full commission disclosure in sales lifestyle protection product features, althoughpractices. Despite intensified pressure on sales insurers are approaching growth in variablepractices, suitability, and disclosure, only 41% products with greater caution. Other strategies,indicated this as a strategy likely to be pursued like Internet and direct mail, continue to play aover the next three years. role, although at a much lower priority than existing methods. Lastly, while there is Insight: This might be an indication of increased attention to the use of more a general desire to be a reactive follower on aggressive investment management practices this topic as opposed to a change leader, particularly given the potentially and the need for full commission disclosure, controversial nature of disclosure and the both strategies rank the lowest of all reviewed. impact it could have on distributors if not done consistently through the industry. !!! In response to describing the greatest challenge(s) facing Sales andConclusions: Marketing executives, the responses allThe focus is on (1) optimizing the existing carried a consistent theme:distribution channels and (2) enhancing ..............product features to provide competitive Agent recruiting, retention…aging distribution...cost of distribution...effectiveadvantage and meet market demands while distribution…figuring out the appropriate(3) expanding the tools, techniques, and blend of distribution...allocatingtraining of the existing field force. Consistent investment and resources over competingwith the strategies depicted in the Operations channels…finding and keepingand Technology sections of this survey, distribution…dwindling sales force…growing the investment in the Web combined recruiting and retaining qualitywith better use of the Web’s portfolio of tools producers…retaining good reps…sales productivity...reducing agent turnover.that enhance distribution channel effectiveness !!!is clearly a top priority at the respondents’12 Robert E. Nolan Company
  16. 16. Life Annuity Industry Survey Findings 5. OperationsOperationally, respondents are working across A. Consolidate similar functions acrossthe board on service delivery, technology, and channels and products for economy ofstructure. Of all the operations strategies, two scaleemerged as clear winners. Almost unani- B. Adjust consumer service standards tomously, speed of service is seen as a strategic reflect customer tiers based on profitimperative (97%). Speed is closely followed C. Adjust producer service standards toby providing more service access methods reflect contribution to profits (tiered service)such as phone, Web, e-mail, VRU, and soforth (93%). 10% 15% A. Accelerate service delivery (time 15% needed to complete a transaction including NB) 65% 60% 55% B. Provide more service access methods (phone, Web, e-mail, voice response) 2% 7% A B C Very Likely / Likely Add In Somewhat Likely 95% 86% Insight: Like the credit card industry’s much-touted tiers (e.g., silver, gold, platinum), service tiers allow a company to pursue two separate approaches according A B to unique cost structures. One strategy would be to reduce the services provided Very Likely / Likely Add In Somewhat Likely to less profitable consumers or producers, using the current level as the “top tier” and creating a lower-tier service. This would Insight: A move towards self-service allow a company faced with expense is evident in this response and supported constraints to preserve its service-based by recent industry trends. The Web and competitive advantage for the top tier Internet act as enabling technologies, with while generating savings in the broader, the expanded access provided driving the less profitable groups. The second approach, complicated by the cost factor, industry toward faster delivery of service. would be to create a new, higher tier with added services above the current level. ForThe second most popular strategies looked example, a “concierge” service line for personalized support, direct access,first at the cost-effectiveness of service expanded hours, and higher service levelsdelivery by combining functions to gain (such as faster answer time) might beeconomies of scale (75%), tied with service created. One drawback to this approach istiers based on profit (consumers) (75%) and that, unlike the first approach where service is reduced for all but the topfollowed closely by contribution to profits agents, creating a new, higher service tier(producers) (70%). would add to costs. Robert E. Nolan Company 13
  17. 17. Life Annuity Industry Survey FindingsThe other strategies rated by the survey Some form of consolidating telephone serviceparticipants were spread rather evenly, operations will be undertaken by a majority ofreflecting a diversity of planned approaches: respondents (58%). Still, companies remain A. Align operations with customer split on the tradeoffs in combining distributor markets (employer, individual, and consumer telephone service operations, wirehouse) with the typical determinant being whether B. Increase hours and days of service most of the calls are sales support and new availability (move towards 24/7) C. Consolidate distributor and consumer business (keep them split) or service-related telephone service operations (combine them). Organizational questions of D. Align operations with channels of this nature remain unique to each company’s distribution (e.g., career, bank, etc.) distribution systems and contact center (computer-telephony) integration capabilities. One action to be taken is consolidating physi- 14% 14% cal locations and relocating to a lower-cost 17% 14% area. Fifty-one percent (51%) of respondents 51% either were not likely to pursue this strategy or 50% 41% 40% did not know. If you added “somewhat likely” to the total, the total goes to 68%. Only 10% A B C D indicated this as a very likely strategy. Very Likely / Likely Add In Somewhat Likely !!! Technology and effectivenessThe relatively close ranking of two distinct remain a consistent source oforganizational strategies—by channel (54%) competitive advantage, as indicatedand by market (65%)—indicates that these by the consistency of responses to thesolutions are custom to the company and question regarding the top priority forbased on other existing product, channel, or gaining competitive advantageservice strategies. The interesting finding is through service.that collectively, most companies are .........reorganizing in some fashion to improve costs, Straight through processing….service, or both. technology that meets targeted consumer needs at cost effective price… use ofOver half (64%) of the companies surveyed technology… technical automation andare moving towards expanded service hours. process improvement… use ofThis works in conjunction with expanding technology... economies of scale and useaccess through Web, e-mail, and interactive of technology.voice response previously mentioned (93%). Reduced cycle time… reduced costs… Insight: : Giving broader hours a lower better service… faster time service…. priority than broader access is based on the delivery efficiency… speed to market... fact that easy self-service options reduce superior service. the need for expanded direct service. !!!14 Robert E. Nolan Company
  18. 18. Life Annuity Industry Survey FindingsConclusion: service tiers which provide a sense of privilegeService as a competitive advantage is coming to top producers and high-value consumers isof age as product features and pricing dif- becoming more prevalent, although secondaryferences converge. Speed and simplicity are to the price/service tradeoff.two key measures of effective delivery on thisstrategy. We know that some companies have The top priorities for gainingyet to venture into the self-service arena of the competitive advantage through service will be:Web, and many have not expanded their callcenters into contact centers that handle calls, 1. Training for consistent deliverye–mail and even instant messaging. The lack of service,of strategies and actions in these venues arerisky and could cause these companies to fall 2. Having adequate technologiesbehind as they fail to meet producer and to effect good service, andconsumer expectations, compromising growth 3. Monitoring to make sure goodand market share potential. Similarly, the con- service is delivered.”solidation of functions that bring economies ofscale to the company and one-stop shopping to – Insurance Company Presidentthe consumer remains a solid strategy. Finally, Service / Cost Levers Supply-side Supply-side Demand-driven Demand-driven New Service Delivery New Service Delivery Improvements Improvements Improvements Improvements Models Models CONTINOUSLY TUNE portfolio WORK ACROSS FIND “New Ways” THE FACTORY THE BUSINESS OF DOING BUSINESS • Continuous efforts to lower • End-to-end understanding of • Leverage new service costs, improve quality, develop cost and value models, e.g., self-service people • Reinforce affordability mindset via web, STP – Capture scale • Work w/products to make • Rethink underlying – Streamline processes better, more informed choices business model – Automation around design • IT innovations (e-signature) – Best Practice Adoption • Increase advance planning of • Creative sourcing and JVs – Raise average productivity new product rollouts – Eliminate layers / increase • Revisit services and service spans of control levels delivered – Sourcing to improve unit cost • Charge for services Cost / Service Cost Cost / Service Primary Impact Source: Nolan presentation to IASA on May 2006, Session 106 Tackling the Ongoing Expense Challenge Robert E. Nolan Company 15
  19. 19. Life Annuity Industry Survey Findings 6. TechnologyContinuing the direction of the past several Trailing close behind these three technologiesyears, technology remained the most were two almost just as highly ranked thatconsistently supported strategy surveyed. That attempt to simplify the core processessaid, it is important to recognize that involved in issuing insurance and payingcompanies often express desires to implementnew technologies prior to the reality of agents:discussing organizational priorities and A. Common consolidated front-endsresource constraints. It is easy to see favorite (simple multi-product entry)solutions without the constraints of a cleartimeline for implementation or resource costs B. Consolidated commission systems with accelerated electronic paymentto add perspective. Adding these realitiesmore often than not significantly reduced the 16% 17%number of solutions that were actuallyimplemented.Respondents ranked three technology 83% 80%strategies significantly above the rest: A. e-Signatures and online applications B. Document management, work flow and imaging A B Very Likely/Likely Dont Know/Somewhat Likely C. Web self-service for distributors and/or customers (portals) 5% 11% 15% 1. Common consolidated front-ends to address the problems of multiple legacy systems associated with aging product 88% portfolios (83%), and 95% 85% 2. Consolidated commission systems tied to accelerated electronic payments (80%). The next three technology strategies were still A B C highly ranked, with over 70% of respondents Very Likely/Likely Dont Know/Somewhat Likely indicating they were Likely to Very Likely to implement, although the percentages are1. E-signatures supporting the operations starting to soften with a higher percentage of strategy to provide fast service with “Do Not Know” responses: broader access to Web self-service for an amazing 95% of respondents. 1. Client Relationship Management (CRM)2. Document management building a single view of all systems (73%), foundation for greater distributed service 2. Data warehouse / data mining for customer (think contact center and simultaneous segmentation (72%), and processing) for 88% of respondents. 3. e-Delivery of customer materials (71%).3. Web portals and online electronic transac- tions enabling consumer and distributor self service for 85% of respondents.16 Robert E. Nolan Company
  20. 20. Life Annuity Industry Survey Findings A. Client Relationship Management (CRM) – single view all systems Insight: As the practical applications B. Data warehouses/data mining for of Web-enabled service and online customer segmentation and target applications grow, it is likely that, like sales e-delivery of consumer materials, the C. e-Delivery of customer materials adoption rate of instant messaging and (annual/ quarterly statements, prospectus, etc.) e-mail or their successors will increase. Given the current state of Web service, 23% 25% 26% the lower ranking is more indicative of the premature nature of these 73% 72% technologies versus any actual statement 71% of their long-term viability. A B C The remaining technology investment Very Likely/Likely Dont Know/Somewhat Likely responses show a consistent desire for tech- nology strategies that have been popular acrossEven for these strategies, the “Not Likely” a number of surveys and years.responses remain negligible (3–4%). A. Expert (rules based) systems for UW Insight: While e-signatures and B. Contact Center automated work force online applications are likely to represent C. Consolidation of admin systems the largest investment, the electronic D. Straight through Processng (STP) delivery of customer materials in support E. Business Process Management of the online purchase ranks somewhat F. Replacement of legacy administration lower. This is probably a direct result of 2% 4% 10% 10% the technology adoption curve, with the 13% 19% first priority being online applications, 33% 31% transitioning to electronic delivery of 23% 32% 33% materials as more consumers sign on as 33% “electronic customers,” bringing with them expectations of electronic service. 65% 65% 64% 58% 57% 48% Instant Messaging and e-mail-based consumer services A B C D E F 42% Very Likely/Likely Not Likely Dont Know/Somewhat Likely 50% Insight: : Expert systems have been a Very Likely/Likely Dont Know/Somewhat Likely target of investments for a number of years with mixed but improving results. AThere remains mixed priorities with regards to key contributor to the improved resultssupporting electronic messaging technologies has been the focused application ofas a service tool, specifically instant messaging technology in lieu of the earlier broad-and e-mail, with only 50% of respondents brush efforts to design “artificialindicating Likely to Very Likely to implement, intelligence.” With clarity of purpose hasmatched by 42% in the Do Not Know and come improved applicability.Somewhat Likely category and 8% Not Likely. Robert E. Nolan Company 17
  21. 21. Life Annuity Industry Survey FindingsContact (or call) center work force manage- or improvement of core administrativement systems have become more important systems has moved to the forefront ofover the last few years in parallel with the administrative strategies.recognition of potential efficiencies andservice improvements buried in most Insight: Enhancements like STP, whichcall/service centers. This change also supports can be done as an add-on to existing systems or a complete front-end replace-the service strategy regarding increased ment, move companies forward in terms ofconsolidation of telephone centers. service, cycle time, and consistency. Such enhancements are also relatively cost- Insight: : With the inevitable blending effective. of transactions and calls to achieve service and productivity goals, organizations will need advanced tools to manage how, when, Business process management followed right and where the work is done. Work force behind STP at 57% “likely to very likely.” management tools are likely to continue to This reflects recognition that continuous increase in importance over the next improvement and a focus on effectively several years. managing the core processes that drive a company represent significant opportunities.Consolidation of administration systems isnow the more likely path chosen over a flat !!!replacement of legacy systems (65% vs. 48%). Companies have a wide variety ofThe cost of replacing older systems combined demands for technology, and yet therewith a growing availability of front-end and are common themes. ..............add-on products has given extended life to the • Imaging, document management andmany generations of processing systems workflow;currently in use. • Straight through processing; • e-signatures and electronic commerce; Insight: A phased plan of con- • Contact centers for calls, e-mail, faxes; solidating multiple platforms onto a single, • BPM and process improvement; and existing strategic platform, and then • Web tools for the field first and gradually enhancing and/or modularly customers second. replacing the older system, seems to be the .............. prevalent approach. As one Company President stated: Nothing stands out above others - it is aStraight-through processing (STP) continues combination of back office efficiency andto receive relatively strong favor as a systems better front-end efficiency with customersinvestment, with 58% of the respondents (self-serve, contact center automated management, etc).likely or very likely to invest in it. As !!!mentioned, the focus on modular replacement18 Robert E. Nolan Company
  22. 22. Life Annuity Industry Survey FindingsConclusion: focused, particularly in the key knowledgeNot surprisingly, technology remains an management areas of claims and underwriting.important strategic enabler to business growth Bottom line: companies pondering where toand profitability. With an emphasis on place their systems investment dollars shouldoperationally-based strategies, companies are look first at expanded service access andlooking more to their systems investments to streamlined transaction processing.make their services a competitivedifferentiator. Even clearer is the desire toextend into the electronic world of Web-basedservices, electronic data collection (online An Operations Director summedapps), and electronic delivery (e-mailed it up this way:statements) as more companies incorporatethese features into their core capabilities. Use technology to provideMore mature technologies like document service that is low-cost but feelsmanagement, workflow, CRM, and common customized to the policy-owner orfront ends (the “graphical user interface” orGUI concept) also remain top candidates for producer.consideration and investment dollars. Expertsystems seem to be finding its niche asapplicability becomes better defined and more Quality of Current Business Processes and Technology Support According to the respondents of Nolans Technology Strategy and Implementation in the Insurance Industry survey, the weighted score for the level of technology support provided to a portfolio of key business processes reinforced the need for continued improvement in applying technology as a competitive enabler. IT Business Respondents Respondents Business Tech. Business Tech Business Process Process Support Process Support Quality Quality Quality Quality New Business Underwriting C+ B- B- C Policy/Member Service B- C+ C+ C Claims Disbursements B C B C Agent/Field Support Management C C C C Premium Billing Collections B- C+ C C Financial Reporting B B B- C+ Customer Serivce (Call Center) B- B- C+ C+ Source: Nolan Insurance Industry Technology Study Robert E. Nolan Company 19
  23. 23. Life Annuity Industry Survey Findings 7. OutsourcingOutsourcing remains an active topic, with On the other hand, processes typicallyproponents and opponents presenting equally considered core remain less likely targets:valid perspectives based on their individualsituations. A. Agent Contracting (Licensing Appointments) B. New BusinessIn Nolan’s 2003 Technology Study, we C. Policy Administration (Active Blocks)reported that less than a third of the D. Call Centers (Consumer, Producer)respondents felt their organizations had beensuccessful with information technology E. Claimsoutsourcing. This lack of success led to verylow comfort levels with business processoutsourcing (BPO). This experience seems 3% 5% 8% 15% 16%even more common for this survey. Onaverage, only 16% of respondents felt they 64% 58% 66%were likely to outsource any key functions 49% 49%within the next three years—the rest (84%)were not likely to do any outsourcing or did A B C D Enot know one way or the other. Not Likely Including Dont KnowLooked at another way, by combining “very Despite a number of highly publicized servicelikely,” “likely,” and “somewhat likely”responses, we can see the most popular contracts and rapid growth in the overallcandidates. The target function for most sourcing industry, respondents showed aoutsourcing remains selective information relatively strong disinclination towards the usesystems functions, although there has been a of external, non-U.S.-based resources forstrong shift towards a few non-core functions business support. Information systems mainte-like document management (mailroom, nance and development remained the mostimaging) and policy administration for popular target area, with document manage-legacy/inactive blocks of business: ment (image processing) also showing up as a candidate on the list for near-shore options: A. Document/Management (Mailroom, Imaging) A. Document Management B. Systems Maintenance B. Systems Maintenance C. Systems Development C. Systems Development D. Systems Infrastructure (Data Center, Network) D. Systems Infrastructure E. Policy Administration (Legacy/Inactive Blocks) 11% 56% 56% 49% 11% 42% 42% 24% 9% 16% 17% 9% A B C D E A B C D Somewhat Likely, Likely, Very Likely Off Near20 Robert E. Nolan Company
  24. 24. Life Annuity Industry Survey FindingsSlightly more popular with respondents was Conclusion:the use of on-shore resources; respondents Insurers will continue to use outsourcingcontinued to target systems-related functions selectively, and will look to it primarily as aat an even higher percentage while adding to solution for IT functions and areas deemedthe list corporate functions (accounting, HR, non-core to growth. Companies consideringpayroll) and policy administration of inactive the outsourcing of core functions that feedblocks. On-shore document management growth or competitive advantage, like new(mailroom, imaging) showed up as the most business or agent licensing, need to evaluatelikely candidate, although with less than one- this strategy with care. Even the outsourcingthird of the respondents (28%): of call centers seems to represent a less popular strategy as companies begin to realize A. Document Management B. Corporate Functions the revenue opportunities represented by C. Policy Administration (inactive blocks) customer-facing functions. D. Systems Maintenance E. Systems Development Although technology has advanced to the F. Systems Infrastructure stage where geographically distributed service staff is feasible, we don’t see a significant shift in that direction within the industry, at least not within the next three years. 28% 22% 21% 18% 19% 20% A B C D E F On Underwriting Priorities In Nolans Property and Casualty Industry Survey Findings, respondents reinforced the relatively low interest in functional outsourcing when they ranked it as the lowest priority when compared to other major business strategies. High Organic Growth Expense Management Customer Service New Tools Training Growth Through Acquisition Low Outsourcing Source: Nolan PC Study 2005 Robert E. Nolan Company 21
  25. 25. Life Annuity Industry Survey Findings Next Steps: Strategies in TransitionIndustry Trends measures of effectiveness. One-stop shoppingThe aging of America is a trend that concepts combined with service tiers thatcompanies need to address quickly, including match level of service to profitability shouldmodified product features as well as be investigated. Other key strategies includecustomized distribution and service. Equally expanding self-service on the web and callimportant, companies need to determine centers into contact centers that handle calls,whether they will participate in the e-mail and even instant messaging. Similarly,opportunity represented by ethnic markets, the consolidation of functions that bringtaking into consideration linguistic demands economies of scale to the company remains aoperational capacity, distribution, service, and solid strategy.segment. TechnologyCompetitive Landscapes Leading edge investments should be made inGiven the need for efficiency and areas that provide competitive differentiation,effectiveness, a core strategic decision to be shifting the focus to services and support:made is whether to be niche-focused or to • Expanded access,serve broad, possibly even international, • Streamlined transactions, simplifiedmarkets. Marginally profitable lines should usage, reduced cycle time, andbe eliminated as companies focus on core • Web services, and electronic delivery.competencies and strengths. Banks andalternative distributions like the Internet Sustaining investments should be made inshould continue to be monitored for potential mature technologies, providing the base forimpact. operational excellence:Sales and Marketing • Document management and workflow,The greatest market opportunities rest with the • Common front ends (“graphical userchanging demographics, specifically the interface” or GUI’s), andgrowth in aging and ethnic populations. Sales • Selectively applied expert systems inefforts and product designs need to areas like claims and underwriting.incorporate the opportunities represented bythis shift, including expanded focus on Outsourcingaccount retirement and lifestyle protection Selective IT functions including help desks,products. Optimizing existing distribution network management, data centerchannels with tiered investment of resources management and telecommunications remainand services will be the key to improving primary candidates for outsourced support.channel productivity, incorporating increased Contact Center outsourcing, beyond overflowuse of web support services, modified services, is reversing its trend as companiescompensation structures, and enhanced start leveraging its inherent competitivetraining and retention strategies. opportunities. Great care should continue to be taken when it comes to core serviceOperations functions like new business or agent licensing.Service as a competitive advantage should be Near- and on-shore services are becomingthe focus, with speed and simplicity as the key more viable options preferred over off-shore.22 Robert E. Nolan Company
  26. 26. Life Annuity Industry Survey FindingsBACKGROUND ACKNOWLEDGEMENTSNolan is an operations and technology The information, results and insights found inconsulting firm specializing in the insurance, this study are based on detailed surveyshealth care, and banking industries. Since completed with senior level executives across1973, we have helped companies redesign a wide range of stock and mutual companiesprocesses and apply technology to improve within the life and annuity insurance industry.service, quality, productivity, and costs. Our To each of those executives who took the timeconsultants are senior industry experts, each to respond, we extend our thanks andwith over 15 years of specialized experience. appreciation.We are trusted advisors to our clients and we Lead Author: Steve Callahanare committed to delivering measurable and Contributors: Steve Discher, Ron Zimmersustainable results.This report is one of a series of insurance QUOTING THIS REPORTindustry research studies conducted by the Recipients may quote briefly from this studyRobert E. Nolan Company. For the purposes (one or two sentences) without expressof this survey, insurance industry executives permission. However, all such quotes must bewere asked to weigh in on a variety of key accompanied by the phrase: “Source: Robertissues and challenges they expect to face over E. Nolan Company - www.renolan.com.”the next three to five years. Their responses More extensive quoting or other reuse in anywere tabulated and are detailed in this report, form is not permitted without the expressalong with insights into the possible written consent of the Robert E. Nolanimplications of their consolidated responses. Company, Inc. Publication date: December, 2006. Robert E. Nolan Company Management Consultants Please visit www.renolan.com to view original articles, case studies, and industry surveys. For further information, please contact us: info@renolan.com (877) 736-6526 (877-RENOLAN) Robert E. Nolan Company 23
  27. 27. Robert E. Nolan Company, Inc. Management Consultants www.renolan.com Simsbury, CT • Dallas, TX

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