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200903 loma resource

  1. 1. insurance future Page 1 of 9 From March 2009 Resource Looking Ahead : The Industry in 5 Years What will the insurance and financial services sector be like five years from now? For answers, Resource turned to some seasoned industry executives. (also see Suppliers Outlook at end of main article) By Jennifer C. Rankin At the end of 2008, 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 were: 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 Company Al Meyer, CLU, ChFC, executive vice president, American Family Insurance Group L. John Pearson, CLU, chairman, president and CEO, Baltimore Life Insurance Company Eric S. Rubin, FSA, senior vice president of Strategic Planning, New York Life Barry Stowe, chief executive, Prudential Assurance Company E-MAIL Susan D. Waring, CLU, ChFC, COO, executive vice president andThis page to a friend CAO of Life Affiliates and vice president of Health, State Farm InsuranceEnter recipients e-mail: Craig W. Weber, senior vice president, Celent Send this page John W. Wells, senior vice president of Long-Term Care, Conseco/Bankers Life and Casualty Company We published their predictions in January (see “Forecast for 2009”). Now that you’ve had a chance to ponder them, we bring you their answers to three questions with a longer time horizon: What do you think our industry will be like five years from now in terms of structure, products and customers? Will it be drastically different or similar to today? How should the industry prepare for this future?http://www.loma.org/res-03-09-five-years.asp 3/25/2009
  2. 2. insurance future Page 2 of 9 Here’s what they had to say. CLARK: In the future, we will see fewer companies; simpler products for selected markets; and a greater number of Web-based customers. To prepare, we must focus on being market driven and respond to customer needs in a flexible manner. MEYER: There will continue to be more consolidation in the industry going forward. I don’t think we will see drastic changes from the multi line perspective. The view of some products as commodities will continue. Then the only differentiator will be price or service level. WELLS: Consolidation will continue to reduce the number of companies. We don’t expect to see a rush of new competitors coming from other industries, but rather more partnering/joint venturing with firms like Google. We anticipate more growth in Web-based and direct-to-consumer sales, resulting in fewer agents, who will have a changed role in providing value to their customers. Independent marketing organizations should increase in size, and we anticipate worksite sales to grow. We expect to see products that emphasize more cost-sharing with the consumer, resulting in consumers becoming more educated and selective about the health care choices they make and the health care plans they choose. Protection products will continue to be in demand, as will medical “gap” products, HSA-type products, middle market products—low face term, supplemental health—and worksite products. With a new administration in place, government-managed healthcare is possible, creating a bigger focus on individual supplemental products. The industry’s customer base and customer profiles will continue to change over the next five years. Baby Boomers are entering retirement, but as retirement savings will not sustain the desired lifestyle for many retirees, we expect that some type of ongoing connection with active work will be common. STOWE: I do see a greater and greater shift to Asia as the real growth engine for our industry. Over half the world’s population lives in the region and it is under penetrated in terms of insurance coverage. Rapidly developing economies mean insurance is becoming more and more accessible. Within the products and services we offer in Asia, I expect an increasing emphasis on retirement solutions and the way we package our products and services to provide a more personalized and holistic approach to an individual customer’s needs through the whole cycle from accumulation to providing income in retirement and addressing protection needs, particularly health incident related. RUBIN: The current financial crisis will have a lasting effect on today’s consumers. We believe the flight to quality we are seeing today will be evident in future years. Consumers will prefer the most financially strong, highly rated companies and long-term guarantees will be front and center in their minds. Providing products with long- term guarantees as well as products that limit exposure to market volatility will become more prevalent. The arms race with variable annuity (VA) living benefits is not sustainable over the long term and we expect more rational competitionhttp://www.loma.org/res-03-09-five-years.asp 3/25/2009
  3. 3. insurance future Page 3 of 9 to emerge in the form of higher rider costs and lower promised benefits. With the government under single party control and pressure to find additional revenue sources, the industry will need to be vigilant and engaged in the legislative process. PEARSON: Our industry is clearly failing the middle market. We know this market presents an enormous opportunity, but the industry is not fulfilling its mission to meet the market’s needs. The demographics of the middle market are changing by becoming more multi-cultural, and the industry needs to find ways to more effectively address this shift. Industry-wide, we can expect to see a more concentrated marketplace with fewer companies. The advent of a number of new technologies will benefit the industry and our customers. A federal regulator is also likely to be in place in the next few years, making the introduction of new products much more efficient and economical. In turn, these cost savings will be passed on to our customers. WARING: Within the next five years in order to acquire economies of scale and bolster market share, many medium and smaller size companies will enter into alliances or merge to obtain critical mass. Financial needs and specialization will drive sales and acquisitions of specific blocks of business. Principle Based Reserves and International Financial Reporting Standards may allow more innovative and competitive products to be developed. Annuity products that contain income features will create a large market opportunity as the Baby Boomers continue to enter retirement and seek ways to attain an income they cannot outlive. Mortality will improve, but morbidity (health and wellness) will decrease. Long term care and life insurance will merge and become a mainstream combination product. Customers will become more diverse requiring more specialization to appeal to various segments of the marketplace. The family unit will continue to change and to shrink. In the coming years, data mining software will be readily available to the consumer on their home computer systems. This, along with dramatically faster computing and Internet access speeds, will make the Internet a much more powerful consumer tool in learning about and shopping for insurance. Access to the Internet will be omnipresent, immediate, and utterly routine. Combine these trends with the Echo Boomers becoming the largest segment of the economy, and the Internet will be a critical component of any insurer’s business plans. Additionally, the manner in which potential customers access advisers will also change significantly. Technology will allow shoppers to have face-to-face access to an advisor via broadband connection whenever and wherever they choose. The idea of a local agent will erode substantially; human agents will be on-line and remote, but accessible at the touch of a button. The concept of “shopping” without going on-line will be completely foreign. Availability of information on rates will dramatically narrow the pricing bands of companies on term insurance. ALT-SIMMONS: The globalization of insurance is here to stay. Carriers that continue to insist that globalization is of relevance for only the very largest players in the industry do not understand that it ishttp://www.loma.org/res-03-09-five-years.asp 3/25/2009
  4. 4. insurance future Page 4 of 9 now the very fabric of the industry. Clearly, the financial services industry in its totality is now interdependent and insurance executives must become students of all of financial services. Utilizing a world’s worth of resources, both internal and external, will be a key factor in managing talent gaps and financial stability. Even though the current challenges are daunting and virtually all consuming, insurance executives must maintain a vision for the future. The insurance industry is fundamentally strong and resilient and will come out of the current crisis with renewed enthusiasm. However, the industry will not look the same. There will be casualties. Carriers that are able to apply technology to business problems in new and creative ways will be the survivors. Key insurance markets are maturing and globalization provides opportunities for insurers not only to diversify geographically but also to identify new target markets for products and services. A new market-driven approach to the insurance industry, facilitated by regulatory reform, has opened up new markets to foreign insurers. A growing middle class in developing countries supplies insurers with a previously untapped customer base for protection products. Global expansion brings a host of challenges and risks in setting up new operations, including navigating political and regulatory barriers, creating partner relationships, and servicing new customers. As their business model becomes more complex and geographic scope wider, many large insurers are wrestling with identifying new opportunities and managing risk. The financial crisis may well see the emergence of megacarriers. The financial crisis has wreaked havoc on insurance company balance sheets and stock prices, and insurers who were perceived to be financially stable are reeling in the current market environment. The strongest insurers are looking at acquisition opportunities that at any other time would never have presented themselves. The second area of consolidation will be centered on market segments and books of business. While wholesale acquisition of firms will be extremely limited, some institutions will see opportunity to acquire lines of business or books of business from carriers that are retrenching back to core business competencies. CALLAHAN: For the insurance industry, five years is not really a long- range forecast. To put that in context, it is a little more than one Presidential term, the typical (though unacceptably protracted) duration of a major systems overhaul, just over twice the shelf life of a term life product (2.2 years), or about the same shelf life as a whole life product (4.7 years). Still, there are a number of major trends that will start to bear fruit in this timeframe, creating some material changes. The changes will not be drastic but rather more transitional in nature as companies gradually move towards their future state. From a structural viewpoint, it is very likely that there will be a continued consolidation within the industry driven by gaining economies of scale achieved through mergers, book of business sales, and national expansion of successful regional companies. Global expansion will also play a big role in this structural shift as larger U.S. carriers move into countries like China and India. There is less likelihood of significant global expansion into the U.S. other than through acquisition given the relative saturation of the market compared to other emerging markets. There will also be the successful holdouts—the boutique carriers focusing on a specialized customer base or product where they are able to create a sustainable differentiation. Yet in the end there will be fewer, larger companies; fewer regionals; and a small pool of boutiquehttp://www.loma.org/res-03-09-five-years.asp 3/25/2009
  5. 5. insurance future Page 5 of 9 players. Along the same lines, distribution channels will shift to broader blends of options as the Internet, bancassurance, and even retail channels expand while the career channel continues its downward trend. As the generations age, and as the pool of available experienced sales staff shrink, alternative distribution will slowly grow. With respect to products, over the next five years a great deal of attention will be given to meeting the needs of income over protection. Much of the focus is a result of the aging Baby Boomers’ attention to structured decumulation, driving the growth and variation of annuities as a key market opportunity. Term life will also continue to experience the benefit of market attention as it becomes an even more affordable solution for those who choose the “buy term and invest the difference” path for personal protection. The attachment of guarantees and related modified features will sustain the popularity of universal life, which will continue to command the largest market share. There will also be an expansion of note in two key areas: employer market voluntary benefits as well as product combos where life and disability insurance (for example, universal life and long term care) are bundled to meet a particular market segment. The other changes within the product world will be quicker speed to market, concurrent with a shorter shelf life, and the simplification of sales and support materials to comply with readability and suitability requirements that are gaining momentum. A transition to multi-language policies and forms will also be part of the strategy for some companies as they recognize the growing diversity of the U.S. market and build products specifically for select markets. Five years from now, many of today’s customers will still be alive. As a result, some of the same requirements for service and support will continue to exist for companies servicing this generation of buyers. Increasing marketplace complexity will be the result of new generations entering the market with their own set of habits, expectations, and service demands. This will create a requirement for companies to sustain multiple support structures as they sustain existing relationships, while building new service platforms for new generations. The support demands from newer generations will be challenging as they will require accessibility to answers 24/7, immediate responsiveness, multiple methods (Web, chat, phone, in person), and customer-aware systems that provide the basis for individualized service. In some instances, the need for individualized service will also cross language barriers that will have to be addressed across the multiple methods as well as the distribution channels. The reality is that customer-awareness and customer-centricity will be the key to market differentiation and success. This is an acceleration of current trends more than a drastic shift in a new direction. WEBER: Five years from now the customer profiles will have changed only slightly, with the most obvious shift being rooted in demographics—as a population we’re aging. But drivers will still be buying auto insurance, and people with families will be buying life insurance. Retirees will be looking for safe investments and ways to guarantee that they don’t outlive their money. But the real difference will be found in customer behaviors and preferences. We think that five years from now they will have morphed considerably toward the convenience and ease that we see in other industries today. The buying experience will be more real time, and less intrusive. The claim experience will be shorter, and more effective. And channels will demand differentiated services from their carrier partners to a far great degree than they receive them today. Insurers need to prepare for this newhttp://www.loma.org/res-03-09-five-years.asp 3/25/2009
  6. 6. insurance future Page 6 of 9 world be cranking up their process and system agility. They need to get smarter about how they use their own data, and external data. And they need to set the bar very high on service. Suppliers Outlook Several insurance industry suppliers had comments on the long-term outlook for the industry. Yes, there will be challenges, but there are also opportunities. Here is what they had to say: EDS: Preparing for the Long-Term By Terry Schreiber, Principal Consultant, EDS Given today’s turbulent markets and murky economic prospects, it’s natural for insurers—and their customers—to be focused on survival and stability: simply getting to the “other end” of the downturn. For many, the long-term future—perhaps 10 years away—will take care of itself. Or will it? How can insurers prepare for that long-term future while navigating the treacherous short term? Successful companies will aim to “get to the future first”,1 using near-term activities to build competencies that create separation from competitors in both difficult and favorable economic environments. § Viewed from the intersection of business and technology, here are key elements positioning an insurer to get to the future first: § Maintain a roadmap. An ad hoc approach by governments to the financial crisis has resulted in more questions than answers. It won’t get insurers to the future, either. § Realign costs. The insurance industry of the future must be more streamlined. Its cost base will be constrained as never before. Intelligent cost management, encompassing business processes and their enabling technologies, will generate competitive momentum. § Build in agility. A panel of industry executives and advisors recently concluded 2 that the industry’s biggest technology roadblocks are legacy applications and traditional processing platforms. Simultaneously dismantling these roadblocks and re-calibrating cost structure will be a distinctive competency. § Choose effective partners. A high-value partner will bring capabilities to support all these elements as well as the strength to deliver in any economic climate. With disciplined execution of these elements, insurers will increase their competitive separation in the near-term future. Over the course of 10 years, these companies will reach the future first…and reshape an entire industry.http://www.loma.org/res-03-09-five-years.asp 3/25/2009
  7. 7. insurance future Page 7 of 9 ImageRight: Use Nimble Focus Principle By Mike Fess, ImageRight Product Visionary Insurers gaze into the future every day assessing risk and return. Unfortunately, there are no highly developed actuarial tables for the technology that will be the next big thing. Assessing that risk and determining how best to guarantee a return on technology investments in the long-term future are problematic at best. The principle of Nimble Focus can guide insurers down this long-term path with the least danger. Technological change is rapid and those changes can often reap devastating consequences. Locking into a proprietary technology or solution can limit your ability to respond to changing technologies. By the early 1980s, insurers around the globe had determined that success in the future depended on heavy investments in centralized mainframe computing power. With that investment made, insurers were largely unable to reap the benefits of the shift to the PC and the commoditization of computing power that has dominated the last generation of technological change. Insurers had become less than nimble largely because of a lack of focus—or more appropriately a focus on the wrong prize. Businesses too often make the wrong technology decisions and hamper their ability to be a nimble enterprise because they focus exclusively on the technology and not the business needs that the technology should serve. Constant focus on business need directs you to the right technology decisions and prepares for the future— whatever that future may hold. ImageRight’s nimble and insurance focused approach to developing content management, workflow and business intelligence is helping insurers prepare for the future by performing with expense, loss and combined ratios dramatically lower than industry averages. PDMA: How to Navigate Uncertain Times By Steve Herker, FLMI, Senior Business Solution Consultant, PDMA The uncertain financial environment will present challenges for insurance companies, just as it will for consumers. Frivolous spending will be replaced with a keen focus on the “essential” expenditures. Tighter budgets will require IT projects to have clear, demonstrable benefits to cost reduction and the bottom line. The forthcoming economic challenges are also ripe with opportunity. Forward-thinking insurers have an opportunity to align IThttp://www.loma.org/res-03-09-five-years.asp 3/25/2009
  8. 8. insurance future Page 8 of 9 spending projects with organizational goals. But, where do you start? Here are four key questions for insurers to consider in IT spending priorities: § Can we quickly and cost-effectively bring new products to market? If not, all bets are off. While the current focus may be on guaranteed income products, it’s important to remember that product preferences are cyclical. IT systems must offer broad, rapid and flexible product support. § Are IT cost accurately reflected in product pricing? The most successful companies will use hard data to price new products. The data will point to the IT costs associated with product rollout and support. § Do we have a clear picture of our customers? IT systems must allow insurers to easily leverage client information and provide the type of services customers expect, such as self-service via the Web. § Do our IT systems offer sufficient interoperability? Insurers must be able to leverage multiple solutions in an integrated fashion. Addressing these questions has never been more important. Future success requires a precise vision for addressing the financial and operational challenges of tomorrow. McCamish: Continuum of Services Model By Sam Thomas, Executive Vice President, McCamish Rapidly changing market conditions require fast response in product development in order to gain or maintain market share. Additionally, to stay competitive, companies must operate an efficient service model that meets the specific demands of different markets and different distribution channels by segment. Having the flexibility to change the mix of high touch service and low cost outsourcing by market segment and delivery model is necessary to match costs with opportunities. The days of a monolithic service model for success are over. Increasingly having the ability to dial in highly efficient, super- automated insurance functionality without the expense and risk associated with buying and installing purchased software means the difference between timely meeting of market demands and being bogged down with inhibiting infrastructure. McCamish Systems operates an End-to-End Service Model for BPO and SaaS deployment. The model facilitates a continuum of hybrid deployments, by segment, with functions selected between BPO and SaaS, with the flexibility of modifying the deployment overhttp://www.loma.org/res-03-09-five-years.asp 3/25/2009
  9. 9. insurance future Page 9 of 9 time. For a changing world, arming the insurance operation with the flexibility to meet new product or distribution challenges as they emerge is an approach that fits the times. Contact Resource at resource@loma.org Advertise with us...Your Financial Services Customers are here. Download LOMAs 2009 Education & Training Catalog here Download LOMAs 2009 Products & Services Catalog here Chinese | Español | Français | Português | About LOMA | Banking | Healthcare Management | Members Only | Whats New Customer Assistance | Downloads | Education/Training | FLMI Program/Societies | International | Life Insurers Council LOMANET | Meetings/Events | News Center | Online Learning | Products/Services | Publications Research Reports | Resource Magazine | Technology Directory | The LOMA Store | Search Site | Site Map | Privacy Policy Write us at: LOMA, 2300 Windy Ridge Parkway, Suite 600, Atlanta, GA 30339-8443 Phone: 770-951-1770 or In the U.S. and Canada: 1-800-ASK LOMA (1-800-275-5662) Fax: 770-984-0441 E-mail: Askloma@loma.org Copyright © 2009 LOMA. All rights reserved. For technical assistance or to report problems, contact: webmaster@loma.orghttp://www.loma.org/res-03-09-five-years.asp 3/25/2009