201303 LOMA Resource: Five Year Outlook


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Contribution to panel discussion of the key changes to be expected in the insurance industry over the next five years from technology to product development.

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201303 LOMA Resource: Five Year Outlook

  1. 1. Our Industryin 5 Yearscover focus10 March 2013 RESOURCEBy Jennifer C. RankinWhat will the insurance sectorbe like five years from now?Resource turned to someseasoned industry executivesfor answers.010_019_Cover_Story-LONGER.indd 10 2/22/2013 8:51:51 AM
  2. 2. www.loma.org 11t the end of 2012, Resource asked insuranceindustry leaders to share their thoughts on whatthe year ahead holds for sales and profitability,information technology, structural change, andcustomer service, publishing their predictions inJanuary (see “Forecast 2013”). Here, we bring you theiranswers to two questions with a longer time horizon: Whatdo you think our industry will be like five years from now?What opportunities does the future hold?The executives who answered these questions are a crosssection of the board of directors of LL Global, the umbrellaorganization for insurance industry trade associations LOMAand LIMRA, plus other key industry players. They are:Thomas P. Burns, CLU, ChFC, chief distribution officer,Allianz LifeSteven M. Callahan, CMC®, ChFC, CLU, FFSI, FLHC,FLMI/M, senior consultant and practice developmentdirector, Robert E. Nolan CompanyEsfand E. Dinshaw, LLIF, chairman and CEO,Sammons Financial GroupRobert Ehren, senior vice president, Life ProductManufacturing, Securian Financial GroupMichael R. Fanning, executive vice president,U.S. Insurance Group, MassMutualDoug French, managing principal, Insurance ActuarialAdvisory Services Practice, Ernst & YoungChuck Johnston, director, Americas Life/Annuity &Group Practice, Celent, answering jointly withKaren Monks of CelentW. Kenny Massey, FICF, LLIF, president and CEO,Modern Woodmen of AmericaJoseph R. Monk, ChFC, CLU, CASL, senior vice presidentand CAO, Life; vice president, Health & Securities Products,State FarmKaren Monks, Research Analyst, Celent,answering jointly with Chuck Johnston of CelentDavid W. Simbro, FSA, MAAA, senior vice president andexecutive officer, Life & Annuities, Northwestern MutualDeanna D. Strable, FSA, senior vice president, U.S. InsuranceSolutions, Principal FinancialBURNS: The insurance industry is a critical component ofthe American economy. No other industry can provide thelifetime income guarantees that are so important to themajority of Americans who will be retiring, or planningretirement, in the near future. In the next five years, there willlikely be increased pressure on the Social Security programand even fewer companies with defined benefit programs.Mutual funds and other investments can be good tools foraccumulating assets, but more consumers are demandinginsurance solutions that provide principal protection andguaranteed income.Therefore, I expect regulatory and market developmentsin the next few years that result in insurance products tak-ing a more prominent role in qualified retirement accounts.All 401(k) plans will likely have insurance offerings thatprovide guaranteed income options. New regulations willencourage Americans to transfer a portion of their retire-ment savings to insurance products as they near retirementage. These changes will result in a more secure and stableretirement for millions of Americans.CALLAHAN: Economic baseline forecasts published by theCongressional Budget Office (CBO) project a slow recoverythrough 2015, with overall gross output remaining belowfull potential through the five year horizon to 2018.Unemployment is expected to exceed seven percent through2015, dropping to an average of just over five percent by 2018.Projected governmental spending is expected to averagearound 22 percent of gross domestic product (GDP) through2018 at least, which, while less than 2012’s record break-ing 23.2 percent, still notably high, historically speaking.Discretionary spending is expected to gradually drop from2011’s nine percent to seven percent by 2018 and 5.6 percentin2022,whilemandatoryprograms,includingSocialSecurity,Medicare, Medicaid, and federal health care, are expectedto increase from 13.3 percent in 2013 to roughly 13.5 percentin 2018. Last—and critically important to the insuranceindustry, interest rates are expected to remain low, withthree-month Treasury bills averaging 0.1 percent in 2013risingtoabout2.5percentby2018andten-yearTreasurynotesaveraging 2.5 percent in 2013 rising to about four percentby 2018. These numbers all represent the CBO’s “baselineforecast”, which includes a number of optimistic assumptionsabout the ability to achieve the caps and reductions imposedlast year by legislation. Odds are good actual results willbe less ideal. The CBO’s 2012-2022 baseline forecast helpsset the economic context that will be influencing theinsurance industry over the next five years.Working in conjunction with the economic influences,three macro-trends will play a significant role in shapingthe industry’s direction between now and 2018. The first istechnology,whichwillaccelerateinnovationandnewapplica-tions as well as deepen the impact of analytics, social media,web-based service, mobile technology, and cloud solutions.Thesecondisdemographics,whichwillincorporateanincreas-ingly diverse population and the impact of Baby Boomersmoving to decumulation products.The third is globalization, as carriers expand fasterinto international markets and face increased regulatoryand financial complexity, multilingual servicing, andlikely consolidations.010_019_Cover_Story-LONGER.indd 11 2/22/2013 8:52:49 AM
  3. 3. 12 March 2013 RESOURCE12 March 2013 RESOURCEEach of these brings demands for newskills, modified products, distribution and ser-vice innovations, risk management advances,and capital investments. All during a timeof very thin margins, low interest rates, andincreased risk of disintermediation as olderassets with better returns mature and haveto be rolled into lower return investments.Not to mention increased diligence with capitaland reserves.A good number of opportunities comealong with these challenges. The most obviousand heaviest worked one remains the retiringBaby Boomers and their conversion fromaccumulation to decumulation. Here we havethe infamous conversion of over $30 tril-lion in illiquid assets moving to income orlegacy investments, along with the large inforceblock of old term and whole life policies thatBaby Boomers will be looking to replace.Guarantees, income streams, alternative cov-erage like long term care and critical illnessare all relevant to this market. Existing clientretention and conversion units focused on the needs of theretirees represent one option. The inforce base will becomeincreasingly fluid as more and more Baby Boomers reachthat point where they need to transition their portfolio.Unprepared carriers will miss out.Another tremendous opportunity for carriers is themuch-touted underserved middle market, a segment of thepopulation that both needs and can afford insurance butat face amounts difficult for most of today’s channels tocost justify. As was noted by one agent in a recent survey,given the chance to make a three hour sale for a $1 millionpolicy or a two hour one for a $200,000 policy, they willwork on the $1 million one every time. Yet as noted byLIMRA in October of 2012, the potential representedby this market is approximately $1 trillion. Carriers able tofind a cost effective way to serve this marketwillfindthemselveswithanexcellentsourceof growth. Options include cross sellingto more dynamic lines like personal autoor homeowners, using telesales/web-basedcampaigns, going after the worksite angle,or using technologies like e-app, e-signatureand straight through processing to createa “ticket” sale approach to the lower faces.To date only a few carriers have startedto move in each of these directions, othersneed to be fast followers to avoid missingthe chance.Niche products and markets representthe third opportunity, where carriers cancustomize products for a targeted segmentof the market that is not currently directlyserved. A number of carriers have donethis for the Hispanic market, developingspecific products, materials, and speciallytrained agents to address the specific needsof this population. There are numerousother underserved segments that representa similar opportunity. Along these same lines, for thelarger carriers, the globalization of insurance is openingdoors around the globe. Extending the concept of insuranceto emerging markets can prove to be a tremendous boon.Both Deloitte and PricewaterhouseCoopers have providedsupporting research and opinions on the opportunitiesrepresented by select international expansion.The fourth opportunity is an existing one that remainsonly partially served. Carriers able to leverage existingtechnologies in order to create an “order taking” approachto buying insurance will find a wealth of opportunity frommiddle market to younger markets to voluntary worksite.The pieces exist, as proven by those slowly putting themin place; carriers able to rapidly deploy a click and buy lifeor retirement insurance product will find themselves ridinga large wave of success.Tom BurnsAllianz LifeEsfand DinshawSammonsFinancial GroupBob EhrenSecurianFinancial GroupMike FanningMassMutualDoug FrenchErnst & YoungSteve CallahanRobert E. NolanCompanyI expectregulatory andmarketdevelopmentsthat resultin insuranceproductstaking a moreprominent rolein qualifiedretirementaccounts.010_019_Cover_Story-LONGER.indd 12 2/22/2013 8:53:24 AM
  4. 4. www.loma.org 13What will five years bring to the industry?Regulatory: The continued influence of the FederalInsurance Office (FIO) combined with the increasingsimilarities across states will result in a gradual convergenceof regulations around widely accepted standards.Although still state regulated in 2018, regulatory trendswill tend to standardize around market conduct, suitability,transparency, disclosure, compensation, guarantees andlicensing issues. Look to the indexed product market to gainintensified attention resulting in either a revisiting of thefailed151Aregulationorasimilarchangeinlicensingrequire-ments. There remain some surprises to come for consumerswho have purchased these products that may create a similarflashpoint as was created with variable products when themarket fell (and these did require special licensing).Products: There will have to be both a simplification anda modularization of products to meet the changing marketdemands. The variable products have proven to be veryspecialized targeting a niche market, and willlikely continue in that role. A derivative ofindexed universal life (UL) that includes a“fixed return” option while allowing otheroptions with structured market participationwillbeoneoftheprimarysellers.Itwillrequiremore competitive pricing and transparencyaround fund management fees, but if the fixedreturn option is done right, it may take overpart of the traditional whole life market.Consumers have become much more sensitiveto self-directed investment management andmarket participation than in the past, whichwill drive increased popularity around low-cost options that incorporate limited riskmarket participation. Consider it like themutual fund industry’s evolution. Term willcontinue to serve a key segment of the marketas well. In both cases, specialty plug-on rid-ers will include long term care, accelerateddeath benefit, critical illness and income conversions as wellas the typical spouse, child and accidental death benefit.Secondary guarantees will have had to deal with AG38’sreserve pricing impact and are likely to be more expensiveand less popular. In fact, many companies have alreadyeither started raising rates on their guaranteed universal lifeline of products, like Aviva and Nationwide, or are pullingthe products off the market, like Protective Life and PennMutual. The shift to fixed indexed annuities will parallelthe shift in life. Single premium immediate annuities willbe enhanced with supplemental coverage and riders so thatthey will be more appealing to the retiring Baby Boomers.Distribution: Slow transformations will be occurringon the distribution side of the insurance industry as thechannels start to blend. Look for increased focus on feebased advisors, commission based specialists, worksiteagents, and telesales teams that support web applications.The difference between independent and career will con-tinue to dissolve as labor laws continue to putpressure on the distinctions and as the agents’need for income drives how they shape theiragency. In addition, given that the averageinsurance agent is 56 and in 15 years morethan half of those selling today will beretired, there is a need both to acceleratetalent recruitment, increase sales throughdirect channels, reinvigorate the worksitechannel, and integrate life and annuity saleswith other distribution outlets like banksand property casualty agents. The otherdistribution shift will be towards a greater“mixed media” sale that incorporatesan online presence for informationalpurposes and initial contacts, the use ofweb conferencing for interviews and ques-tion/answer sessions, fewer in personmeetings but they will still exist, and teambased selling.Chuck JohnstonCelentKenny MasseyModern Woodmenof AmericaJoe MonkState FarmDave SimbroNorthwesternMutualDeanna StrablePrincipal FinancialKaren MonksCelentSlowtransformationswill beoccurringon thedistributionside of theinsuranceindustry asthe channelsstart to blend.010_019_Cover_Story-LONGER.indd 13 2/22/2013 8:54:09 AM
  5. 5. 14 March 2013 RESOURCE14 March 2013 RESOURCEService: As competitivedifferentiation continues tobe provided via the servicechannel, companies willcontinue to invest in enhanc-ing their service methodsand staff. Some of the shiftswill include: broader hoursof coverage moving towards24/7 for larger companies;multi-mode communicationscenters incorporating email,fax, chat, web conference,collaboration and calls; mul-tilingual service staff andmaterials; web portals forinsureds and policyholdersthat include real-time abilityto handle transactions; andsingle points of contact formulti-product companies. The communications centers willshift towards virtual, split shift staffing creating geographi-cally dispersed call teams managed virtually. A single viewof the customer within the company will be used for businessintelligenceandbytheserviceteams.Therewillbeautomatedevent and time triggered customizable contact points. Train-ing of communications staff will be continuous and treatedas critically important.Technology: Sales and service “pad” computers will becommonplace and will incorporate apps for managing clientbases,enactingpolicytransactions,takingpayments,modelingpolicies, field underwriting, taking an app, and “just-in-time”training of the agent or communications staff. A consolida-tion of select commodity services will be underway, offeringlower cost cloud-based solutions to carriers. For those stillconverting legacy systems, there will be increased appeal tooutsourcing. Predictive analytics will permeate almost all ofthe carrier operation, from discrete underwriting assessmentbased on external as well as internal characteristic tags, toagent placement and training, to product design and pricing,to business review and problem escalation. Social mediawill be commonplace and simply replace a portion of theadvertising, education, communication and service budgetsas the social platforms are used to simplify doing businesswith carriers. Social intelligence—that is, information minedfrom the various social platforms—will be a common sourceofunderwritingandclaimsinformationusingvendorsolutions.Electronic sales and service will be in the refinement stage,allowing apps to be taken, paramedicals scheduled, inquiriesmade, and changes transacted all via multimedia devices.Being in person will be reserved for the critical milestonecontact points like the close.The time will fly, and 2018 will be here before it can beimagined. Change is gradual but will be transformational aswell. The industry is faced with absorbing a good number ofmajorstructuralshiftsoccurringfromproducttodistributortoconsumer,allenhancedbyaconstantflowofnewtechnologies.For the carriers focused on growth and ready to take managedrisks, there could never be a more inspiring time. For thosemorecomfortableintheircurrentmodeofoperation,rememberone of Dr. Deming’s famous sayings: “It is not necessary tochange. Survival is not mandatory.”DINSHAW: Expect an increase in combination products—afocus on meeting consumer needs, which will lead to lessemphasis on whether a product is able to be categorized asonly life insurance, or as an annuity, or as a long-term carepolicy, and so forth.EHREN: It is always difficult to predict too far out in the future,as the economy and regulatory change can alter any plans,no matter how well thought through. What I see emerging isthe combination of technology and the massive need of themiddle market for life insurance. The industry will find away to meet that need tremendously better than we do today.FANNING: In some ways, I see what people fundamentallyvalue most in this industry remaining the same. The reasonspeople go to an agent to buy insurance are the same as theywere a hundred years ago: to protect the ones they love.However, as we all know,the basis for this business isrelationships. Technology andsocial media are promptinga whole new generation ofemployees and customers tomake purchasing decisionsin non-traditional ways. Andwhen you think about the vari-ousmarketsthatnowcomprisethe broader insurance buyingpopulation—multicultural,women and Millennials, notto mention the aging popula-tion—the industry will needto reach multiple audiencesthrough multiple channels andpossibly through products orservices that may not currentlyexist. This is where companieswill need to be innovative.Everyoneagreesthe lowerinterestrateenvironmentwillcontinueto pressureeach of us.14 March 2013 RESOURCEThefinancialhealth of theU.S. lifeindustry as awhole isgenerallygood, whichpositionsus well forthe future.010_019_Cover_Story-LONGER.indd 14 2/22/2013 8:54:48 AM
  6. 6. 16 March 2013 RESOURCE16 March 2013 RESOURCEHarnessing big data will be critical to addressing thisdynamic, as the insurance and financial services industriesprobably have more customer data than any other industry.Arming our employees andagents with the right infor-mation will enable us to findnew customers in targetedsegments, develop ways toreach them, and ultimatelyup-sell, cross-sell, and makebetter risk decisions. Thatwilldrivetoplineandbottomlinegrowth,andmostimpor-tantly,helpusmaintainmoremeaningful relationshipswith our customers.FRENCH: In five years fromnow, the demographic shiftwill be a central force inthe U.S. market. The 55+and the under-35 age cat-egories will be the fast-est growing segments over the next decade. The 55+group will be focused on accumulating assets and theorderly liquidation of said assets over the course of theirretirement, while individuals under 35 will want simpleprotection products and a digital distribution and advicemodel. They will not want face-to-face sales and complicatedproducts. For 55+, opportunities will exist for retirementincome and wealth transfer; for under 35, it will be a moretransparent platform and consumer-friendly transactions.JOHNSTON/MONKS:Thelifeinsuranceindustrywillshiftevenfurthertowardaproductmanufacturing/non-owneddistributionmodel with that distribution becoming more fragmented thanever. Between on-line (and brick and mortar) retail aggrega-tors incorporating insurance products into their product lines,the broadening of employee benefits to include more non-insurance products which are not overly regulated andincreased push of annuities into broad financial planningofferings, insurers must align their business and technologyto work with multiple distribution business models, focus onwholesaler and consumer media models to drive market shareand prepare to answer to regulators over market conduct andproduct usage/funding requirements through much greateruse of big data opportunities. Celent believes that this trans-formation will take more than five years, however. By 2017,it will become clear that leading insurers will adopt thesemodels as part of a longer term transition strategy.The bestopportunitiesexist forcompaniesthat startby solvingproblemsrather thanleading withproducts.MASSEY: Unless the Federal Reserve’s policies reverse,our industry will struggle to manage a profit. Everyone agreesthe lower interest rate environment will continue to pressureeach of us. My biggest concern: Since the Fed has intention-ally worked to decrease rates, my fear is that they will simplywalk away from a hands-on approach and allow interestrates to rapidly increase too fast versus managing the ratesback to a true market valued level.MONK: As I think about the future, there is certainly a lotto be excited about. First, customers will continue to needhelp managing risk, recovering from the unexpected andrealizing their dreams. I can’t think of an industry betterpositioned to do just that. People need our products andservices, especially as employer and government entitieshave less responsibility for long-term financial planningoptions and individuals take more ownership of theirfinancial future. Second, the financial health of the U.S. lifeindustry as a whole is generally good, which positions us wellfor the future. And finally, our industry is of vital importanceto the economy and to individuals’ financial well-being.According to the American Council of Life Insurers (ACLI),life insurers pay out $1.5 billion every day through paymentsfrom life insurance, annuities, long-term care insurance,disability income insurance, and deposit funds used forretirement.SocialSecuritypays$1.9billionperdayinbenefitsto U.S. households. That makes a statement and will wellinto the future.SIMBRO: Five years from now I would expect to seefewer companies in the marketplace. Industry consolida-tion will result in fewer companies, which means fewerproduct options.We may also see more regulation of our industry,particularly at the federal level. Fewer companies andgreater regulation can lead to a loss in consumer trust.Consumers are already concerned about a company beingin existence at time of claim. And they may perceive thegreater regulation, particularly at the federal level, as a signof industry weakness. It’s easy to lose consumer confidenceand very hard to gain it back.STRABLE: Our industry must be innovative in how wethink about and present our products and services. Thisincludes not just how we commu-nicate, but what we communicate.The best opportunities exist for com-panies that start by solving problemsrather than leading with products,especially for those in under-servedmarkets. With consumer confidencewaning, we need to make insurancesolutions current and relevant. wcover focus010_019_Cover_Story-LONGER.indd 16 2/25/2013 11:41:34 AM