Life & Annuity IndustrySurvey FindingsStrategies for a ChangingIndustryRobert E. Nolan CompanyManagement Consultants
Robert E. Nolan CompanyLife & Annuity Industry Survey FindingsIncreased regulation. Aging systems.Changing demographics. Productcommoditization. Intensified competition.Compressed interest rates. Distributionconsolidations. Life and Annuity insurers arefacing increasingly complex and challengingconditions as demands for returns andprofitability magnify the pressure on growth.In this turbid realm of an industry intransition, it is not a lack of strategic optionsso much as the often conflicting diversity ofchoices available that today’s seniorexecutives are faced with sifting through.Where to best apply the limited availableresources of time, money and people is nowmore than ever a decision process requiringthe greatest of care and focus.The Robert E. Nolan Companys Life &Annuity Industry Survey Findings suggestthat strategic priorities are starting to shiftfrom an internal, operational focus to anexternal, market driven one. With this shift,executives are challenged with the need tobalance the tradeoffs between service,support, product features and returns. Withinthis context, five strategic trends stand out asdifferentiators in the years ahead:Shifts in demographics paired with chang-ing customer expectations demand intensi-fied attention for growth-oriented compa-nies, with 95% of respondents profilingthe aging of America and 88% the expan-sion of ethnic markets as each demandingattention.Translating strategy into action specifi-cally in the areas of expense managementExecutive Summaryand the effective use of technologyremains a challenge, even with 85% ofrespondents saying their companies have aclear vision, goal, and strategy.Leveraging sales and marketing invest-ments for optimal returns stands out,particularly with respect to (1) optimizingthe existing distribution channels, (2)enhancing product features to providecompetitive advantage and meet marketdemands, and (3) expanding the tools,techniques, and training of the existingfield force.Utilizing service as a competitive advan-tage to offset the convergence of productfeatures and pricing stands out as one ofthe key differentiators of forward-thinkingcompanies, with almost unanimousrespondent agreement that speed ofservice will be a strategic imperative.Timeliness was closely followed by theneed for access methods from phone, Web,e-mail, and voice response to traditionalwritten requests.Intensely focused technology strategiesencompassing key service platforms like:(1) e-signatures, (2) document manage-ment, (3) Web self-service, (4) multi-product common front-ends, and (5)consolidated commission systems. On theother hand, while it remained a limitedstrategy, only 16% of respondents felt theywere likely to outsource any key functionswithin the next three years.22.214.171.124.2.
Robert E. Nolan CompanyLife & Annuity Industry Survey FindingsPage• 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 ................................................................ 23Table of ContentsRobert E. Nolan Company, Inc.Management Consultants90 Hopmeadow StreetSimsbury, CT 06070(877) 736-6526 (877-RENOLAN)firstname.lastname@example.org Preston RoadDallas, TX 75252
Robert E. Nolan CompanyLife & Annuity Industry Survey Findings1Based on answers to our self-classificationquestions, we see that respondents repre-sented a healthy mix across levels, roles, andbusiness size.Responses received represent a broad mix ofall key functional areas...A broad diversity of business line blends, with asolid majority Life and Annuity, followed bySingle Line companies and then PropertyCasualty, is represented.Allocation of Responsesby DepartmentAllocation of Responsesby Officer LevelOperations23%C-LevelExecs24%5%StaffFinanceU/WITSales &MarketingC-Level29%EVP/SVP22%VPAVP/DirectorOther7%18%16%7% 7%15%27%Allocation of Responsesby Business LineLife/AnnuityBlends69%PC Primary,Multi-lineLife/AHBlendsSingleLine Only14%12%5%Stock and mutual companies were equally repre-sented. Based on annual premium revenue:• A little over half (54%) of the respondentswere under $500 million a year,• Just over a quarter (25%) were in excess of$2.5 billion, and• Leaving the remaining fifth (20%) between$500 Million to $2.5 Billion.Stock and Mutual CompaniesCompanyTypeNo. of HomeOffice StaffUnder $500Million$500 Million to$2.5 BillionOver $2.5BillionGrandTotalMutualStock• 500 or fewer• 501 to 1,000• 1,001 to 2,000• 2,001 or moreSubtotal• 500 or fewer• 501 to 1,000• 1,001 to 2,000• 2,001 or moreSubtotal27%2%29%17%5%3%25%54%2%2%2%2%8%3%3%6%12%20%2%12%14%12%12%26%29%4%4%14%51%20%8%3%18%49%100%Grand TotalBreakdown of Survey Respondents...with almost all respondents in senior leader-ship positions (51% at EVP or higher andalmost 80% at the officer level).
Robert E. Nolan CompanyLife & Annuity Industry Survey Findings21. Company Self-AssessmentWhen asked about the strategic direction oftheir company, respondents gave a reassuringresponse. Eighty-five percent (85%) of therespondents said their companies have a clearvision, goal, and strategy:At least for the companies involved in thesurvey, the importance of clarity in purposeand direction is apparent. However, answers tothe follow-up questions showed that trans-lating strategy to action in areas such asexpense management and the effective use oftechnology remain a challenge:Strongly Agree / AgreeStrongly Disagree / DisagreeDont KnowN Has clear vision, goal and strategy forwhere it wants to be in three years85%3%12%Strongly Agree / AgreeStrongly Disagree / DisagreeDont KnowN Effectively uses process improvementto generate measurable resultsN Expense ratios will decreasemeasurably over the next 3 years54% 27% 19%50% 31% 19%would not decrease. The eye-opening statisticis almost 20% of respondents are not aware iftheir company has a strategy.In the same vein, only slightly more than halfthe respondents (54%) felt that processimprovements were being used effectively togenerate measurable results. Twenty-sevenpercent (27%) said their companies were notusing process improvement effectively toreduce expense, compared to the almost 20%who had process improvement projects butdid not know if they were effective. Insight: The competitiveness of themarketplace, driven by both consumersand investors, continues to demandfocused management of expenses. Thisrequires a clear understanding of thecurrent situation, desired results, andactions to be taken. Absent a connectionbetween expense ratio, action plan, goal,and strategy, companies are susceptible tohigher costs, noncompetitive prices, and,ultimately, a gradual erosion of marketshare and/or profitability. Insight: The use of continuousimprovement, especially in operationallyintense environments like insurancecompanies, plays a key role in improvingcost-effectiveness. With no continuousrevalidation and redesigning of processes,the overhead associated with servicesprovided can grow significantly.When asked the same question in 2001, 75%of companies felt that expense ratios woulddecline significantly for successful companiesover the next three to five years. In the currentsurvey, that percentage dropped to 50% whilemore than 30% believed their expense ratiosGiven the competitive environment, in threeyears would you rather be leading a companythat has been consistently reducing expensesand improving processes or one that hasn’t?For the half of the companies without clearexpense and service strategies and goals, thismight be the time to reconsider yourpriorities.
Robert E. Nolan CompanyLife Annuity Industry Survey Findings3Responses to questions about technologystrategies profiled a similarly interestinginconsistency:while slightly fewer (57%) stated that ITgenerates measurable results. However, 38%either did not know or felt that their ITdepartments were poorly aligned with thebusiness strategies. Equally troubling is that43% either did not know or did not believe ITgenerated real results. Even more dramatic isthe gap when it comes to technology as anenabler of competitive advantage, with only45% agreeing and 55% either not knowing ornot believing that IT is an effective enabler ofcompetitive advantage.Strongly Agree / AgreeStrongly Disagree / DisagreeDont KnowN IT Department is well alignedwith the businessN Plans on making significant techinvestments to remain competitiveN Uses technology effectively as anenabler of competitive advantageN Effectively uses IT to generatemeasurable results Insight: Aligning IT with the busi-ness continues to remain fundamental toeffective realization of marketplace andoperational benefits. Strategic alignmentrequires significant information sharing,broad-based involvement, and, above all,common goals and rewards.65% 21% 14%61% 12% 27%57% 23% 20%45% 24% 31%Almost two-thirds (65%) of the respondentsplan to continue their investment intechnology, offset by a significant percentage(35%) who are uncertain or do not plan tocontinue their technology spending. This is asurprising finding given the investment andresults of the past few years. When we asked asimilar question in 2001, more than 90%predicted that successful life companieswould invest in new technologies to remaincompetitive.A good majority (61%) said that their ITdepartments are aligned with the business!!!When asked What long standingpractices do you believe are likely torequire revision in the next 1 to 3years?..............How we price, underwrite and service ourproducts…changes have caused us to re-think the services we offer.VP of Underwriting..............Growing shift to direct / retail for salesand service, further impacting brokercompensation practices.Head of Product Management..............Product-focus will begin to change tosolutions-focus...change may be very rapidonce it takes hold.Sr. Manager, Sales/Marketing!!!
Robert E. Nolan CompanyLife Annuity Industry Survey Findings4The existence of a clearly communicatedvision, goals, and strategy helps a companyfocus on a collaboratively adopted and cost-effective transition to their future businessmodel. Translation of these concepts intoactionable plans with measurable results is atthe crux of growth and profitability. Given thecompetitive nature of the industry andtightening profit margins, managing expenseratios must be a key goal of any strategyimplementation, which means a high-profilelinkage to actions and their impact across thecompany. Failure to tie, in some way, theimpact of strategy execution to expense ratiocould easily constrain paybacks and limitfuture opportunities. Along these same lines,the use of technology and process improve-ment to enhance service delivery and cost-effectiveness must play a core role in anyongoing strategy.Conclusion:Given the importance of information tech-nology as an enabler of growth, profitability,and competitiveness, this disparity of resultsconcerns us—it represents a potentialdisconnect in a critical business component.This is especially true considering the opinionsexpressed in the Technology section of thesurvey. Respondents expressed a strong needfor IT to act as the foundation upon whichcompetitive advantage is built going forward.This need becomes extremely acute asproducts become more commoditized andprofit margins narrow. Companies shouldconsider investing in the necessary structureand communications to ensure that they areclearly identifying, communicating, andsupporting the link between IT, results, andcompetitive advantage.CustomersIndependentProducersBetter Service through Process Innovation TechnologyExpense Reduction throughProcess Improvement TechnologyOrganization Structure ManagementThat is Accountable, Responsive, AgileNicheFocusIntegratedFinancial ServicesCustomerFocusDistributionStrategiesMarketingStrategiesServiceStrategiesEnterpriseStructureLife Industry Strategy MapGlobalAlliancesAlternativeChannelsRelationshipManagementIntegratedSystemsMarketSegmentMarketSegmentMarketSegmentMarketSegmentMarketSegment
Robert E. Nolan CompanyLife Annuity Industry Survey Findings5Overwhelmingly, respondents indicated thatdemographic change was the one trend thatstands above all others. Each demographicchange shown was rated highly as a significantopportunity for growth:An almost equally significant trend is thegrowth in diversity of ethnic markets, eachbringing language and presentation require-ments that span distribution, call center,correspondence, and all other major functionsinvolved in selling to and servicing insurancebuyers. Hispanics are the group thatrespondents pointed out as the fastest growingunderserved population, followed closely byAsians. With more than one foreign languageinvolved, the complexity of the situation iscompounded.While lower- and middle-income segmentshave been recognized in the past asunderserved markets, more companies areviewing them as a viable source of newcustomers. This recognition of opportunity,though measurably behind that of the agingand ethnic markets, is significant. For lower-to middle-income customers, respondentsrecognize distribution through work site saleschannels and sponsored groups each representa cost-effective opportunity for growth.2. Industry TrendsStrongly Agree / AgreeStrongly Disagree / DisagreeDont KnowN Work site and bank sales will be asignificant opportunity for growthN Low- to middle-income marketsN Ethnic marketsN Aging U.S. population as an industryimpact driving change2%22%10%68%19%18%63%5%7%88%4%95% Insight: Changes in national demo-graphics resulting from the aging U.S.population are bringing significant oppor-tunities and challenges to the industry. Thepayout and maturity stages of products, aswell as features and benefits tailored for anolder population, should be key areas ofconcern in product design. Furthermore,with the diminished value of government-sponsored programs like Social Security,the need for privatized wealth creation,protection, and management will providetremendous opportunity. Successful insurerswill need to have available a diverse suiteof products covering the full range ofretirement concerns, such as cash manage-ment, lifestyle protection, wealth transfer,and inflation protection. Insight: The importance of the ethnicdiversity trend is clearly recognized, yetthe industry as a whole has made onlyslight progress in improving its ability toservice the various segments. Solutionsrange from significant internal ISinvestment or outsourcing on the high endto minor translation of marketingmaterials without supporting multi-lingualservice capacity on the low end. Themost successful companies will be theones that offer the full spectrum of multi-lingual materials and service capacity. Insight: The margins available inthese markets, however, are so low as torequire extremely efficient distributionand service, bringing additional chal-lenges to the table. However, for the mostpart, the same basic product structure andfeatures can be leveraged across thesemarkets.
Robert E. Nolan CompanyLife Annuity Industry Survey Findings6The second most significant industry trendidentified involves compliance-related items:Given the formality and structure of theregulatory environment, it is easier to estimatethe impact of compliance with regulationssuch as SOX, the Patriot Act, anti-moneylaundering, and privacy laws. The result, it isagreed, will be that compliance will cost morein systems, staff, and processes. Less clear isthe impact of possible tax reform, whererespondents are spread across “agree,”“disagree,” and “do not know.”Even less known is the potential impact ofclass-action lawsuits. Litigated contentionshave centered on a range of issues, from feedisclosures to agent compensationagreements. Historically, there has been asense of comfort in the industry’s ability toself-regulate, but this has changed with thefrequency and size of penalties in recentclass-action lawsuits. In 2001, 70% said thatclass-action suits would change the waycompanies market and sell products. Today,while a third of the companies are concernedabout the risks these lawsuits represent, thelargest percentage (45%) are unsure what theoutcome will be.Strongly Agree / AgreeStrongly Disagree / DisagreeDont KnowN Class action suits will significantlychange how companies marketN Tax reform (estate or flat) and lifetimesavings accounts major impactN Privacy issues will require increasinglylarger investmentsN Cost of compliance with regulationswill continue to increase45%19%36% Insight: The lack of consensusregarding tax reform may be due to diver-gent marketing strategies, with someconcentrating on wealth protection, otherson basic income re-placement products,and so on. In general, tax reform remainson the radar but appears too unpredictableto motivate any significant near-termproduct design or marketing strategies.34%21%44%12%4%84%7%5%88%!!!When asked the most important trend(s)facing the industry over the next threeyears, there were some varyingresponses...............How to make life insurance moreaffordable and reduce the cost ofprocessing insurance claims, new businessand service.CIO..............Affordable and simple to understand Lifeand Health Insurance Products that meetthe needs of an aging population.Medical Director..............Will consumer driven healthcare resolveinflationary healthcare expenses? willemployers get out of providing healthcareto employees?VP Sales/Marketing!!!
Robert E. Nolan CompanyLife Annuity Industry Survey Findings7changes in processes and associated increasedcosts will be incurred as companies move tosatisfy the new requirements. Less clear arepotential changes in the estate and income taxarenas, where potential changes are toouncertain to drive product changes at thistime.Conclusion:The survey identified three significantdemographic opportunities that companiesshould act on:1. The graying of America,2. Growth in ethnic populations, and3. Lower- and middle-income markets.While not new, the aging of America is atrend that companies need to address quickly.Product features as well as distribution andservice techniques need to match the needs ofthe senior market.Less clear is the impact of ethnicity, clearly alarge and growing market, but one fraughtwith high sales and support costs and complexchallenges. A careful demographic evaluationof this market should be part of everycompany’s plan; the evaluation should lookfor a match between capacity, distribution,service, and segment.Regarding compliance, careful cost manage-ment is required to ensure that overhead doesnot grow inappropriately as a key element infulfilling regulatory obligations. Growth inregulatory based compliance will drive!!!Across all company respondents, therewas one very consistent messageregarding future marketing and productconsiderations that had to be taken intoaccount – the words were written anumber of different ways, but allpointed to the same situation:..............population aging...growth of lifesettlements...aging of the population...aging of U.S. population...retirementincome management as baby boomersretire...aging U.S. population and themarket opportunities it creates...agingpopulation and wealth transfer...agingpopulation...boomers aging andretiring...aging population with longer lifespans and better health...!!!Common Drivers of Value ImprovementSource: Nolan presentation to LIMRA Marketing Forum on Risks and Challenges in our IndustryCutting or containingthe tail of the productportfolioCutting or containingthe tail of the productportfolioManaging expensesthrough automationand processredesignManaging expensesthrough automationand processredesignProfitable growth inpremiumProfitable growth inpremiumEnhancing channelprofitability andthroughputEnhancing channelprofitability andthroughputTapping the hiddenvalue in currentcustomer / channelrelationshipsTapping the hiddenvalue in currentcustomer / channelrelationshipsManage financialperformance on anongoing basisManage financialperformance on anongoing basisLife andAnnuity ValueImprovementLife andAnnuity ValueImprovement
Robert E. Nolan CompanyLife Annuity Industry Survey Findings83. Competitive LandscapesOn the competitive front, most respondentssee industrywide refocusing as likely:The message here is that many companies willbe concentrating their efforts on their bestlines and eliminating marginally profitableancillary lines. For those companies, a back-to-the-basics approach supersedes the goal tobe a financial supermarket. A majority alsostate that niche companies will be moresuccessful than companies offering fullfinancial services. Two factors probablyunderlie this response: the company’s currentposition in the market (specialized vs. broad)and its distribution system.The impact of merger and global expansiontrends is less clear:About half (49%) of respondents believemergers and acquisitions will improveeconomies of scale and the other half areeither unsure or believe the opposite—thatbigger is not necessarily better.Another interesting and unclear response isthe almost completely even split on the impactof globalization, despite the continuedincursion of non-U.S. companies into the U.S.industry. This response seems to be a result ofthe surveyed company’s strategy, with about athird of respondents working on globalexpansion (possibly with a partner company),a third content to remain domestic, and a thirdstill uncertain whether it’s necessary to expandinto international markets.Niche companies will be moresuccessful than full financial services Insight: Companies with career chan-nels (and particularly those covering smalltowns and rural areas) may need a broaderproduct portfolio than those marketingmostly through brokers, whether they man-ufacture all lines or private label a fewlower volume lines to enrich their productsets.59%24%17%Strongly Agree / AgreeStrongly Disagree / DisagreeDont KnowDivestitures, discontinued productswill grow as companies focus on returnsStrongly Agree / AgreeStrongly Disagree / DisagreeDont KnowTarget mergers and acquisitions willimprove economies of scaleStrongly Agree / AgreeStrongly Disagree / DisagreeDont KnowGlobal expansion of U.S. companieswill be a major source of growthStrongly Agree / AgreeStrongly Disagree / DisagreeDont Know66%5%29%49%20%31%37%30%33%
Robert E. Nolan CompanyLife Annuity Industry Survey Findings9Today, only 19% feel this is a threat andalmost half (47%) do not see these businessesas major threats.Conclusion:From a marketing perspective, companiesneed to make a strategic decision betweenbeing either niche-focused or broad marketbased, possibly even international.Respondents are split between the impact ofglobalization and merger and acquisitions.That said, the majority of companies will bemost successful by focusing on their corecompetencies with a clearly defined marketand strategy, eliminating marginally profitableancillary lines. A majority also state thatniche companies will be more successful thancompanies offering full financial services.Interestingly, there is less concern over theimpact of banks and Internet on distribution.Two long-standing competitive threats nowseem more uncertain than they used to.In 2001, 50% of respondent felt that theInternet would not destabilize the profitabilityof life companies’ traditional distributionchannel. Today, this has dropped to 22%believing that the Internet will not have adestabilizing effect.A majority (63%) remain uncertain of whethertraditional channels are threatened by onlinedistribution, a concern that’s existed sinceweb-based sales first arrived on the scene.The ultimate impact remains to be seen.We see a similar shift in attitude regarding theentry of banks and other non-insurancecompanies; compared to the Internet,however, respondents are less concerned withthis development. In 2001, about 50% ofexecutives believed banks and other non-traditional competitors would be a majorstrategic threat over the next three to fiveyears.Banks and other non-insurance entitieswill become major threatsStrongly Agree / AgreeStrongly Disagree / DisagreeDont Know19%47%34%Internet sales will destabilizetraditional channel profitabilityStrongly Agree / AgreeStrongly Disagree / DisagreeDont Know15%22%63%
Robert E. Nolan CompanyLife Annuity Industry Survey Findings10Very Likely / LikelyNot Somewhat LikelyDont Know4. Sales and Marketing StrategiesAnswers to questions about product strategyoffer both consistency and an interestingdisparity between market trends and likelystrategies. In interpreting the results, keep inmind the changes in market demographicspreviously discussed.Leveraging existing products takes advantageof market presence, distributor expertise, andoperational infrastructure. Increasing theemphasis on retirement and lifestyle products,particularly products like annuities whichmeet the payout needs of seniors, indicatesadaptation to changes in the marketplace. Theinteresting disparity involves the cautionshown with respect to variable investmentproducts, a recent core element in the rapidgrowth in annuity product portfolios.Although over 40% indicate a likelihood ofincreased marketing of variable products, the“not likely” answers are over 50%.N Expand into PC or AH lines eitherdirectly or with private labels9%68%24%Very Likely / LikelyNot Somewhat LikelyDont KnowN Increase marketing of variableinvestment-related productsN Increase focus on retirement/lifestyleproducts (annuities)N Enhance existing products with uniquefeatures and/or reduced charges Insight: Significant barriers to entryof variable products, including a highercost of entry, intensified regulatoryscrutiny with associated distribution risks,and greater investment management andservicing complexity, may keep carriersout of the market. Insight: While the virtual tie is a littlesurprising, the overall result indicates thatsome companies are pursuing productmanufacturing as a core strength andothers might follow another core strategy,such as distribution.As a strategy, manufacturing products forother carriers to distribute had split results inthe survey. The 40% of companies whoreported being likely to do this was offset bythe 43% that said they were not likely.For those carriers not already in the business,expansion into Property and Casualty orAccident and Health lines was not a supportedstrategy, with 68% saying “not or somewhatlikely.” Most of the supporting votes (24%)came from companies already in this business. Insight: Consistent with the overalltheme of staying focused on corecompetencies and leveraging existingexpertise and infrastructure, expansioninto an entirely new line falls low on thelist of preferred strategies.N Build private label products fordistribution by other carriers17%43%40%9%51%41%12%16%73%83% 14%3%Very Likely / LikelyNot Somewhat LikelyDont Know
Robert E. Nolan CompanyLife Annuity Industry Survey Findings11Very Likely / LikelyNot Somewhat LikelyDont KnowAnother strategy related to product perform-ance, aggressive investment practices,received only 24% “likely” votes, with themajority (55%) saying “not or somewhatlikely.” Overall, investment strategy remainsconservative for the time being.A look at distribution strategies further sup-ports the leveraging of existing resources asthe main direction for companies to pursue.The three primary distribution strategiesindicated by respondents were:1. Providing online access to production(84%),2. Web conferencing and e-learning (81%),and3. Expanding the existing field force (74%).These strategies build on current resources andcore competencies while leveraging currenttechnologies, infrastructure, and expertise todrive growth.When asked in 2001 about Internet sales, onlya quarter of respondents (25%) believed that,as need-based products, Life, Annuity, andDisability would sell well over the Internet.Today, 46% of respondents plan to increaseInternet-based products and sales. That isalmost balanced by the 42% not likely tofollow that strategy. Companies are still almostas likely to use direct marketing (phones andmail) to reach new customers (52%). Insight: It is likely that these changeswill be gradual, selective, and very closelywatched as their impact on product,pricing, and profitability is measured overtime.85%12%Very Likely / LikelyNot Somewhat LikelyDont KnowN Expand existing field forceN Integrate use of web conferencing ande-learning into field mgt. practicesN Provide distributors access to web-based prod., commission client info.N Increase Internet-basedproducts and salesN Increase direct marketing efforts(inbound and outbound phones, mail)12%42%46%Very Likely / LikelyNot Somewhat LikelyDont Know21%28%52%17%8%74%9%10%81%9%7%84%N Pursue aggressive investmentpractices - shorter duration and hedging55% 19%24% Insight: Companies show a willing-ness to continue to supplement their salesefforts via these alternative distributionsources, although responses indicate astronger preference to support their fieldforces.A look at distribution strategies furthersupports the leveraging of existing resourcesas the main direction for companies to pursue.
Robert E. Nolan CompanyLife Annuity Industry Survey Findings12Very Likely / LikelyNot Somewhat LikelyDont KnowMore surprising is the response on the need toincorporate full commission disclosure in salespractices. Despite intensified pressure on salespractices, suitability, and disclosure, only 41%indicated this as a strategy likely to be pursuedover the next three years.Conclusions:The focus is on (1) optimizing the existingdistribution channels and (2) enhancingproduct features to provide competitiveadvantage and meet market demands while(3) expanding the tools, techniques, andtraining of the existing field force. Consistentwith the strategies depicted in the Operationsand Technology sections of this survey,growing the investment in the Web combinedwith better use of the Web’s portfolio of toolsthat enhance distribution channel effectivenessis clearly a top priority at the respondents’companies. Inevitably, these strategies force achoice between being ‘leading edge’ versus‘fast follower’ in deploying these technologies,because not providing equal or betterfunctionality will erode a company’s com-petitiveness from a distributor’s perspective.As a result of the graying of America, there isalso a recognized shift to retirement andlifestyle protection product features, althoughinsurers are approaching growth in variableproducts with greater caution. Other strategies,like Internet and direct mail, continue to play arole, although at a much lower priority thanexisting methods. Lastly, while there isincreased attention to the use of moreaggressive investment management practicesand the need for full commission disclosure,both strategies rank the lowest of all reviewed. Insight: This might be an indication ofa general desire to be a reactive follower onthis topic as opposed to a change leader,particularly given the potentiallycontroversial nature of disclosure and theimpact it could have on distributors if notdone consistently through the industry. !!!In response to describing thegreatest challenge(s) facing Sales andMarketing executives, the responses allcarried a consistent theme:..............Agent recruiting, retention…agingdistribution...cost of distribution...effectivedistribution…figuring out the appropriateblend of distribution...allocatinginvestment and resources over competingchannels…finding and keepingdistribution…dwindling sales force…recruiting and retaining qualityproducers…retaining good reps…salesproductivity...reducing agent turnover.!!!N Incorporate full commission disclosureinto sales practices36%22%41%
Robert E. Nolan CompanyLife Annuity Industry Survey Findings13Operationally, respondents are working acrossthe board on service delivery, technology, andstructure. Of all the operations strategies, twoemerged as clear winners. Almost unani-mously, speed of service is seen as a strategicimperative (97%). Speed is closely followedby providing more service access methodssuch as phone, Web, e-mail, VRU, and soforth (93%).The second most popular strategies lookedfirst at the cost-effectiveness of servicedelivery by combining functions to gaineconomies of scale (75%), tied with servicetiers based on profit (consumers) (75%) andfollowed closely by contribution to profits(producers) (70%).5. Operations Insight: A move towards self-serviceis evident in this response and supportedby recent industry trends. The Web andInternet act as enabling technologies, withthe expanded access provided driving theindustry toward faster delivery of service. Insight: Like the credit card industry’smuch-touted tiers (e.g., silver, gold,platinum), service tiers allow a company topursue two separate approaches accordingto unique cost structures. One strategywould be to reduce the services providedto less profitable consumers or producers,using the current level as the “top tier” andcreating a lower-tier service. This wouldallow a company faced with expenseconstraints to preserve its service-basedcompetitive advantage for the top tierwhile generating savings in the broader,less profitable groups. The secondapproach, complicated by the cost factor,would be to create a new, higher tier withadded services above the current level. Forexample, a “concierge” service line forpersonalized support, direct access,expanded hours, and higher service levels(such as faster answer time) might becreated. One drawback to this approach isthat, unlike the first approach whereservice is reduced for all but the topagents, creating a new, higher service tierwould add to costs.95%2%86%A B7%A. Accelerate service delivery (timeneeded to complete a transactionincluding NB)B. Provide more service access methods(phone, Web, e-mail, voice response)Very Likely / Likely Add In Somewhat Likely65%10%60%A B C15%55%15%A. Consolidate similar functions acrosschannels and products for economy ofscaleB. Adjust consumer service standards toreflect customer tiers based on profitC. Adjust producer service standards toreflect contribution to profits (tieredservice)Very Likely / Likely Add In Somewhat Likely
Robert E. Nolan CompanyLife Annuity Industry Survey Findings14The other strategies rated by the surveyparticipants were spread rather evenly,reflecting a diversity of planned approaches:The relatively close ranking of two distinctorganizational strategies—by channel (54%)and by market (65%)—indicates that thesesolutions are custom to the company andbased on other existing product, channel, orservice strategies. The interesting finding isthat collectively, most companies arereorganizing in some fashion to improve costs,service, or both.Over half (64%) of the companies surveyedare moving towards expanded service hours.This works in conjunction with expandingaccess through Web, e-mail, and interactivevoice response previously mentioned (93%).Some form of consolidating telephone serviceoperations will be undertaken by a majority ofrespondents (58%). Still, companies remainsplit on the tradeoffs in combining distributorand consumer telephone service operations,with the typical determinant being whethermost of the calls are sales support and newbusiness (keep them split) or service-related(combine them). Organizational questions ofthis nature remain unique to each company’sdistribution systems and contact center(computer-telephony) integration capabilities.One action to be taken is consolidating physi-cal locations and relocating to a lower-costarea. Fifty-one percent (51%) of respondentseither were not likely to pursue this strategy ordid not know. If you added “somewhat likely”to the total, the total goes to 68%. Only 10%indicated this as a very likely strategy. Insight: : Giving broader hours a lowerpriority than broader access is based on thefact that easy self-service options reducethe need for expanded direct service.51%14%50%A B C D14%41%17%40%14%A. Align operations with customermarkets (employer, individual,wirehouse)B. Increase hours and days of serviceavailability (move towards 24/7)C. Consolidate distributor and consumertelephone service operationsD. Align operations with channels ofdistribution (e.g., career, bank, etc.)Very Likely / Likely Add In Somewhat Likely!!!Technology and effectivenessremain a consistent source ofcompetitive advantage, as indicatedby the consistency of responses to thequestion regarding the top priority forgaining competitive advantagethrough service..........Straight through processing….technology that meets targeted consumerneeds at cost effective price… use oftechnology… technical automation andprocess improvement… use oftechnology... economies of scale and useof technology.Reduced cycle time… reduced costs…better service… faster time service….delivery efficiency… speed to market...superior service.!!!
Robert E. Nolan CompanyLife Annuity Industry Survey Findings15The top priorities for gainingcompetitive advantage throughservice will be:1. Training for consistent deliveryof service,2. Having adequate technologiesto effect good service, and3. Monitoring to make sure goodservice is delivered.”– Insurance Company PresidentService / Cost LeversportfolioNew Service DeliveryModelsNew Service DeliveryModelsSupply-sideImprovementsSupply-sideImprovementsDemand-drivenImprovementsDemand-drivenImprovements• Continuous efforts to lowercosts, improve quality, developpeople– Capture scale– Streamline processes– Automation– Best Practice Adoption– Raise average productivity– Eliminate layers / increasespans of control– Sourcing to improve unit cost• End-to-end understanding ofcost and value• Reinforce affordability mindset• Work w/products to makebetter, more informed choicesaround design• Increase advance planning ofnew product rollouts• Revisit services and servicelevels delivered• Charge for services• Leverage new servicemodels, e.g., self-servicevia web, STP• Rethink underlyingbusiness model• IT innovations (e-signature)• Creative sourcing and JVsCONTINOUSLY TUNETHE FACTORYWORK ACROSSTHE BUSINESSCost / Service Cost Cost / ServicePrimary ImpactFIND “New Ways”OF DOINGBUSINESSSource: Nolan presentation to IASA on May 2006, Session 106 Tackling the Ongoing Expense ChallengeConclusion:Service as a competitive advantage is comingof age as product features and pricing dif-ferences converge. Speed and simplicity aretwo key measures of effective delivery on thisstrategy. We know that some companies haveyet to venture into the self-service arena of theWeb, and many have not expanded their callcenters into contact centers that handle calls,e–mail and even instant messaging. The lackof strategies and actions in these venues arerisky and could cause these companies to fallbehind as they fail to meet producer andconsumer expectations, compromising growthand market share potential. Similarly, the con-solidation of functions that bring economies ofscale to the company and one-stop shopping tothe consumer remains a solid strategy. Finally,service tiers which provide a sense of privilegeto top producers and high-value consumers isbecoming more prevalent, although secondaryto the price/service tradeoff.
Robert E. Nolan CompanyLife Annuity Industry Survey Findings1695%5%88%A B C11%85%15%A. e-Signatures and online applicationsB. Document management, work flow andimagingC. Web self-service for distributors and/orcustomers (portals)Very Likely/Likely Dont Know/Somewhat LikelyA. Common consolidated front-ends(simple multi-product entry)B. Consolidated commission systemswith accelerated electronic paymentContinuing the direction of the past severalyears, technology remained the mostconsistently supported strategy surveyed. Thatsaid, it is important to recognize thatcompanies often express desires to implementnew technologies prior to the reality ofdiscussing organizational priorities andresource constraints. It is easy to see favoritesolutions without the constraints of a cleartimeline for implementation or resource coststo add perspective. Adding these realitiesmore often than not significantly reduced thenumber of solutions that were actuallyimplemented.Respondents ranked three technologystrategies significantly above the rest:Trailing close behind these three technologieswere two almost just as highly ranked thatattempt to simplify the core processesinvolved in issuing insurance and payingagents:The next three technology strategies were stillhighly ranked, with over 70% of respondentsindicating they were Likely to Very Likely toimplement, although the percentages arestarting to soften with a higher percentage of“Do Not Know” responses:Common consolidated front-ends toaddress the problems of multiple legacysystems associated with aging productportfolios (83%), andConsolidated commission systems tied toaccelerated electronic payments (80%).1.2.Client Relationship Management (CRM)single view of all systems (73%),Data warehouse / data mining for customersegmentation (72%), ande-Delivery of customer materials (71%).126.96.36.199. TechnologyE-signatures supporting the operationsstrategy to provide fast service withbroader access to Web self-service for anamazing 95% of respondents.Document management building afoundation for greater distributed service(think contact center and simultaneousprocessing) for 88% of respondents.Web portals and online electronic transac-tions enabling consumer and distributorself service for 85% of respondents.1.2.3.A B83%16%80%17%Very Likely/Likely Dont Know/Somewhat Likely
Robert E. Nolan CompanyLife Annuity Industry Survey Findings17There remains mixed priorities with regards tosupporting electronic messaging technologiesas a service tool, specifically instant messagingand e-mail, with only 50% of respondentsindicating Likely to Very Likely to implement,matched by 42% in the Do Not Know andSomewhat Likely category and 8% Not Likely.The remaining technology investmentresponses show a consistent desire for tech-nology strategies that have been popular acrossa number of surveys and years. Insight: While e-signatures andonline applications are likely to representthe largest investment, the electronicdelivery of customer materials in supportof the online purchase ranks somewhatlower. This is probably a direct result ofthe technology adoption curve, with thefirst priority being online applications,transitioning to electronic delivery ofmaterials as more consumers sign on as“electronic customers,” bringing withthem expectations of electronic service. Insight: : Expert systems have been atarget of investments for a number ofyears with mixed but improving results. Akey contributor to the improved resultshas been the focused application oftechnology in lieu of the earlier broad-brush efforts to design “artificialintelligence.” With clarity of purpose hascome improved applicability.Even for these strategies, the “Not Likely”responses remain negligible (3–4%).73%23%72%A B C25%71%26%A. Client Relationship Management(CRM) – single view all systemsB. Data warehouses/data mining forcustomer segmentation and targetsalesC. e-Delivery of customer materials(annual/ quarterly statements,prospectus, etc.)Instant Messaging and e-mail-basedconsumer services50%42%Very Likely/Likely Dont Know/Somewhat LikelyVery Likely/Likely Dont Know/Somewhat Likely Insight: As the practical applicationsof Web-enabled service and onlineapplications grow, it is likely that, likee-delivery of consumer materials, theadoption rate of instant messaging ande-mail or their successors will increase.Given the current state of Web service,the lower ranking is more indicative ofthe premature nature of thesetechnologies versus any actual statementof their long-term viability.65%33%65%A B C D E F31%64%23%58%32%57%33%48%33%2% 4%13% 10% 10%19%A. Expert (rules based) systems for UWB. Contact Center automated work forceC. Consolidation of admin systemsD. Straight through Processng (STP)E. Business Process ManagementF. Replacement of legacy administrationVery Likely/Likely Not LikelyDont Know/Somewhat Likely
Robert E. Nolan CompanyLife Annuity Industry Survey Findings18Consolidation of administration systems isnow the more likely path chosen over a flatreplacement of legacy systems (65% vs. 48%).The cost of replacing older systems combinedwith a growing availability of front-end andadd-on products has given extended life to themany generations of processing systemscurrently in use.Straight-through processing (STP) continuesto receive relatively strong favor as a systemsinvestment, with 58% of the respondentslikely or very likely to invest in it. Asmentioned, the focus on modular replacementor improvement of core administrativesystems has moved to the forefront ofadministrative strategies.Business process management followed rightbehind STP at 57% “likely to very likely.”This reflects recognition that continuousimprovement and a focus on effectivelymanaging the core processes that drive acompany represent significant opportunities. Insight: A phased plan of con-solidating multiple platforms onto a single,existing strategic platform, and thengradually enhancing and/or modularlyreplacing the older system, seems to be theprevalent approach. Insight: Enhancements like STP, whichcan be done as an add-on to existingsystems or a complete front-end replace-ment, move companies forward in terms ofservice, cycle time, and consistency. Suchenhancements are also relatively cost-effective. Insight: : With the inevitable blendingof transactions and calls to achieve serviceand productivity goals, organizations willneed advanced tools to manage how, when,and where the work is done. Work forcemanagement tools are likely to continue toincrease in importance over the nextseveral years.Contact (or call) center work force manage-ment systems have become more importantover the last few years in parallel with therecognition of potential efficiencies andservice improvements buried in mostcall/service centers. This change also supportsthe service strategy regarding increasedconsolidation of telephone centers.!!!Companies have a wide variety ofdemands for technology, and yet thereare common themes...............• Imaging, document management andworkflow;• Straight through processing;• e-signatures and electronic commerce;• Contact centers for calls, e-mail, faxes;• BPM and process improvement; and• Web tools for the field first andcustomers second...............As one Company President stated:Nothing stands out above others - it is acombination of back office efficiency andbetter front-end efficiency with customers(self-serve, contact center automatedmanagement, etc).!!!
Robert E. Nolan CompanyLife Annuity Industry Survey Findings19An Operations Director summedit up this way:Use technology to provideservice that is low-cost but feelscustomized to the policy-owner orproducer.Quality of Current Business Processesand Technology SupportSource: Nolan Insurance Industry Technology StudyNew Business Underwriting C+ B- B- CPolicy/Member Service B- C+ C+ CClaims Disbursements B C B CAgent/Field Support Management C C C CPremium Billing Collections B- C+ C CFinancial Reporting B B B- C+Customer Serivce (Call Center) B- B- C+ C+Business ProcessITRespondentsBusinessProcessQualityTech.SupportQualityBusinessProcessQualityTechSupportQualityBusinessRespondentsConclusion:Not surprisingly, technology remains animportant strategic enabler to business growthand profitability. With an emphasis onoperationally-based strategies, companies arelooking more to their systems investments tomake their services a competitivedifferentiator. Even clearer is the desire toextend into the electronic world of Web-basedservices, electronic data collection (onlineapps), and electronic delivery (e-mailedstatements) as more companies incorporatethese features into their core capabilities.More mature technologies like documentmanagement, workflow, CRM, and commonfront ends (the “graphical user interface” orGUI concept) also remain top candidates forconsideration and investment dollars. Expertsystems seem to be finding its niche asapplicability becomes better defined and moreAccording to the respondents of Nolans Technology Strategy and Implementation inthe Insurance Industry survey, the weighted score for the level of technology supportprovided to a portfolio of key business processes reinforced the need for continuedimprovement in applying technology as a competitive enabler.focused, particularly in the key knowledgemanagement areas of claims and underwriting.Bottom line: companies pondering where toplace their systems investment dollars shouldlook first at expanded service access andstreamlined transaction processing.
Robert E. Nolan CompanyLife Annuity Industry Survey Findings207. OutsourcingOutsourcing remains an active topic, withproponents and opponents presenting equallyvalid perspectives based on their individualsituations.In Nolan’s 2003 Technology Study, wereported that less than a third of therespondents felt their organizations had beensuccessful with information technologyoutsourcing. This lack of success led to verylow comfort levels with business processoutsourcing (BPO). This experience seemseven more common for this survey. Onaverage, only 16% of respondents felt theywere likely to outsource any key functionswithin the next three years—the rest (84%)were not likely to do any outsourcing or didnot know one way or the other.Looked at another way, by combining “verylikely,” “likely,” and “somewhat likely”responses, we can see the most popularcandidates. The target function for mostoutsourcing remains selective informationsystems functions, although there has been astrong shift towards a few non-core functionslike document management (mailroom,imaging) and policy administration forlegacy/inactive blocks of business:On the other hand, processes typicallyconsidered core remain less likely targets:Despite a number of highly publicized servicecontracts and rapid growth in the overallsourcing industry, respondents showed arelatively strong disinclination towards the useof external, non-U.S.-based resources forbusiness support. Information systems mainte-nance and development remained the mostpopular target area, with document manage-ment (image processing) also showing up as acandidate on the list for near-shore options:A. Document/Management (Mailroom,Imaging)B. Systems MaintenanceC. Systems DevelopmentD. Systems Infrastructure (Data Center,Network)E. Policy Administration (Legacy/InactiveBlocks)AA. Agent Contracting (Licensing Appointments)B. New BusinessC. Policy Administration (Active Blocks)D. Call Centers (Consumer, Producer)E. ClaimsSomewhat Likely, Likely, Very LikelyA B C D E56% 56% 49% 42% 42%A B C DB C D EA. Document ManagementB. Systems MaintenanceC. Systems DevelopmentD. Systems Infrastructure16% 17%11%24%11%9%9%49%15%64%3%58%8%49%16%66%5%Not Likely Including Dont KnowOff Near
Robert E. Nolan CompanyLife Annuity Industry Survey Findings21AA. Document ManagementB. Corporate FunctionsC. Policy Administration (inactive blocks)D. Systems MaintenanceE. Systems DevelopmentF. Systems InfrastructureB C D E F28%21% 18% 19% 20% 22%OnSlightly more popular with respondents wasthe use of on-shore resources; respondentscontinued to target systems-related functionsat an even higher percentage while adding tothe list corporate functions (accounting, HR,payroll) and policy administration of inactiveblocks. On-shore document management(mailroom, imaging) showed up as the mostlikely candidate, although with less than one-third of the respondents (28%):Conclusion:Insurers will continue to use outsourcingselectively, and will look to it primarily as asolution for IT functions and areas deemednon-core to growth. Companies consideringthe outsourcing of core functions that feedgrowth or competitive advantage, like newbusiness or agent licensing, need to evaluatethis strategy with care. Even the outsourcingof call centers seems to represent a lesspopular strategy as companies begin to realizethe revenue opportunities represented bycustomer-facing functions.Although technology has advanced to thestage where geographically distributed servicestaff is feasible, we don’t see a significantshift in that direction within the industry, atleast not within the next three years.In Nolans Property and Casualty Industry Survey Findings, respondents reinforcedthe relatively low interest in functional outsourcing when they ranked it as thelowest priority when compared to other major business strategies.Underwriting PrioritiesOrganic GrowthHighLowExpense ManagementCustomer ServiceNew ToolsTrainingGrowth Through AcquisitionOutsourcingSource: Nolan PC Study 2005
Robert E. Nolan CompanyLife Annuity Industry Survey Findings22Next Steps: Strategies in TransitionIndustry TrendsThe aging of America is a trend thatcompanies need to address quickly, includingmodified product features as well ascustomized distribution and service. Equallyimportant, companies need to determinewhether they will participate in theopportunity represented by ethnic markets,taking into consideration linguistic demandsoperational capacity, distribution, service, andsegment.Competitive LandscapesGiven the need for efficiency andeffectiveness, a core strategic decision to bemade is whether to be niche-focused or toserve broad, possibly even international,markets. Marginally profitable lines shouldbe eliminated as companies focus on corecompetencies and strengths. Banks andalternative distributions like the Internetshould continue to be monitored for potentialimpact.Sales and MarketingThe greatest market opportunities rest with thechanging demographics, specifically thegrowth in aging and ethnic populations. Salesefforts and product designs need toincorporate the opportunities represented bythis shift, including expanded focus onaccount retirement and lifestyle protectionproducts. Optimizing existing distributionchannels with tiered investment of resourcesand services will be the key to improvingchannel productivity, incorporating increaseduse of web support services, modifiedcompensation structures, and enhancedtraining and retention strategies.OperationsService as a competitive advantage should bethe focus, with speed and simplicity as the keymeasures of effectiveness. One-stop shoppingconcepts combined with service tiers thatmatch level of service to profitability shouldbe investigated. Other key strategies includeexpanding self-service on the web and callcenters into contact centers that handle calls,e-mail and even instant messaging. Similarly,the consolidation of functions that bringeconomies of scale to the company remains asolid strategy.TechnologyLeading edge investments should be made inareas that provide competitive differentiation,shifting the focus to services and support:• Expanded access,• Streamlined transactions, simplifiedusage, reduced cycle time, and• Web services, and electronic delivery.Sustaining investments should be made inmature technologies, providing the base foroperational excellence:• Document management and workflow,• Common front ends (“graphical userinterface” or GUI’s), and• Selectively applied expert systems inareas like claims and underwriting.OutsourcingSelective IT functions including help desks,network management, data centermanagement and telecommunications remainprimary candidates for outsourced support.Contact Center outsourcing, beyond overflowservices, is reversing its trend as companiesstart leveraging its inherent competitiveopportunities. Great care should continue tobe taken when it comes to core servicefunctions like new business or agent licensing.Near- and on-shore services are becomingmore viable options preferred over off-shore.
Robert E. Nolan CompanyLife Annuity Industry Survey Findings23BACKGROUNDNolan is an operations and technologyconsulting firm specializing in the insurance,health care, and banking industries. Since1973, we have helped companies redesignprocesses and apply technology to improveservice, quality, productivity, and costs. Ourconsultants are senior industry experts, eachwith over 15 years of specialized experience.We are trusted advisors to our clients and weare committed to delivering measurable andsustainable results.This report is one of a series of insuranceindustry research studies conducted by theRobert E. Nolan Company. For the purposesof this survey, insurance industry executiveswere asked to weigh in on a variety of keyissues and challenges they expect to face overthe next three to five years. Their responseswere tabulated and are detailed in this report,along with insights into the possibleimplications of their consolidated responses.ACKNOWLEDGEMENTSThe information, results and insights found inthis study are based on detailed surveyscompleted with senior level executives acrossa wide range of stock and mutual companieswithin the life and annuity insurance industry.To each of those executives who took the timeto respond, we extend our thanks andappreciation.Lead Author: Steve CallahanContributors: Steve Discher, Ron ZimmerQUOTING THIS REPORTRecipients may quote briefly from this study(one or two sentences) without expresspermission. However, all such quotes must beaccompanied by the phrase: “Source: RobertE. Nolan Company - www.renolan.com.”More extensive quoting or other reuse in anyform is not permitted without the expresswritten consent of the Robert E. NolanCompany, Inc.Publication date: December, 2006.Please visit www.renolan.com to view original articles,case studies, and industry surveys. For furtherinformation, please contact us:email@example.com(877) 736-6526 (877-RENOLAN)Robert E. Nolan CompanyManagement Consultants