200901 loma resource-industry_forecast

world insurance future Page 1 of 19

From January 2009 Resource

Forecast for 2009
Insurance industry leaders predict what’s ahead for product
sales, information technology, customer service, government
regulation—and more.

By Jennifer C. Rankin

What a difference three months makes. During the first nine months
of 2008, consumers, corporate execs, and media pundits felt
uneasy about a wide variety of economic indicators, but hopeful.
That all changed in September, when the credit crunch ballooned
into Wall Street’s biggest crisis since the Great Depression,
setting into motion an astonishing chain of financial failures and
exposing the vulnerable underbelly of the world’s financial
infrastructure.

On December 1, America’s bi-partisan National Bureau of Economic
Research confirmed the U.S. is in a full-blown recession (and has
been for a year). Stock indexes continue to yo-yo wildly. And
venerable financial institutions are reaching out for federal financial
aid, reinventing themselves as commercial banks, laying off tens of
thousands of employees, putting themselves up for sale, and more.

It’s against this backdrop that Resource asked insurance industry
leaders to share their thoughts on what the year ahead holds for
sales, profitability, technology and customer service. The executives
who participated in our annual forecast included a cross-section of
members of the LL Global board of directors plus several industry
analysts. They included:

Rachel Alt-Simmons, research director, Insurance, TowerGroup

Steven Callahan, ChFC, CLU, FFSI, FLHC, FLMI, senior consultant
and practice development director, Robert E. Nolan Company

Robert W. Clark, president and CEO, Shenandoah Life Insurance
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Al Meyer, CLU, ChFC, executive vice president, American Family
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L. John Pearson, CLU, chairman, president and CEO, Baltimore Life
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Eric S. Rubin, FSA, senior vice president of Strategic Planning, New
York Life

Barry Stowe, chief executive, Prudential Assurance Company

Susan D. Waring, CLU, ChFC, COO, executive vice president and
CAO of Life Affiliates and vice president of Health, State Farm

http://www.loma.org/res-01-09-forecast-2009.asp 1/2/2009


Insurance

Craig W. Weber, senior vice president, Celent

John W. Wells, senior vice president of Long-Term Care,
Conseco/Bankers Life and Casualty Company

Here’s what they had to say:

1. SALES

What is your prediction for sales, premiums and profits for our
industry as a whole in 2009? What products look particularly
strong or weak?

CLARK: I believe sales will be flat, total premium will increase slightly
and profits will be lower. If the stock market volatility remains high, then
variable products will continue to be weak. Term and Medicare
supplement products should post some increases.

MEYER: We are in the multiline business so my answer will be very
different from the life companies. We expect revenues to continue to
be relatively flat in the industry with a small increase in the mid to low
single digits.

WELLS: Sales and premiums should grow modestly in 2009, with
profits showing considerable improvement assuming the financial
markets stabilize and improve over 2008. It is my belief that the
volatility and financial challenges of venerable financial institutions in
2008 will cause consumers to move to more fixed products with
guarantees. Combination products will gain share to address the
long-term care needs of Middle America. With a change in the White
House, Medicare supplement sales should rebound relative to
MedAdvantage.

STOWE: In 2009 I would expect to the see the aggregate growth
rates for Asia moderate somewhat relative to the last few years.
Nevertheless the fundamental drivers for our industry in Asia remain
very compelling given the demographic changes already underway,
increasing levels of personal wealth and low penetration rates of
insurance products.

With respect to products, there is already a high proportion of regular
premium business in Asia relative to single premium and in the
current environment this is a real strength. I expect this proportion to
increase. With their direct exposure to fluctuations in market
valuations, it’s reasonable to presume that unit linked products will
come under some pressure in the current market, but there are some
mitigating factors; for example, at Prudential Corporation Asia, we
have a wide range of funds supporting linked products including
some very conservative options. Also the concept of ‘dollar cost
averaging’ is well understood.

I believe there will always be a high demand for protection and health
related products—particularly in Asia, where there tend to be high
levels of ‘out of pocket’ expenses associated with medical bills.

RUBIN: On the life insurance front, we expect overall industry sales
to hold steady. Following the trend in the last two bear markets,
variable universal life (VUL) will continue to be flat for the next two to



three years. Whole life from strong companies will do well. Large
universal life (UL) cases may pick up if estate taxes are increased
under the Obama administration.

For annuities, fixed sales will be strong reflecting a normalized yield
curve that provides a rate increment on fixed deferred annuities over
bank CDs. Variable annuity sales are likely to show weakness with
investors concerned about market volatility. We expect continued
strength in immediate annuities as people’s desire for safety and
guarantees outweighs concerns about the level of interest rates.
Profits will continue to be strained for companies with large
concentrations of their business in variable products. As a result, we
may see traditional variable product players refocusing their efforts
on fixed products.

PEARSON: ‘Unprecedented’ may be an overused term, but it’s a
very fitting word to describe the current economy. Because the
industry finds itself in uncharted waters, it’s difficult to predict what
lies ahead. However, we can be fairly certain that 2009 will bring
lower than expected sales and premiums, resulting in reduced
profits.

Baltimore Life serves a middle market that requires the guarantees
and stability we provide. Many of our customers are feeling
financially strained, and they need assurances that their future
remains secure. Our business will remain intact by continuing to
provide these assurances.

On a product level, we’re likely to see more term insurance sales in the
coming year. During the time leading up to the recovery of the
economy, we will probably see an increase in products that offer
premium and cash value guarantees and a reduction in the sale of
equity-based products.

WARING: It is likely that life insurance sales will be relatively flat for
2009 and fixed annuity sales will be up. There may be slight
increases possible in premium. Policy count will continue its long
term decline. Variable universal life (VUL) will continue to see
significant decreases due to market volatility and recession. Policies
with guarantees such as no-lapse guarantee universal life (NLG UL)
should perform well. The increasingly price driven nature of term
insurance may pose a potential threat to industry profitability. Term
insurance will continue to perform well as customers look to keep
expenses at a minimum.

ALT-SIMMONS: The economic events of 2008 have caused rapid
changes in consumers’ behavior and the attractiveness of life and
annuity insurance products. These changes impact the ways
products are both sold and used, and they highlight the difficulties
insurers have in keeping up with and anticipating changes in product
demand. For multiline insurers, refocusing distribution channels on
the most appealing products in a given market environment is a huge
challenge. Rapidly shifting product mix and equity volatility create
opportunities but also can create additional long-term risks for
insurers.

Changes resulting from the financial turmoil of 2008 have affected
insurers in the life and health segment in multiple ways, depending
on consumers’ ability to pay premiums and maintain policies. As U.S.
consumers are squeezed by inflation, rising gas and heating costs,
troubled mortgages, deflated retirement plans and savings, lost jobs,
and a general lack of confidence in the economy, they will take a



closer look at household spending. Life and health policies formerly
seen as must-haves now become nice-to-haves. The result is that
insurers will see more individual life policies lapse as consumers
direct their spending to other necessities, and the number of new
policies issued will decline.

For policyholders with significant cash values in their life insurance
policies, TowerGroup expects two outcomes. First, policyholders will
tap into their policies for loans. Although the outcome for insurers will
not necessarily be bad, policyholders will reduce the death benefit
amount if the loan is not paid off or will lose the policy’s cash cushion
used to pay policy premiums if they do not make premium payments.
The second outcome is an increase in life settlements. A life
settlement is a transaction between an insured (generally over age
65) and a third party to sell the insurance policy to the third party for
a higher value than the policy’s cash surrender value. The third party
continues to make premium payments and becomes the policy’s
beneficiary. In other words, the third party is an investor that bets on
the original insured’s life expectancy. For insurers, this practice
increases the potential for disruption to pricing models and lapse
assumptions; it also triggers compliance and suitability risk.

Fixed annuities are solid. These low-risk investments lock in a
guaranteed income rate for the duration of the product (anywhere
from one to 10 years) and are an alternative investment to CDs.
Fixed annuities are regulated insurance products guaranteed by the
insurer, but are not insured by the Federal Deposit Insurance
Corporation (FDIC). When fixed annuity interest rates exceed CD
rates, as in the current environment, the products will receive a
greater percentage of sales. Banks are the primary distribution
channel for these products and remain a bright spot for sales as
investors seek risk-free investments. However, the turmoil of the life
insurance industry is contributing to policyholders’ fear, leaving many
potential investors on the sidelines.

Indexed annuities are in play. The summer of 2008 created turmoil for
indexed annuities as the U.S. Securities and Exchange Commission
(SEC) sought to reclassify these insurance-regulated products as
securities products, bringing them under the jurisdiction of the SEC.
Despite significant backlash from insurance companies, industry trade
groups, and distributors, the SEC quietly closed the comment period
on September 10, 2008, less than two months after the original
proposal, denying industry requests to extend the comment period.
Under pressure, the SEC reopened the issue for comment. As of mid-
November, the SEC is in the process of reviewing comments. The
proposal has some broader industry implications. In light of the
economic crisis and perceived lack of regulation—particularly lax
enforcement by the SEC throughout this crisis—insurers should expect
more regulation and less participation in the regulatory process. Also,
the battle will intensify between federal and state regulators over who
regulates insurers.

New sales of variable products have been slowing month over month
for the past year as rocky equity markets keep investors on the
sidelines, although existing investors of variable products with
guaranteed minimum withdrawal benefits (GMWB) or principal
protection features are seeing limited downside. Insurers can run into
trouble if the product account values fall below the guaranteed
amounts. Insurers utilize hedging strategies or reinsurance treaties to
mitigate the risk. The first guarantees were launched in the early
2000s, so these mitigation strategies have not been tested in an
extended down market.



Insurers hedge GMWB risk exposure through strategies that use
derivatives and futures to offset long-term risk exposure to the
guarantees. Hedging costs increase with market volatility, reducing
product profitability. There are also increased risks of ‘hedge
breakage’, in which a mismatch between assets and liabilities
renders the hedge ineffective. With insurers on the hook for variable
annuity product embedded guarantees, and the gap between the
guarantee and the actual account value widening as equity markets
decline, insurers must find ways to shore up their capital base.
Several insurers, including Hartford, Genworth, Lincoln and
AEGON/Transamerica, are attempting to reorganize as bank holding
companies in order to tap into the U.S. government’s Troubled Asset
Relief Program (TARP), in part to gain access to additional capital.

Also, as market volatility increases, the cost of hedging increases as
well. Many insurers are bringing their variable annuity product
designs back to the drawing table. Expect to see products in the very
near future with reduced guarantee benefits at a greater cost.

CALLAHAN: Total life and annuity premiums tend to track to the U.S.
gross domestic product (GDP). In recessions, they dip along with the
GDP and are likely to continue to track in the same relative direction
over time. New sales volume for individual life insurance in terms of
application count will likely continue the 20+ quarters of quarter-on-
quarter downward trending, with group life trending up as voluntary
workplace markets improve. Annuities continue to represent a
tremendous opportunity for material growth as Baby Boomer
retirement rates accelerate, and will became a major focus of carrier
marketing and product efforts. As companies work to penetrate the
underserved middle market employer group, sales will reflect a
positive shift to increased voluntary benefit programs. Near term,
total inforce premium will probably shrink. Trends indicate a material
spike in lapses during recessionary times and that, combined with an
increase in withdrawals, loans, and partial surrenders will all take
their toll on investable assets.

Profits are likely to remain lower than prior years for the next few
years as portfolios are washed clean of any association with the
current financial crisis and the recession runs its course. This will
bring attention once again to expense management and the
associated value analysis of a company’s operational environment,
with the goal being to improve efficiency and nondestructively reduce
costs. As the economy recovers and companies start to aggressively
roll out new products and capabilities, profits should start to trend
higher, returning to pre-recession levels somewhere near the latter
part of the five year horizon.

Term life and annuities—fixed, immediate and variable—are likely to
continue their growth based on the maturing Baby Boomer market
segment that is shifting its money from accumulation, or protection,
to decumulation, or income, opportunities. Variable annuities have
had a good run since 2006, yet they and other equity-based products
are likely to experience a bit of a sales hiatus during the market
instability. Fixed and immediate annuities hold appeal that should be
sustained as the retirement market continues to grow, despite the
market performance. In addition, universal life products carrying
competitive guaranteed minimum benefits should continue to hold
appeal, especially if the guarantees outperform current higher-risk
market investments near term.

Those who ride the downturn without material investment into new
capabilities and products will find themselves lagging their



competitors once the economy turns. Those companies willing to
invest during this down cycle will be better positioned for the
improving economy, gaining a competitive advantage.

2. FINANCIAL CRISIS

How do you think our industry will be affected in 2009 by the
current financial crisis?

CLARK: Increase in consolidations and lower earnings.

MEYER: There will be some fallout, but nothing like we saw in the
banking industry. There will be a product impact with some
companies rethinking the guarantees built into some products.

WELLS: The industry will need to restore consumer confidence while
working with regulators and the accounting authorities to address the
issue with fair value and accounting for other than temporary
investments. I see insurers building capital and liquidity in 2009.

STOWE: I believe there will be renewed emphasis on getting the
basics right. This means ensuring businesses have a thorough
understanding of the risks on (and off) their balance sheets, more
rigorous profit testing of products, a sharper focus on sound, long
term investment strategies and greater emphasis on the quality of
advice to customers.

I would also expect to see some consolidation within the industry as
some of the smaller or financially challenged players look for an exit.

Fundamentally, though, I believe our industry will emerge from the
current situation in better shape than ever before. There will always
be strong demand for good savings and protection vehicles that meet
customers’ needs.

RUBIN: Carriers with strong reputations, strong balance sheets, and
high ratings will benefit. The risks associated with irresponsible and
aggressive pricing will finally get the attention of rating agencies. We
believe rating agencies and regulators will look more deeply to
uncover risks previously ignored.

WARING: The current financial crisis will present many challenges
and opportunities for the industry. Many companies will encounter
credit losses that are above normal, variable product lines will suffer
from a reduction in asset-based revenue and financial management
will be a challenge for some. However, these challenging times have
also given rise to a ‘flight to quality’ that can be an advantage to
highly rated companies. There is no doubt that we will be facing an
unfavorable environment in 2009, but the majority of the industry is
well positioned to be able to survive the current financial crisis.

Past economic recessions and downturns have been shown to have
little to no impact on life insurance industry trends. I expect that
premium trends will continue to rise while policy count will continue to
decline. Specifically for 2009, premium will probably increase only
slightly, while policy count will continue to decline modestly. A couple
of charts from LIMRA illustrate this trend (see chart at end, Will
History Repeat Itself?).

ALT-SIMMONS: Close ties with the financial services industry mean



that insurers are not immune to the impact of the financial implosion
of 2008. Across the insurance industry, losses to insurance
investment portfolios for life insurers are resulting in higher than
anticipated investment losses. Fortunately, the industry remains
highly capitalized, thanks to strong earnings and regulatory capital
structure implemented over the past decade. Despite having capital
in excess of regulatory requirements, insurers are looking to solidify
their capital bases and investor confidence through stock offerings
and private equity investments. Some U.S. insurers are also
considering tapping into the U.S. government’s financial bailout
package to shore up their capital positions.

Many insurers around the world have written down investments in
financial firms that have collapsed, such as Lehman Brothers, Fannie
Mae, Freddie Mac, and AIG. These toxic investments are causing
significant write-downs, negatively impacting earnings. In the life
insurance industry, market volatility keeps potential customers and
investors on the sidelines. For existing blocks of business, especially
variable insurance products with lifetime benefit guarantees, a major
decline in equity performance will cause product assets to fall below
guaranteed levels as well as reduce the amount of asset-based fee
income, which is crucial to life insurers’ profitability.

The battle over state versus federal regulatory control of the U.S.
insurance industry will reach fever pitch in 2009. Because of the
power of the various opposing factions, there will be more talk than
substance. Although the initiative will be adopted, implementation will
not likely take place until 2010. However, carriers cannot wait for the
dust to settle before taking action. When decisions are made, the
time frames for compliance are likely to be very short. In Europe, the
2012 implementation of Solvency II guidelines is weighing heavily on
insurers. U.S. insurers should expect similarly structured solvency
initiatives to be proposed in the next year in the United States.

An even more compelling reason for immediate action is that existing
regulatory agencies will strengthen their review activities in an effort
to prove they are the appropriate point of governance. Carriers will
have to consolidate data at the enterprise level so they can prove
they understand their risk vulnerabilities and where they have
exposure to financial uncertainty.

CALLAHAN: Regulatory oversight is likely to increase as greater
focus turns to monitoring solvency information. New York State’s
plans for increased focus on insurers’ stress test processes is one of
many actions to come as states work to show diligence in fiscal
oversight. For those that are acquiring bank holding companies or
thrifts, their access to TARP will result in even more oversight,
potentially in unsuspected areas, at the federal level. The potential
reduction in solvency requirements advocated by the ACLI and under
consideration by the NAMIC would increase the demand for greater
oversight and increase risk as the cushions for market variability are
reduced. The momentum for a national charter is likely to increase,
although the passage of the charter remains questionable in the
immediate future and will depend upon how well companies handle
the crisis in terms of solvency.

Obviously, investment strategies will have to be adjusted, driving an
increased focus on expense ratios and efficiency. Closer attention to
distribution channel costs and effectiveness will also increase, as the
gradual decline in the total agent population over the last few years
drives additional investigation of alternative, or supplemental,
channels and products. Economies of scale will create a number of



structural shifts from an increase in mergers and acquisitions to the
reduction, sale, or elimination of marginally profitable (or
unprofitable) product lines.

Activities such as agent conventions and other incentive events are
generally misunderstood by people outside of the industry and will
come under closer scrutiny as industry watchdogs are now looking to
expose these types of events as a sign of continued unnecessary
spending while the taxpayers bail out failing companies in general.
This may force companies to reward their top producers in a lower
profile than usual.

WEBER: We’ve all been in ‘duck and cover’ mode for about a month
now, but things seem to be settling down. While there are bad news
stories out there, particularly for Tier 1 insurers who were aggressive
in their investments, there are also some smiles of smug satisfaction
on the faces of CFOs who steered clear of the problem investments.
As a result, a crop of winners and losers will emerge out of the fog
shortly, and we believe that the winners are well positioned to make
selective acquisitions, or to simply drive into new markets that the
less fortunate companies don’t have the time or resources to defend.

3. TECHNOLOGY

What new technologies have the greatest potential to help our
industry, and how can they help?

CLARK: Straight through processing (STP) on simplified issue
products saves time and improves customer satisfaction.

MEYER: Mainly the ability to capture and use data for product and
pricing differentiation.

WELLS: We are finding that advances in voice call recording
analytics are helping us to identify opportunities to improve the
training of our associates, the implementation of new procedures and
the identification of policyholders who need additional help in order to
better understand and use their insurance policy. We have
implemented a system that records and analyzes all calls—we
believe that this will be a very powerful tool for improving our call
center operations over the next few years.

STOWE: Advances in electronic data collection and transmission
continue to improve the efficiency of our business. For example in
Malaysia around 70 percent of our proposals are now completed and
submitted for underwriting electronically.

More generally, the significant increases in the quality and quantity of
information available and the advances in computing power mean we
are better able to model and understand risks than ever before. We
are also better able to collect, store and analyze data relating to
individual customers so we can give them more personalized and
relevant services. For example, although the risks around data
protection and its integrity cannot be underestimated, I believe we
are not too far away from people’s medical records and history being
stored electronically and being directly accessible by underwriters via
the Web. This will considerably improve the efficiency and
effectiveness of the process.

Looking further ahead advances in our understanding of genetics
and the related ability to predict and manage diseases will have a



profound impact on our abilities to predict life expectancies.

RUBIN: We believe the Internet is still underutilized by the industry
as a whole. This is particularly true when it comes to education about
our products; specifically, the value that life insurance and annuities
play in one’s financial security. In addition, self-service technologies
are vital for companies to develop as more and more customers seek
this type of service platform. Automated workflow is a technology that
is critical to keeping costs down for carriers. Straight through
processing (STP) is also important for carriers that do business with
third parties.

PEARSON: Newer technologies have the potential to dramatically
change the buying experience. They will offer a shorter enrollment
process and faster policy issue while greatly simplifying the buying
experience. At some point, we expect that buying a life insurance
policy will be as easy for middle market consumers as purchasing a
mutual fund.

WARING: Nanotechnology and biotechnology combined show the
greatest promise to impact the life insurance industry. Innovative new
treatments for many diseases such as cancer and diabetes show
enormous promise and may greatly impact mortality over the next
decade. This in turn will impact the cost of life insurance and
potentially the customers’ perceived need for our products. The price
decreases will be beneficial for the industry; however, lessened
perceived risk of death in the mind of the customer may make it more
difficult to get consumers to obtain appropriate amounts of coverage.

Underwriting technologies that eliminate the need for invasive
procedures or streamline the process for obtaining pertinent
information will speed up the underwriting process. Data mining will
be an important component of how to determine which non-invasive
procedures can effectively replace current invasive procedures.

Web 3.0, or semantic web, will also have significant impact on the
industry. As the software that drives the Internet gets better at
understanding language, search results will improve. It is not long
before the search for ‘term insurance’ will result in your browser
presenting you with a page of information and prices, rather than a
list of links.

Combining this with improved wireless and handheld computer
devices has the potential to dramatically change the way insurance
of all types is bought and sold. The consumers of the future will
clearly go to the Internet first to research life insurance. This will hold
true even if they later decide they would like to speak with an agent.
Technology will quickly allow these customers to request to ‘speak’
with an agent via a wireless device using videoconferencing or
instant messaging. Our next generation of consumers will be very
comfortable with this sales model and will likely demand it of the
companies they do business with. Further, the expanded use of
electronic signatures and use of biometrics for customer
authentication will simplify the sales and servicing processes and
help ensure customer privacy.

ALT-SIMMONS: An industry trend that will expand in 2009 is the
industrialization of insurance operational processes. Insurers are
applying methodologies, technology solutions, and best practices
from other industries, such as manufacturing. Applying a supply
chain management approach to operations shifts manual work from
employees to automated business processes. The current focus on



process automation, including the automation of workflow between
employees and dataflow between systems, is evolving toward a
model in which the work tasks themselves are automated, allowing
for the optimization and reallocation of staff resources.

Sourcing also continues to provide an alternate cost containment
approach for insurers and can result in industry business
transformation. Outsourcing takes advantage of the sourcing
partner’s economies of scale. The outsourcer services not just one
insurer’s process needs but those of other insurers as well—all on a
single platform—by delivering common business process services.
This scale allows the outsourcer to identify best practices and drive
industry processing standards, which in turn reduces transaction
turnaround time and decreases cost.

Rapid growth in the marketplace for software as a service (Saas) as
well as hardware and computing as a service is causing insurers to
take a hard look at both applications and infrastructure. These
functions often require significant internal expertise to manage and
maintain and therefore significant cost. Insurers now realize that they
don’t have to keep building on their infrastructure just because they
have it, especially if the existing infrastructure fails to meet business
requirements. By allowing external providers to take over either
application maintenance, storage, or computing power, insurers free
up internal IT resources and create scalable capacity.

CALLAHAN: The industry is still faced with legacy applications and
traditional processing environments to a great extent, which will make
investments in improving operational effectiveness a continued focus.
Platform enhancements ranging from systems replacement to straight-
through processing will remain areas of attention. For the more
forward-thinking companies, an investment in predictive analytics for
consumer segmentation along behavioral and cultural lines will
increase along with the leveraging of this intelligence in managing
distribution channel dispersion and demographics. Product design will
continue to shift from the mass market chassis to one that allows
greater modularity and customization to match diverse customer
needs. Improvements in quality and timeliness of service will continue
to be an important area of investment. Expanded use of web servicing
for agents and policyholders will also grow as companies recognize
the efficiencies of these technologies as well as their necessity for
benefiting from the future potential of Gen Y. The need to provide
electronic servicing and product acceptance and delivery will not
replace the more traditional methods, adding complexity to the
operational environment as both infrastructures will be required.

WEBER: There are all kinds of new technologies out there with
potential. But it’s the concepts of modern technology themselves that
will drive positive change, rather than one specific technology.
Empowering business users, using SOA to increase automation and
decrease the pain of integration—those are the sorts of things that
will make a real difference. And they’re already well underway today.
The revolution began several years ago and is in full swing.

4. CUSTOMER SERVICE

How important is customer service to our industry, and how can
it be improved?

CLARK: Very important. The goal is to provide service 24/7 in a
variety of ways—Web sites, voice mail, customer contact centers,
video and so on.



MEYER: There is a lot of information available on customers and
what they want for products and services. Using metrics in the proper
places and driving results in each organization is the way to improve
customer satisfaction.

WELLS: During these difficult economic times, our customers need
to be assured that the insurance protection they have purchased
from us is easily accessible and relevant to their needs. That can’t
happen without a focus on customer service at all levels of the
organization. At Conseco, we have accomplished that focus by
consolidating customer service for our two major business segments.
With a larger, focused organization in place, we have improved all of
our customer service metrics. Of course, technology makes a
difference, too, and we have also made significant 2007 and 2008
investments in our call center and customer service representative
technologies to accomplish our goal of having superior customer
service. We believe that high quality customer service is a
fundamental goal for any insurance carrier and we intend to continue
improving how we provide it.

STOWE: Trust and confidence underpin our industry and a poor
customer experience doesn’t only impact the company responsible, it
can tarnish the whole industry. Good customer service is absolutely
essential to our continued success.

Improving customer service is continuous journey that’s shaped by
changes in technology and customer behavior. For example, many
customers now like, indeed expect, to be able to manage their
insurances directly online. However, the key driver for improving
service is to ensure the business really makes the effort to listen to
and understand what customers tell you they want. At Prudential
Corporation Asia we conduct a number of customer focus groups
throughout the year and these are incredibly enlightening.

Fundamentally though, the key to success in customer service is
attitude. Everyone in the business must genuinely care about how
their actions impact customers.

RUBIN: Critical. In many respects customer service is the clear
differentiator. As products become commoditized, customer service
will set competitors apart from one another. The development of user
friendly, visually appealing statements continues to be an
improvement opportunity for many carriers. Moving toward a
customer-centric model can make improvements. One stop service
shop will be critical to providing top-notch service to consumers.

PEARSON: The importance of customer service is a given in our
industry. Getting to know customers is the key to success for any
business, and the life insurance industry is no exception. Our
customers want to feel like we know them personally, so it’s
important for all areas of an organization to make customer contact
as seamless as possible. This can be accomplished through
database integration at all levels, resulting in more efficient customer
transactions.

WARING: Customer service is seen as critical to most industry
executives but is not seen as a differentiator among consumers,
according to recent research done by the Insurance Advisory Board.
Having said that, it is critically important to offer customers the
options they require for self service via the Web and a key
component of service is time related. Customers have clearly
indicated that when it comes to purchase and renewal decisions,



price and product outweigh customer service (see Pricing Pressure).

ALT-SIMMONS: Customer- and broker-facing initiatives continue to
be top priorities. For insurers, they include enhancing online
servicing capabilities and investing in processes and systems that
make it easy to do business. Advertising and marketing dollars will
increase as insurers seek to reassure their customers and
distribution partners of their stability. They will back up that
reassurance by continuing to modernize business and customer
service processes.

A change in market and consumer demographics is leading to a shift
in the way business is done. This dramatic change will continue as
the next generation of users turns to the Internet more and more for
access to quotes, policies, and advice. This new breed of consumer
will force carriers and distributors to respond more quickly, pushing
out products and information at a faster rate than they are
accustomed to do. Insurers must create automated straight-through
processes to facilitate the buying process through many of these new
mediums. Insurers that ignore this mandate will find themselves
lagging far behind their competitors.

As social networking platforms and mobile devices become the
standard, having an information-based portal is no longer the
minimum required. Interactivity and 24/7 support structures will
replace the cobbled together Web portals and functionality that many
carriers currently have in place. To achieve this end, carriers must
adopt systems that not only create a personal experience but
automate that process as well. Distributors must mirror these
capabilities to facilitate customer acquisition and service.
Increasingly, insurers are using intelligent routing in their call centers
to ensure that customer needs are appropriately routed to the right
customer representative. Analytics are used to create needs-based
solutions, enabling the insurer to offer the right product to the right
consumer at the right time.

Within the organization, knowledge management systems provide
another advantage by providing a forum to capture and disseminate
information effectively throughout the enterprise. As a large number
of experienced insurance workers reaches retirement, the strain will
increase on insurers as decades of knowledge go out the door. The
automation of core business and underwriting processes will ease
some of the stress, but tools exist that can facilitate the collection of
information and collaboration between employees. The
pervasiveness of collaboration features in software solutions will help
insurers capture and manage knowledge throughout the
organization.

CALLAHAN: Products are approaching a commoditization status
where new benefits and features are quickly matched by other
companies—especially those that have recognized the criticality of
speed to market and adaptability. This makes the delivery of
customer service—where, when, and how the customer wants it—
the primary source of sustained competitive differentiation. In other
words, customer focus will be the foundation of future growth,
particularly as the market becomes more segmented and
demanding. Improving customer service will require systems that are
designed for individual customer awareness and service tailoring.
These technologies must deliver timely service in a manner that is
understandable by the customer and in the method preferred—in
person, by phone, by the Web, by mobile device, by mail, or all of the
above. The need for customer-focused service will also increase



tension with distribution channels as the importance of representing
the first impression and the most persistent impression of the carrier
continues to escalate. The demand for customer-driven service will
drive technological changes that require fast adoption curves,
flexibility, and diversity for service enablement that is in sync with the
reality that service staff play a critical role in customer relationships
and customer satisfaction. This last item will make talent
management of service staff a critical focus for aspiring companies.

WEBER: The real question is whether insurers are raising the bar on
service or not, because their agents and customers certainly are. I
would say we’ve made decent progress in the past couple of years,
especially in understanding customer expectations and starting to
deliver on them. But we’ve got a long ways to go, and companies
that don’t get it right will suffer. I would argue that for most lines of
business you can’t compete on product and price anymore. You’ve
got to compete on service, and the delivery tool to get there is
modern technology.

5. PROFITABILITY

How can our industry increase its profitability over the long-
term?

CLARK: Effectively manage all costs, especially distribution costs by
responding to customer needs in a variety of ways.

MEYER: Responsible assumptions and pricing are a start. Customer
retention also has a positive impact on profitability.

WELLS: Managing risk margins will continue to be a focus —
carefully selecting risks, managing expenses, and controlling claims
costs to ensure that we can be successful in the marketplace for the
long-term.

Key drivers of improved profitability will continue to be product
innovation and speed of delivery to the distribution channel.
Companies that can efficiently bring disease prevention products
with an emphasis on reducing expenses and premium to the market
will be best poised to capitalize on increased sales and profits.
Focusing on relationship-building strategies with policyholders will
also result in increased profits. Enhancing service and
communication will increase customer satisfaction, improve policy
conservation, and provide opportunities to cross-sell other products
to the household.

A solid technical infrastructure that facilitates appropriate automation
and minimizes timely and high-cost manual processes will make a
strong contribution to long-term results and profitability. Expense
reduction as an unrelenting focus can contribute by outsourcing
functions or tasks that are not core competencies, including data
entry activities, certain high-volume back-office transactions, and
mailroom activities.

STOWE: Obviously sound expense, claims and investment
management are important, but I believe good persistency is equally
if not more important and this comes down to the quality of sales
advice. It’s essential that our industry continues to do all we can to
ensure the people get the best products, ones that really do suit their
long term needs.



For international businesses, there are opportunities to deliver
economies of scale through judicious expansion and also to leverage
learning and experience in one market to another. For example for
us as part of UK’s Prudential plc we can take product and other
expertise from Europe and US and apply this in Asia, enabling us to
leap frog stages of the development cycle.

RUBIN: First and foremost, appropriate pricing. The industry needs
to look beyond the spreadsheet mentality and value the quality of the
promise that backs the products we offer. Long term profits and
industry financial strength require use of realistic and conservative
long-term assumptions. The industry must do a better job at resisting
the pressure to use rosy long term assumptions to drive short term
sales.

PEARSON: Incredible opportunities exist to grow our revenue base.
In particular, the upcoming retirement of the baby boom generation
and the vast number of uninsured and underinsured support this
assertion. The younger generation continues to present an untapped
opportunity, and our industry needs to work harder to reach this
market segment. We need to account for the unique way that the
younger market segment processes information, and create products
and practices to take advantage of the opportunities this segment
provides.

WARING: The industry has a chance to embrace certain
technologies to substantially improve acquisition expense. On-line
medical records, prescription checks, and other electronic record and
data sources will allow for automated underwriting. These same data
will provide for improved and increased numbers of underwriting
classes as new kinds of data become available. We foresee some
companies automatically placing 80% of all business without human
expense.

Expenses can be held level or lowered by aggressive expense
control, outsourcing and managing risk. Alliances may be able to
provide access to products more cost effectively than self
manufacturing.

While we foresee agents being an important part of the process for
the next five years, we feel consumers will be comfortable working
remotely or virtually with these agents—there will be far fewer agents
relative to purchasers and this will also lower expenses.

Organically, improving mortality will improve profitability absent some
catastrophe such as a flu pandemic or wide-scale terrorist attack.

ALT-SIMMONS: The insurance industry will be tested in the
upcoming year. Carriers that have been investing in technology to
manage risk, optimize price, and be the carrier of choice for the most
profitable distributors will come out significantly ahead of carriers
who have ignored the calls to adopt. Carriers with the discipline and
executive leadership to focus resources, both financial and human,
at an enterprise decisioning level will come out of the current
economic crisis ahead of the pack, many of their competitors having
simply pulled inward and done nothing to manage the external and
internal pressures. Operational efficiency and enterprise risk
management must become ingrained core competencies. Executives
who are able to maintain a long-term vision despite the short-term
economic imperatives will be able to accomplish these objectives,
but doing so will be a balancing act that will challenge all but the
most innovative.



CALLAHAN: Companies must focus on more flexible operational
environments that are able to individualize products and service
delivery to an increasingly segmented marketplace. Economies of
scale, the discipline of focused strategies, and investments in a
staged replacement of traditional systems with modularized and
more efficient technologies is required. There is a concurrent need
for investment in service talent via training, tools, and empowerment
combined with new compensation systems that reward differentiating
service at the team and department level. Innovation, speed to
market, flexibility, efficiency, and value-added service will all be
required in order to optimize the opportunity. The rigors of true
strategic planning ala’ Michael Porter must be reintroduced and
institutionalized. Also needed is a stronger focus on corporate
overhead and the benefits of rightsourcing non-value-added services
where economies of scale or leading edge platforms cannot be cost
effectively achieved in-house. There is an increasing need for
innovation and fundamental change in order to succeed in the new
age. Industry leaders will therefore be challenged to rethink industry
paradigms and bring new approaches to the corner office. n

Forecast Highlights

Key decision makers from a cross-section of insurance industry
companies participated in the 2009 forecast. According to
participants:

U.S. Sales, Premiums and Profits: In 2009, life insurance sales will
hold steady, premium growth will be modest, and profits will
decrease. Stock market volatility and the implosion of venerable
financial institutions in 2008 have made consumers wary;
consequently, variable products will be vulnerable as consumers
move to more fixed products with guarantees. On the upside, whole
life products from strong companies will do well. Term insurance will
continue to do well as consumers look to keep expenses at a
minimum. Immediate and fixed deferred annuity sales will be strong.
Variable annuity products with guaranteed minimum withdrawal
benefits (GMWB) or principal protection features will weather the
storm, but expect to see new products in the very near future that
offer reduced guarantees at a greater cost. Large universal life (UL)
cases may pick up if estate taxes are increased under the Obama
administration.

Regulatory and Legislative Issues: The battle will intensify over
who should regulate insurers—the feds, the states or both. On the
product front, the Securities and Exchange Commission (SEC) wants
to reclassify indexed annuities as securities products, which will bring
them under SEC regulatory control; despite significant backlash from
the insurance industry, the SEC is, thus far, undeterred.

Financial Crisis: Most insurance companies are well positioned to
survive the current financial crisis. Nonetheless, companies will
rethink the guarantees built into some products and we will see some
industry consolidation as smaller and financially challenged players
look for an exit. The risks associated with irresponsible and
aggressive pricing will finally get the attention of rating agencies and
regulators, who also will monitor solvency information more closely.

Technology: The technologies with the greatest potential to help the
industry include straight through processing (STP), voice call



recording analytics, self service technologies, nanotechnology,
videoconferencing, semantic Web (also called Web 3.0), wireless
devices, electronic signatures, and biometrics (for customer
authentication). The industry’s biggest roadblocks are legacy
applications and traditional processing platforms.

Customer Service: Service is seen as critical to most industry
executives, but is not seen as a differentiator among consumers,
according to recent research. One study found that when it comes to
purchase and renewal decisions, price and product outweigh
customer service.

Long-Range Forecast: Participants also commented on what they
think the insurance industry will be like in 10 years. Their views on
this will be featured in the March issue of Resource.

Chart 1

Pricing Pressure
Insurers believe customer service drives differentiation, but
customers rank service last.



Chart2.jpg

Chart 2



Will History Repeat Itself?

Here’s a look at the impact recessions have had on insurance sales
and persistency. Source: LIMRA

Premium Chart1.jpg

Contact Resource at resource@loma.org


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