201005 LOMA CFO Inforum: State of the Insurance Industry

State of the Industry Address
Presented to:
LOMA Financial Inforum 2010
Presented By:
Steven Callahan
Practice Development Director
Robert E. Nolan Company
May 17, 2010

© Robert E. Nolan Company
www.renolan.com | Page 2
LOMA CFO Inforum
May 17, 2010
Agenda
§Major Trends
§Executive Survey Findings
§7 Elements of a Successful Company

LOMA CFO Inforum
May 17, 2010
Major External Trends Impacting Industry
1. Economic
2. Regulatory
3. Demographic
§ Consumer Behavior
§ Product Portfolios
§ Investment Decisions
§ Distribution Complexity
§ Service Operations
§ Competitive Positioning

LOMA CFO Inforum
May 17, 2010
1. Industry Lags Economic Recovery
§ Gradual Recovery from Economic Recession
– Potential of an extended jobless recovery
– Unemployment and Underemployment remains an impact
– Personal Debt influences buyer choices, withdrawals, lapses
§ Capital Shortage
– Product Design and portfolio requires closer attention
– Guarantees fine balance between competitiveness and risk / cost
§ Ratings
– Consumer Confidence negatively impacted, Brand reinforcement
needed
– Cost of Capital cascades into investment and product decisions
§ Investment Returns
– Constrained expenses limit technology and operational options
– Product Performance in competitive marketplace with choices

LOMA CFO Inforum
May 17, 2010
Consumer Reactions
§ Flight to “Quality”
– Shift to Term and selective Whole Life plans
– Dramatic drop in Variable lines
– Baby Boomer transition from Accumulation to Income
• 2009 a substantial year for fixed annuities
§ Diversification
– Multiple alternative investments
– Greater competitive pressures
§ Security
– Brand awareness
– Ratings and financial stability
§ Still looking for flexibility
– Financial returns
– Transfers

LOMA CFO Inforum
May 17, 2010
Significant shift in Product Mix
§ Consumers are cautious and conservative in their choices
– Large drops in market sensitive product lines, offset by shifts to
whole life and growth in the blend of participation and return floors
provided by Equity Indexed Annuities (EIAs)*
§ Sales through direct channels represented more than
20% of the policies, about 5% of premium sold, and 13%
of the total face value*
* Source: LIMRA

LOMA CFO Inforum
May 17, 2010
Consumer and Policy Realities
§ Good chance that many employees will face effectively
compensation reductions of up to 50%
§ Risk of loss of home and reduced retirement account
values forcing people to work longer
§ Lapses by count and by face remaining at their 10 year
highs, while policy loans and rates remain a critical factor
§ Guarantees and price points are becoming an even
greater factor in decision making
§ Even as the market recovers, the long term effects
continue to cascade impacting strategies crossing
product, market, distribution, and operational lines

LOMA CFO Inforum
May 17, 2010
Prevalent Industry Reaction to Turmoil
§ Most common response is stick with the fundamentals
– Focus on core businesses and products
– Leverage competitively differentiating expertise
§ Followed by tighter expense management
– Search for expense reductions and operational efficiencies
– Tactics: hiring freezes, eliminated projects, fewer products
§ Under an umbrella of increased risk management
– Remaining very conservative in their investments
– Minimal asset write-downs
– Negative impact on investment income & customer returns
§ All this, while compliance and regulatory concern (and
cost) increases

LOMA CFO Inforum
May 17, 2010
Common Tactics for Today’s Risk Management
§ Integrated enterprise approach in mitigating risk through
increased cross-functional interactions
§ Utilizing assessment tools for measuring relativity of risk
§ Reducing reliance on rating agency opinions
§ Modeling broader range of scenarios and outcomes and
then hedging against a wider range of scenarios
§ Increasing the emphasis on quality in acknowledgement
that market risk tolerance is lower

LOMA CFO Inforum
May 17, 2010
2. Regulatory Oversight Will Increase
§ National Influence
– National Office of Insurance
– Changes in tax treatments will impact products
– Health care reform impacting spending patterns and buyer needs
§ Ratings
– Continued downward pressure on ratings
– Impact of RBC measures
§ Suitability
– Increased consumer protection
– Complicated application review and approval processes
§ Commissions
– Shifting away from heaped commissions
– Full transparency and impact on distribution

LOMA CFO Inforum
May 17, 2010
Cost of Compliance Will Rise
§ 97% of surveyed executives stated new regulations will
drive up the cost of compliance
– Probably one of the most unfortunate lasting side effects of the
crisis in the financial services industry.
– Most of the problems centered elsewhere in the industry, all
companies are expecting additional regulation and enforcement
costs, putting a drain on already limited resources.
§ 77% of surveyed respondents indicated a change in tax
treatments - especially estate taxes – would have a major
industry impact
– Preponderance of opinion is that the change is inevitable
– Particularly relevant in the large, aging Baby Boomer market

LOMA CFO Inforum
May 17, 2010
Governance of Resources Critical
§ Stronger governance of corporate resources is required
– Economic conditions have removed any organizational “slack”
– Lower returns and increased competitive drive the need for
targeted investments that achieve competitive advantage
§ Disciplined portfolio management methodology is required
– Applies to resources, technology, investments, expenses, product
introductions, distribution channels, all aspects
– Increased management of budgets, operations, IT resources
– Requires tighter gatekeepers, greater justification, stringent
modeling, multiple critical decision points, validated paybacks

LOMA CFO Inforum
May 17, 2010
3. Demographic Shifts Are THE Trend
§ Multigenerational - 5 Generations to serve
§ Aging Baby Boomers impacting product design
§ Diversification of Nationalities and Ethnicities
Consumers (Buyer Behaviors)
Workforce (Sellers Market)
Distributors (Aging Channels)
All with unique and diverse concerns and interests

LOMA CFO Inforum
May 17, 2010
Most Significant : Demographic Differences
§ Key segments identified as primary targets of focus are :
Boomers, Young consumers (Generation X & Y), Middle
Market, and Ethnic segments
– Aging Baby Boomers identified most important consumer shift
as focus moves from accumulation to income
– Next major shift is the younger generations, as companies want
to understand more about appealing to both Generations X and Y
– The Middle Market has been identified as greatly underserved,
with a recognition of a need for insurance but limited means to
access. Employer group approaches are growing here.
– Rapidly growing in importance and focus are the ethnic markets,
with many companies already targeting Hispanic population and
others starting to recognize importance of additional segments

LOMA CFO Inforum
May 17, 2010
Consumer Priorities
1. Innovation
– Financial services providers must match demand for diversity
2. Alternatives
– Choice grows in intensity, comparison shopping is a given
3. Value
– Seeking greater value for their dollar, flexibility in options,
guarantees, and transparently clear, understandable contracts
4. Trustworthy Advice and Assurance
– Consumers still look for trusted advisors to help with financial
planning
– The role of the agent remains, even with newer generations,
although access method and timing of involvement may change

LOMA CFO Inforum
May 17, 2010
Consumer Priorities
5. Convenience
– Today’s buyer is busy, multi-generational and culturally diverse
– Insurers are expected to be able to do business when, where,
and technologically how desired
6. Service
– Expectations have increased for faster (real-time),
smarter (empowered), and more caring interactions
– Once and done expectations prevail
– Market complexity is compounded by drive for service that
is differentiated and customized to each segment
– Competitiveness will be driven by service capabilities

LOMA CFO Inforum
May 17, 2010
Consumers are not the only impact
§ Employers must deal with maturing staff and their exit
from the workplace. Retention of relationships and
transfer of personal knowledge are now key issues
– Increase in shift to virtual workforce for knowledge workers
– Investments in technology reduce demand for clerical labor
§ Distribution Channels are finding their primary source of
career and agency owners preparing for retirement yet
there is insufficient new entrants into the sales force
– Increased advertising and recruiting efforts to attract a younger
generation to sustain the channel’s presence
– Targeted ethnic recruiting in recognition of the need to address
different market segments more effectively

LOMA CFO Inforum
May 17, 2010
Industry Realities
§ Commoditization
– Product Price Points drive competitiveness
– Returns and Guarantees a requirement
– Low Margins a result
§ Simplification
– Elimination of small print and caveats
– Consumer transparency drives acceptance
§ Differentiation for Competitive Advantage
– Service by segmentation
– Brand appeal to discrete markets
– Accessibility based upon buyer preferences

LOMA CFO Inforum
May 17, 2010
Employees
52.5%
27.5%
20.0%
Less than 500 500 to 1500
More than 1500
Survey Population
Company Type
65.12%
34.88%
Stock Mutual

LOMA CFO Inforum
May 17, 2010
Strategic Priorities
Maintaining our current financial rating is a critical business
requirement
93%
Process improvement is an integral method we use to achieve results 87%
We have a clear vision, goal, and strategy to lead us through the next
three years
83%
Our current organizational structure is aligned with our strategies 83%
Capital demands will play a material role in product/market decisions 83%
We have the people talent necessary to drive the business forward 78%
We are strategically reducing expense ratios over the next three
years
72%
Significant technology investments will be made to remain competitive 70%
IT/Systems is effectively aligned with the business and focused on
enabling growth
67%
Use of Reinsurance will be increased to mitigate risk 37%

LOMA CFO Inforum
May 17, 2010
“What Industry Practices are most likely
to change?”
1. Products
– Focus on simplified, value-based products with basic features,
fair cost, and easy-to-understand guarantees and benefits
– Less generous guarantees necessary in certain variable products
– There will be an exodus of some products or lines of business
– Companies will be more cautious with product features
– Investment returns will affect pricing as historical assumptions
have been challenged
– Introduction of modified term plans that approximate dial-a-term
(select a face) and term/UL combos that allow flexible durations,
issue ages, steps in face, and premium payments

LOMA CFO Inforum
May 17, 2010
“What Industry Practices are most likely
to change?”
2. Distribution
– Continue to seek lower cost ways of reaching customers
– Less insurance sold in traditional ways, shift to new methods
– Marketing brochures and illustrations will require more disclosures
and suitability measures
3. Ratings and Risk
– Less reliance on rating agencies for assuring investment quality
– ERM & Asset Liability Management emphasis will increase
– Greater focus on capital adequacy with more stringent regulations
4. Expense Management
– Companies are building sales yet not making profits
– Increased Cost-Benefit Analysis, more use of technology, greater
focus on expense control, operations redesign and optimization

LOMA CFO Inforum
May 17, 2010
What will the greatest strategic
challenges be over the next 3 years?
1. Profitable growth
– Staying focused on core products to achieve deeper penetration
– Improving persistency by better servicing in-force customers
– Opportunistic acquisitions, when available
2. Distribution
– New distribution approaches
– Increasing recruitment
– Improving retention of their agency force
– Improve the quality of the distribution channel
3. Product innovation
– Innovation in product development
– Quickly deliver enhancements for new products and services

LOMA CFO Inforum
May 17, 2010
What will the greatest strategic
challenges be over the next 3 years?
4. Reduce expense while improving service
– Becoming more productive, efficient, and gaining economies of
scale will help bring down unit costs
– Technology, such as more efficient administrative systems
including workflow, will help improve underwriting and the overall
processing of life policies and annuities
– The cost of innovation with multiple systems and outdated
technology is still seen as a major barrier
– Operational efficiency will have to be achieved without waiting on
new technology given the barrier of high costs of technology
The measure of success is achieving the goal of becoming the
carrier of choice for agents while also reducing costs
Focused Leadership + Commitment + Effective Execution = The Challenge

LOMA CFO Inforum
May 17, 2010
Primary Sources of Growth
Deeper penetration of Existing Markets (including retention efforts) 88%
Expanding Distribution Methods (work site, direct, career, bank,
agency)
83%
Greater Demographic Segmentation (age, ethnicity, gender) 63%
Greater Behavioral Segmentation (shoppers, loyalists, service) 60%
Acquisitions 58%
Expanding into New Markets (bank insurance, financial planning) 54%

LOMA CFO Inforum
May 17, 2010
Key Target Markets of Focus
Market Segment % Agree
Middle Market 77%
Older Generations (Age 55 and over) 60%
New Generations (Age 30 and under) 60%
Employer Market 51%
Ethnic Segments 44%
Affluent 36%

LOMA CFO Inforum
May 17, 2010
Primary Sales Strategies
Focusing on enhancing existing products with unique features 100%
Expanding existing field sales force 91%
Focusing on retirement solutions market 81%
Marketing of fixed investment products (life and/or annuities) 80%
…………………………..
…………………………..
Increasing guaranteed benefits of variable products (including
annuities)
32%
Sales Strategy

LOMA CFO Inforum
May 17, 2010
2.21
2.29
2.89
3.12
3.23
3.51
3.82
0 1 2 3 4 5
Variable Life and Variable UL
Variable Annuities
Combo Products
Universal Life
(including Indexed UL)
Fixed Annuities
Whole Life
Term
Growth Product Lines

LOMA CFO Inforum
May 17, 2010
3.07
3.23
4.04
4.05
2.29
2.36
2.45
2.52
2.57
2.79
3.04
0 1 2 3 4 5
Consolidating
physical locations
Other
Virtual and/or
geographical
Creating different
levels of Customer
Aligning operations
with distribution
Aligning operations
with customer markets
Creating different
levels of Producer
Consolidating similar
functions across
Increasing hours and
days of service
Expanding
accessibility
Accelerating service
delivery
Key Operational Strategies

LOMA CFO Inforum
May 17, 2010
Technology remains a challenge
§ Core Issue: What new technologies to invest in and when
– With an influx of “appealing” technologies, disciplined management
of IT resources is critical: avoid distractions (“shiny objects”)
• There is a difference between appealing technology and cost
effective, competitively enhancing solutions
– Portfolio Management Strategy used for all IT related resources
• Provide an effective framework for the evaluation, selection, and
implementation of key projects: a consolidation of RFP, PMO, ROI
– Every investment of scarce technology resources has to pass a
rigorous filter before moving to the next stage
§
§ Discipline addresses competing challenges
– Determining priorities across competing interests for IT resources
– Dealing with or consolidating multiple legacy systems
– Limited availability of IT resources, scarce skillset
– ROI on technology improvements, measured and delivered
– Leveraging new technologies to enhance processes
§

LOMA CFO Inforum
May 17, 2010
Document management - imaging and workflow 41%
………………………
Replace legacy administration systems 25%
Consolidate administration systems 24%
Online applications with e-Signatures 20%
……………………...
Straight Through Processing (STP) of field applications 18%
Tele-underwriting 18%
Enterprise Risk Management systems 17%
……………………….
e-Delivery of customer materials (policies, statements, etc.) 9%
Social Networking (Twitter, Blogs, Facebook, etc.) 3%
Technologies Already in Place

LOMA CFO Inforum
May 17, 2010
Most Likely Next Technology Projects
Web self-service for distributors and/or customers 73%
e-Delivery of customer materials (policies, statements, etc.) 72%
Single-entry front ends (simplified multi-product entry systems) 63%
Online applications with e-Signatures 63%
Automated workforce management systems 62%
Automated Straight Through Processing (STP) of field applications 61%
…………………………………..
Social Networking (Twitter, Blogs, Facebook, Second Life, etc.) 21%

LOMA CFO Inforum
May 17, 2010
What are the most critical areas of
technology focus going forward?
§ Leading the priorities list: Dealing with legacy systems
– Many companies changing or modernizing their legacy systems
– Integrating workflow and business process management (BPM)
§ Contending for top priority: Internet / web-based projects
– Agent portals, E-App, Web self-service, expansion of E-business
– Search for efficient ways to eliminate some work / expenses while
providing better service to agents and policyholders
§
§ Still near the top of the list: Straight Through Processing
– STP remains an excellent solution to speed the new business and
underwriting processes and to streamline other transactions

LOMA CFO Inforum
May 17, 2010
2.31
2.35
2.43
1.66
1.75
1.79
1.85
1.87
1.92
2.10
0 1 2 3
Distributor Call Centers
Consumer Call Centers
Policy Billing and
Administration
Policy Billing and
Administration
Agent Contracting
(Licensing and
New Business Entry
APS Review and
Summarization
Corporate Functions
(Accounting, HR, Payroll)
Teleunderwriting / Initial
Assessments
Document Management
(Mailroom, Imaging)
Most Likely Functions for Outsourcing

LOMA CFO Inforum
May 17, 2010
7 Characteristics of Successful Companies
7 common characteristics of companies who achieve success
year after year in sales, financial strength, and reputation
1. Leadership
– Has a clear vision, goal and strategy
– Ask tough and probing questions
– Delegate but remain close to the issues at hand
– Create an environment of consistent behaviors, high performance
and learning
Most companies have good leadership. In successful companies,
everyone on the management team share the same clear vision of
where the company is headed and can articulate it to others.

LOMA CFO Inforum
May 17, 2010
2. Organizational Alignment
– Structure is aligned with strategy
– Measures and rewards aligned with these characteristics
3. Identifies and exploits niche market opportunities
– Product / Customer / Channel Niches
– Processing / Service Fee niches
– ‘entrepreneurial’ mindset vs. ‘why this won’t work’
– Practical realty of how much will this add to the bottom line
4. Close pulse on the market, superior customer intelligence
– Close agency / customer relationships
– “In the marketplace” or flow of ideas
– Organization aligned to listen, hear and act

LOMA CFO Inforum
May 17, 2010
5. Nimble and quick to act
– Minimal bureaucracy
– Measured experimentation
– Culture focused on problem solving, solutions, content / ideas
– An organization able to adapt with minimal constraints
6. Targeted Investments in Technology
– Analytical tools for risk management, marketing and sales
– Portals, automation, and e-services
– Electronic applications, E signatures
– Easy to do business with (agents and customers)
7. Service Excellence
– Differentiation based on service
– Continuous improvement environment directed to improving
service and reducing cost every year

LOMA CFO Inforum
May 17, 2010
Questions?
Steven M. Callahan, CMC®
972-248-3727 office
206-619-7740 cell
steve_callahan@renolan.com
http://www.linkedin.com/in/stevencallahan
Coming Soon – The Complete Survey Analysis: www.renolan.com/life
THANK YOU FOR YOUR TIME!

201005 LOMA CFO Inforum: State of the Insurance Industry

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