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From Resource, January 2006
Copyright by LOMA
Many Challenges Ahead for Our Industry in 2006
According to members of LOMA’s Board of Directors, tax reform proposals, the optional federal charter, and the forthcoming retirement of large numbers of baby boomers over the next decade or so are among the many challenges the industry will face in the new year. However, they also see many of these challenges as chances for companies to boost efficiency, utilize technology to a greater degree, and create products that better serve customers’ needs.
By Stephen Hall
It’s 2006. Do you know where the industry is going?
Until someone invents a crystal ball or a time machine that allows us to answer that question, we’ll rely on the extensive knowledge, the years of experience, and the well-informed predictions of LOMA’s Board of Directors.
Resource recently surveyed members of the board to solicit their views on where they see the industry headed for 2006. As in recent years, they see the usual dose of complex issues— economic, legislative and regulatory in nature—making sure that nothing in the industry will remain untouched by change for long. And for the most part, they were in agreement on their responses to the six-question survey. Among the major points of agreement were the following:
* Sales and premiums for 2006 will either remain flat or will rise modestly. Profits will be under great pressure from spread compression, moderate sales growth and costs associated with regulation and compliance, but higher interest rates and price increases due to additional capital may help.
* With the push to increase profitability as strong as ever across the industry,
mergers, acquisitions and consolidations will likely continue, and a big merger on the scale of Lincoln National’s acquisition of Jefferson-Pilot last year could be in the offing.
* The anticipated exodus of baby boomers from the workplace over the next 10 to 15 years, combined with a shrinking pool of qualified job candidates to choose from, will pose one of the most ominous
human resource challenges for the industry.
Board members who participated in the 2006 forecast are:
* Lawrence J. Arth, CFA, chairman, president and CEO of the Ameritas Acacia Companies in Lincoln, Neb., and LOMA chairman;
* John M. Bremer, COO of Northwestern Mutual in Milwaukee, Wis.;
* Steve Briggs, CLU, ChFC, executive vice president of the Protective Life Insurance Co. in Birmingham, Ala.;
* Daniel R. De Salvo, executive vice president of American Family Mutual Insurance Co. in Madison, Wis.;
* Alan W. Feagin, president and CEO of Assurant Preneed in Atlanta, Ga.;
* David M. Holland, FSA, MAAA, president and CEO of Munich American Reassurance Co. (MARC) in Atlanta, Ga.;
* Thomas H. MacLeay, FLMI, CFA, chairman, president and CEO of National Life Group in Montpelier, Vt.;
* David J. McFarlane, FSA, FCIA, vice president and COO of Wawanesa Life Insurance Co. in Winnipeg, Manitoba;
*Kevin A. Marti, FSA, CLU, ChFC, senior vice president of life and health operations for Country Insurance and Financial Services in Bloomington, Ill.;
* Susan D. Waring, CLU, executive vice president and CAO for State Farm Life Insurance Co. in Bloomington, Ill.;
* Lizabeth H. Zlatkus, executive vice president and CFO for Hartford Life, Inc. in Hartford, Conn.
The questions and responses follow.
1. Sales.
What is your overall prediction for sales, premiums and profits for our industry as a whole in 2006? What products look particularly strong or weak?
ARTH: Absent a strong equities market or higher interest rates, or both, I would expect to see lackluster growth in life and annuity sales for the overall industry in 2006. Some niche markets will experience growth. Profitability for the industry will continue to face margin pressure due to spread compression for those lines linked to fixed income investments, unless the absolute level of interest rates increases, which may be starting to happen.
BREMER: We expect new life premium growth to be in the low single digits. Sales of universal life with secondary guarantees will slow as companies increase prices and restrict sales at older ages. However, corporate owned life insurance and business owned life insurance sales will pick up in 2006. Disability income insurance sales growth should remain in line with recent historical growth (3 to 4 percent). Interest in immediate annuities and long-term care insurance will begin to pick up as baby boomers approach their retirement years. After three consecutive down years, long-term care insurance may experience positive growth. Profits for the industry will continue to be constrained by moderate sales growth and growing compliance and regulatory costs, but they will benefit from higher interest rates.
BRIGGS: We believe sales will be down somewhat next year. As for which products look particularly strong or weak, term insurance products will be flat to down due to no more price decreases; universal life products will be down due to secondary guarantee pricing tightening; whole life products will be up slightly due to the reduced competitiveness of universal life products; and annuities will be up with slightly rising rates. We believe profits will continue to climb slightly, but returns on capital will be challenged in those companies with significant sales in the universal life/term sectors.
DE SALVO: Sales should increase by 1 to 2 percent over last year, with premiums up 5 to 10 percent. Profits for variable life insurance and variable annuities should remain stable.
FEAGIN: For 2006, sales should be up 3 to 5 percent, with profits up 5 to 7 percent. Life products will be the strongest product for us.
HOLLAND: In 2006, I expect that life sales and premiums will be relatively flat compared to 2005. Term products appear to be in a holding pattern as writing companies assess their strategic position and adjust to the changing reinsurance market. Universal life policies with lifetime secondary guarantees continue to be popular with agents and consumers. Companies are focusing pricing resources on these products to address the Actuarial Guideline 38 reserve standards. Higher reserves may also impact cost, but current products on the market will be replaced slowly as companies fear losing market share. On the health side, the big question is when long-term care sales will revive; I still feel it is the right product at the right time.
On the annuity front, I expect the market to continue to be driven by equity-based products. Variable annuity products dominate sales on the annuity side and are close to returning to their peak sales levels that were reached in 2000 before the equity market correction. We have already seen that equity indexed annuities (EIAs) have emerged as the growth product in the annuity category. I expect this trend to continue, but at a slower pace than we have seen over the past two years. I expect that traditional fixed annuity sales will remain flat or decline as consumers continue to move to EIAs or back into variable annuities.
Although the industry has focused on increasing profitability, it will take some time for the effects to contribute substantially to the bottom line. I do not expect this to have a large immediate effect, as heavy competition continues to require aggressive assessments and profits are driven predominantly by the experience of business already on the books.
MacLEAY: I would expect sales of individual life insurance to be modestly positive in aggregate, with continued strength in universal life with no-lapse guarantees and in equity indexed life products. This assumes that the very attractive pricing of the no-lapse guarantees continues unabated in 2006. In the annuity sector, higher fixed rates should give traditional fixed annuities a boost. Total annuity sales are likely to continue to grow, again with continued strength in the equity indexed segment. Variable annuities will continue to be driven by living benefit guarantees, but the product will continue to face headwinds in the market due to regulatory pressure and lack of enthusiasm for equity-based products in general. Payout annuities of various designs should continue to garner growing market share, but progress is likely to be slow.
From a profitability standpoint, pressure on spreads will lessen on the margin but continue to hinder profit growth for companies with a concentration of spread business. General business conditions should remain favorable, however, so profit growth will likely be in line with recent experience.
McFARLANE: In Canada for 2006, I expect a continuation of the relatively strong profitability the industry has seen over the last few years. This is due in large part to the influence of the large stock insurance companies, their profit focus, their strong market shares, and lower cost structure due to scale economies and technology advantages. However, the one area where the industry continues to see weaker profitability is new individual life business. With more than 50 active competitors and minimal sales growth, profit margins will continue to be squeezed. Within this sector, universal life and term products will see stronger sales relative to term-to-100 and whole life. I also expect the strong sales of critical illness plans that we’ve seen in the last couple of years to continue. Practically all Canadian companies market this type of product, and this—together with increased awareness amongst Canada’s aging baby boomers—bodes well for increasing sales growth in the future.
Another product with excellent growth potential is individual supplementary health insurance. In Canada, more companies are reducing or eliminating health coverage for retirees, which will increase the need for individuals to purchase this type of insurance. Additionally, the growth in self-employment and small businesses will also increase the market potential. Over the longer term, the decision in 2005 by the Supreme Court of Canada to allow private health insurance for essential medical services has the potential to significantly increase the health insurance market.
MARTI: With uncertainty about the economy due to high gas prices and rising interest rates, it is difficult to see more than a modest increase in sales and premiums in 2006. There could be a “fire sale” on universal life products, with aggressive secondary guarantees once reserve changes are finalized. We believe “combination” products, such as life with long-term care, hold great promise; this combination helps address the perceived high cost of stand-alone long-term care. Certainly the emphasis on distribution of accumulated retirement funds of baby boomers who are nearing retirement means immediate annuities will be a hot area for product development.
WARING: In the first half of 2005, life insurance sales have been flat, and annuity sales were down 2 percent. I cannot see this trend changing in 2006, given the current economic conditions. We currently have a flat yield curve where the extra yield on a 10-year bond over a five-year bond is negligible. This flat yield curve hurts the competitiveness of fixed annuities versus bank CDs.
The stock market for the first 10and-a-half months of 2005 has been flat. I cannot see a pickup in fixed annuities until we have a more traditional sloped yield curve. Likewise, we need a stock market increase to fuel an increase in variable sales. With the challenges in the economy and the likelihood of being in the later stages of an economic recovery, a robust bull market seems unlikely.
With rising interest rates, portfolio interest rates should stop declining, and fixed annuity margins could return to acceptable levels if the yield curve would steepen. Profits should remain essentially unchanged from current levels.
Perhaps term insurance will show some growth in 2006 as companies roll out new 2001 CSO term products. The excitement will be driven more by reintroducing the products than by rate changes.
ZLATKUS: For the individual life insurance industry, we generally see flat to marginal sales growth versus 2005. Whole life sales should remain steady. Variable universal life sales will be impacted by equity market movement and the economy. Term products and universal life products with secondary guarantees continue to be under capital and pricing pressure. For individual annuities, we see longer-term trends pointing to future market growth. Such trends include favorable demographics, demand for lifetime income products, and enhanced risk management capabilities among insurers. Demand for living benefit guarantee features will remain strong, given uncertainty in the capital markets. Recently, industry margins have been under pressure with low interest rates and competitive pressures. Looking ahead, margins could expand if interest rates rise or if prices increase in response to additional capital, which may be required on various life or annuity products.
2.
Regulation. What regulatory or legislative issues will be of the biggest concern to our industry in 2006, and why?
ARTH: The estate tax reform/repeal legislative proposals could be a threat to the industry in 2006. Also, the possibility of major federal income tax reform that is currently being discussed could have a major impact on the industry if the tax advantages of life insurance are impacted. The industry seems to be committed to optional federal charter regulatory reform, but to date, little progress has been made.
BREMER: The President’s Advisory Panel of Federal Tax Reform recently outlined two tax reform packages that include a proposal for the elimination of the tax-free buildup in life and annuity products. If the tax-free buildup were eliminated, life insurance sales—of which nearly 75 percent incorporate some savings element—could come under severe pressure.
A high priority for the industry in 2006 is to amend the statutory reserve requirements, being mindful of tax implications, and the need to have an appropriate and transparent reserve system. Also, regulatory efficiency and modernization will gain momentum, particularly the continued consideration of an optional federal charter. Finally, intense regulatory scrutiny of registered products will continue in 2006. It will be interesting to see how the California insurance commissioner’s attempt to mandate changes to already-approved disability income insurance contracts will play itself out.
BRIGGS: Universal life reserve reform will be one of the major regulatory issues for 2006, and the outcome of litigation related to variable annuities in qualified plans could lead to changes in the regulatory or legislative areas.
DE SALVO: The State Modernization and Regulation Transparency (SMART) Act, if passed, would have a positive effect. Disaster recovery issues will be a big problem.
FEAGIN: We’re always concerned about small face amount policy issues and the federal charter.
HOLLAND: There are a number of issues facing the industry. The first is federal taxation. In November, the President’s Advisory Panel on Federal Tax Reform issued a report setting forth two options to reform the federal tax code. Both options contain several provisions which affect life insurance and annuities. One provision would cap the tax-free buildup of cash value in applicable life insurance policies and annuities to $10,000 per year per taxpayer.
The second issue is underwriting restrictions on travel. Legislation regarding this issue has already passed in New York, Illinois, Washington, California and Maryland. Florida is considering a rule regarding the issue, and Massachusetts has legislation pending. In addition, federal legislation has also been introduced, and the National Association of Insurance Commissioners (NAIC) is considering a resolution concerning the issue. The most recent enactments and proposals prohibit discrimination in underwriting based upon future travel in addition to past travel. These federal and state legislative and regulatory actions could severely restrict a life insurer’s ability to appropriately underwrite the risk.
The third issue is reserving changes for life insurance. The ACLI and the American Academy of Actuaries are currently working on a principles-based approach to reserving for life insurance policies, and the NAIC is receptive to this idea. This initiative will likely require considerable time and resources and will not be fully developed in 2006. However, the ACLI and the Academy are currently working on an interim proposal as well. This proposal may have an effect on reserving for life insurance policies in 2006.
The fourth issue is the application of certain requirements of the Sarbanes-Oxley Act of 2002 to all insurance companies. The NAIC has been working on this initiative for some time and should complete its work in 2006. Although the NAIC may complete its work in 2006, the initiative will be phased in over a period of years. The proposed changes would affect the composition of insurers’ audit committees and boards of directors and impose certain requirements on insurers regarding internal controls.
The fifth issue is revised credit for reinsurance regulation in California. The California Insurance Department is currently working on a new regulation regarding credit for reinsurance. The early drafts of this regulation bear little resemblance to the NAIC model regulation regarding credit for reinsurance and could have a major effect on the ability of insurers to contract with their reinsurers. The regulation will likely be published by the end of 2005 and could be effective in 2006.
MacLEAY: The major regulatory issues for the industry will likely continue to come from the securities regulators, as the SEC and NASD proceed with their activities related to variable annuities, equity indexed products and registered representatives affiliated with life companies. On the insurance regulatory front, further progress on the optional federal charter will occur, but the pace will be measured. The president’s efforts on tax reform will get a lot of well-deserved attention, but in all likelihood, they won’t result in any tangible change in the near future. Nonetheless, the proposals now on the table are of grave concern to the industry and will require significant resources to engage in the discussions around future tax policy.
McFARLANE: While I believe it’s more an opportunity than a concern, the Supreme Court of Canada’s recent decision on health insurance could have major implications for our industry. In 2005, the Supreme Court of Canada overturned the act preventing Quebec residents from insuring themselves in the private sector for essential medical services. While this decision only applies to Quebec residents (there is a 12-month stay before the application of the judgment), I believe it is only a matter of time before we see similar changes in other provinces. While there will be much debate between the public, governments, health care providers and insurers, in the long term these changes could significantly expand the market for individual and group health insurance in Canada.
Another potential area of concern for our industry is bankassurance. Currently, the Bank Act is fairly restrictive in permitting banks to market life and health insurance products to their customers. However, this act is up for review in 2006, and increased liberalization could have a significant competitive impact on the Canadian insurance marketplace, especially for smaller companies.
MARTI: Tax reform looms large, due to the potential for major changes in tax qualified accounts and lower marginal tax rates. For estate planning’s sake, we all hope that the long-term estate tax situation will be finalized in 2006. The optional federal charter and the “principle-based” reserving initiatives will also have important implications. With Social Security “reform” seemingly tabled for now, and no solution to the long-term funding issues in sight, future benefit reductions loom as a real possibility. Our industry provides long-term savings vehicles that can help people overcome future benefit shortfalls.
WARING: Number one is the recommendations of the president’s Advisory Panel on Tax Reform, which tilts the playing field to the detriment of the life insurance industry.
The industry supports the NAIC Suitability Model, but we need to minimize state variations as this model is adopted. The speed-to-market benefits of the federal charter/interstate compacts have been stalled by the slow progress of this legislation. Other regulatory issues include complying with the anti-money laundering requirements of the Patriot Act and the possible loss in some states of the right to postpone coverage to clients who plan to travel to foreign hot spots.
ZLATKUS: Regulatory and legislative issues of concern to the industry include appropriate regulations on suitability in the sales process, questions of disclosure on compensation, and ever-changing proposals for the tax code. The industry has been concerned about the potential for lack of uniformity if various states impose new suitability rules on the life insurance or annuity sales process. It is critical that variable annuities and variable life insurance be governed by suitability through rules issued by the SEC and the NASD, rather than by states. The president’s Advisory Tax Panel on federal tax reform has recommended additional savings accounts as well as limits on tax-free buildup for annuity and life insurance products. At this time, it is unclear whether the Treasury or the president will support these Advisory Panel proposals. The mere announcement of such proposals does present additional risks to the industry. Debate also continues on potential changes to, or the repeal of, the estate tax. Uncertainty about the estate tax continues to be a concern for life insurance. As we move closer to the one-year repeal in 2010, a legislative resolution becomes more important.
3.Restructuring.
Do you believe industry restructuring through mergers and consolidations will continue? How is the industry likely to look 10 years from now?
ARTH: I do not anticipate any increase in the level of M&A activity in 2006, but I do anticipate this activity to continue at present levels. Companies will continue to divest non-core businesses, which will present opportunities to some companies to acquire in-force blocks of business. With the pressure on margins in the life insurance industry, scale continues to be critical, and M&A activity is probably the quickest route to increase scale.
BREMER: The market’s increasing pressure on profitability will continue to drive mergers and consolidations. Companies will continue to divest non-core and non-performing operations, and companies will also continue to seek scale to improve efficiencies. As a result, five years from now there will be fewer yet larger players, and niche players will continue to survive.
BRIGGS: Yes, I believe industry restructuring through mergers and acquisitions will continue. A big deal or two will likely get done in 2006. In 10 years, we will have even fewer small and mid-sized companies, with a few very large companies.
DE SALVO: I believe industry restructuring through mergers and consolidations will continue, resulting in fewer companies, with a player yet unknown growing by serving the middle-income market.
FEAGIN: Yes, industry restructuring through mergers and acquisitions will continue. In the future, we will see more specialty insurers and fewer conglomerates.
HOLLAND: The number of new policies issued has not been growing for some time now, and in order for an insurance company to effectively operate, there is a large amount of fixed cost. This leads to an over-capacity within the industry, where distribution retains a significant level of power. One likely outcome would be a continuing consolidation through mergers.
A less likely but more positive outcome would be an increase in sales, such as sales to the middle-income market, with lower costs of distribution and issue. This could be a rising tide that raises all boats, and could sustain or even increase the number of insurers.
MacLEAY: Further consolidation seems inevitable as more organizations seek scale. In 10 years, there will be fewer companies, and the top 10 companies in size will have an even greater share of the market. However, there will still be many companies in the industry who are not in the top 10 but who can successfully deliver valuable products and services to their customers in partnership with professional field associates.
McFARLANE: In Canada, the industry has gone through a significant consolidation over the past 10 years. As a result, the largest three companies combined have an in-force market share in Canada of approximately 65 percent. Consequently, I don’t think we’ll see much further consolidation. Ten years from now, I expect the industry to be made up of a few large companies and a number of much smaller niche marketers.
However, I do expect we’ll see the creation of one or more large companies as the result of an insurance company/bank merger. The federal government recently stated their position opposing bank and cross-pillar mergers as not being in the best interests of their customers. However, I expect this position to change, certainly within the next few years as the government responds to the need for large Canadian financial companies to be of sufficient size in order to be effective global competitors.
MARTI: It is hard not to see ongoing consolidation in our industry going forward. The drive for scale and expanded distribution capabilities are key. There will continue to be a role for companies with a relationship niche—e.g., life affiliates of multi-line property casualty insurers.
WARING: After the John Hancock-Manulife and Lincoln National-Jefferson Pilot mergers, few of the top 30 companies in our industry are obvious acquisition targets. Most activity could be by larger groups acquiring many small companies. To acquire economics of scale, many medium- and smaller-size companies will enter into alliances or merge to obtain critical mass. What’s less predictable is whether we will see mergers of the mega-companies. The latter is what has happened in the Canadian life insurance industry and the U.S. banking industry.
ZLATKUS: There will continue to be mergers, consolidations, and sales of blocks of businesses. Pursuit of growth and product strategies requires scale and capital, yet the industry is mature and not experiencing significant overall growth. Scale and capital are required to satisfy regulatory and rating agency requirements, maintain and enhance internal risk management programs, invest in distribution, technology, and service, and pursue global markets.
4.Technology.
What new technologies have the greatest potential to help our industry, and how can they help?
ARTH: Broadband wireless technologies will continue to make an impact on our ability to improve the accuracy and speed of service to both distribution and customers. Identity management and data security will require significant investments, and security control technology must improve to meet our business needs and compliance obligations to our field representatives and customers.
BREMER: Mobility, enabled by wireless technologies, is becoming mainstream and is changing work styles, allowing financial representatives to maximize their effectiveness by leveraging “between-meetings” time, and to be more effective in accelerating the sales process. The sales process may also be accelerated by leveraging new and existing technologies to move the industry closer to straight-through processing.
BRIGGS: I don’t see any new technologies to exploit in 2006, only an expanded utilization of currently available technologies, such as imaging and OCR (optical character recognition).
DE SALVO: Customer self-service and online purchasing of life insurance products have the greatest potential to help our industry.
FEAGIN: Internet sales and policy delivery have the greatest potential to help our industry.
HOLLAND: The ever-increasing maturity of the available data analytical tools and a greater emphasis on data quality and data standardization are key. The industry’s need to better measure and predict is pushing us to be more active in managing our information. It’s not really about new technologies; it’s about being better data stewards. Data warehousing and business intelligence initiatives are taking hold in the industry today. This will result in a change in the business as we learn more, then manage and react faster than previously possible.
At MARC, we are initiating a business intelligence program that we expect to provide improved client and internal data quality, multi-system data integration, faster availability of client data, enhanced internal controls, consistent analytic results, analytic tools that are more effective and efficient, and automated client data monitoring.
MacLEAY: Further refinements in existing technologies offer the greatest potential for our industry. On the information systems side, the industry still suffers from a myriad of legacy systems for policies that were written decades ago and are still on the books. In spite of all the advancements in IT, there has yet to be a breakthrough in this regard. As tools continue to be refined, there is still significant potential for efficiencies in our basic business processing.
The Internet is another obvious technology that has not been fully exploited, and as next-generation Internet capabilities come on board, the industry should benefit. Related to this is the explosion of communications technologies that should help us be more effective in transacting business and service with our customers and our agents. Finally, advancements in medical technologies are also very promising, both in improving longevity and in predicting and managing medical conditions. With all the pressure on the health care system, it is very likely that information technology will finally be applied to medicine in such a way that medical records are far better documented and easier to interpret, which will be a big aid in underwriting medical risks.
McFARLANE: I continue to believe that expanded usage of the internet has tremendous potential for our industry. A recent study by the World Internet Project, examining worldwide usage of the Internet, reported that of the countries studied, Canada is second only to the U.S. in terms of the highest Internet usage. As consumers’ Internet usage in North America continues to expand, there will be significant service and cost advantages in utilizing the Web to maximize competitive advantage.
MARTI: Web-enabled policy service functionality is needed. Tele-underwriting appears to provide companies with a number of advantages: better information, fewer APS’s required, better time service, and so on. Electronic applications and signatures hold great promise as well for improved time service.
WARING: The Internet and wireless technology continue to hold great potential for our industry. Providing access to information and customer self-service through the Web gives us the opportunity to reach and respond to the customer in the time and manner most convenient for them. Furthermore, the expanded use of electronic signatures and the use of biometrics for customer authentication will simplify the sales and servicing processes and help ensure customer privacy.
Computer programming practices that employ the use of business models to capture business rules ensure consistent use across technical applications. This helps our industry by ensuring higher adherence to compliance and regulatory guidelines while simplifying the process for the end user.
ZLATKUS: Technology trends that continue to help the industry include Web-based customer service, streamlined electronic data interchange with distribution partners, wireless technologies for field support, electronic forms and signatures, imaging technology, automated workflow management, enhanced data mining (audio and video), and tool enhancements for security and compliance management. Grid computing and other technologies are emerging investments that are critical for hedging and risk management programs, which support the product guarantees being offered in the marketplace today.
5. H.R. What is the greatest human resource challenge our industry faces, and how is your company handling this challenge?
ARTH: There will be a large number of retirements across all industries over the next five to 10 years, and attracting and retaining talent will be critical for companies to succeed. Building leadership talent and succession management will require even more attention for a company to be successful.
BREMER: A declining sales force is the greatest human resource challenge facing the industry. In our supply-driven industry, we rely on a sales force to sell our products to consumers. Therefore, it is critical that our industry has the distribution capacity to allow for continued sales growth. We continue to be concerned that fewer and fewer companies are recruiting financial representatives that are new to the business, and instead are relying on recruiting experienced financial representatives from other companies.
BRIGGS: Among the greatest human resource challenges our industry faces are figuring out how to increase productivity with fewer people and gaining access to the middle market. With regard to the latter challenge, no distribution system yet seems efficient and committed to market penetration.
DE SALVO: Recruiting employees and agents is the greatest human resource challenge our industry faces, and we are working to hire a diverse group of people.
FEAGIN: The human resource challenges facing our industry include recruiting and retaining the best and the brightest, and investing more in training and human development.
HOLLAND: One of the immediate HR challenges we face is finding or developing experienced candidates as the candidate pool continues to shrink based on population demographics and industry consolidation. For many years, MARC has enjoyed employees’ long tenure, with many having joined the company early in their careers. As this generation retires, in addition to MARC’s recent growth, our talent acquisition practice is to now hire a blend of entry-level employees and train specific skills, as well as hire mid-level professionals with seven to 10-plus years of experience. Having to consider candidates from totally different sources and educational levels has created new requirements for careful candidate assessment and selection and increased training needs for the new, inexperienced employee. Consequently, MARC implemented formal interview training as well as pre-employment assessment for certain positions. In today’s environment, we have an increased emphasis on FLMI course completion to provide a foundation in insurance knowledge to those joining at mid-careers from other industries, as well as for new entrants to the life insurance industry.
MacLEAY: Our biggest HR challenge as an industry is attracting, developing and retaining high-quality leadership. At National Life, we are addressing this challenge by implementing a comprehensive talent management program that includes a competency-based system of hiring, performance management and development.
McFARLANE: The greatest challenge our industry faces is the replacement of experience and talent as baby boomers retire over the next 10 to 15 years. Not only will companies be vulnerable to the boomers’ retiring, but as resources become scarce throughout the industry, companies risk the loss of key individuals to competitors as well.
In my company, we are doing a number of things in anticipation of this potential risk. First, we encourage and recognize career longevity. Second, we maintain a current management succession plan to ensure we have identified and are developing key replacement employees. Finally, we ensure that jobs are challenging and rewarding, and we have a work culture where employees feel valued and want to keep working until retirement.
MARTI: Our challenge is to recruit, develop and retain talent, including agents. With increased competition for a shrinking pool of talent to draw upon in the future, it will be very important to not only recruit new talent, but to provide appropriate developmental opportunities. Retaining the developed talent will require competitive compensation and benefit packages, as well as creating an environment in which employees feel both needed and recognized for their contributions. Our organization is launching efforts to maximize employee and agent recruiting, development and rewards.
WARING: One-eighth of the country’s workforce is age 55 or older. We expect a large percentage of our top and middle management will retire in the next 10 years. Developing candidates to fill these openings is our top HR challenge. We are placing processes in place and using technology to identify, develop and retain potential replacements. We need to place these candidates into positions where they can develop and execute company policy. Our aim is to develop a large pool of candidates to fill these openings.
ZLATKUS: The products sold by the industry continue to grow exponentially in terms of risk and complexity. Attracting talent that is experienced in dealing with these issues and that brings strong leadership skills is a significant challenge facing our industry. Developing that talent to grow with the complexity of the business and retaining them are also critical. We focus many resources on making the right hiring decisions up-front, and then carefully guiding leadership and career development afterwards. We strive for a positive work environment where employees feel valued, challenged, and accountable for business performance.
6.
Profitability. How can our industry increase its profitability? What is your company doing?
ARTH: Our industry can and must increase profitability. Since competition probably will not allow price increases,
improved profitability will be dependent upon increased home office and field efficiency and productivity, combined with good expense management. Consolidation in the industry that is likely to take place will enable some organizations to grow scale and reduce unit costs. Ameritas Acacia is attempting to improve its profitability by engaging in these activities.
BREMER: The focus should be on long-term profitability. Rational product pricing and appropriate risk management are critically important. Northwestern Mutual’s objective is sustainable, organic, bottom-line growth. We expect to achieve long-term profitability by focusing on three priorities. First, we will strive to grow our insurance revenue through the promotion of our existing products as well as the development of new products. Second, we intend to strengthen our distribution system through investments in technology, with an emphasis on recruiting and retention, as well as continued development of the financial representative’s business model. And third, we will focus on operating efficiencies through the utilization of technology and a culture focused on constant improvement of work process.
BRIGGS: Our industry can increase its profitability by utilizing its capital more efficiently through expense management, securitizations, and disciplined capital allocation to products with adequate returns.
DE SALVO: Our industry can increase its profitability by controlling expenses.
FEAGIN: Increasing profitability is our toughest challenge, and we are analyzing every aspect of our business to improve profitability.
HOLLAND: The best way for the industry to increase its profitability as a whole is to provide the products consumers need today. With the first wave of the baby boom generation turning 60 this year, two big products with huge potential are long-term care and retirement products. Also, there are underserved populations, such as the middle-income market for life insurance and those who need disability income protection during their working years. With respect to improving profitability, there needs to be the discipline to look at long-term, bottom-line performance rather than short-term, top-line growth. At MARC, our planning process is a key step in the direction of improving profitability. By focusing the organization on goals that meet our clients’ needs while improving our returns, we are able to meet our twin goals to be the “preferred partner in risk” and to “turn risk into value.”
MacLEAY: The industry has become very diverse in recent years. Companies referred to as “life insurance companies” vary considerably in product mix and geographic concentration (including international operations), and their profit dynamics can be very different. Many companies have non-insurance businesses blended with traditional life and annuity operations. Having acknowledged that, companies can increase profitability only by managing their in-force business to pricing expectations and offering new products and services that are priced for strong profitability. For National Life, this means maintaining strong pricing and expense management disciplines while finding opportunities to offer attractive products to our target markets.
McFARLANE: It is difficult to give an “industry” answer to this question, because profitability initiatives so often depend on the particular company and the dynamics of the marketplace in which they do business. However, there are a couple of general things companies can do to increase profitability. In Canada’s consolidated market, it’s key to have focus. Companies need to focus on customer segments where they can differentiate themselves and achieve profitable growth, either through product, service, brand or distribution. In today’s market of increasing customer sophistication and declining loyalty— and I include distributors here—it is important to build a high-performance culture centered around the customer. Successful companies will think about the customer experience first and the internal operations after that. In meeting our customers’ expectations, technology will be critical not only in meeting those needs, but in keeping costs competitive and keeping the business profitable. At Wawanesa Life, a key priority for us is completing the installation of a new group administration system that will allow us to deliver quality service at competitive costs.
MARTI: Our industry must find ways to increase its numbers of producers in an economical fashion in order to help drive production increases that exceed expense level increases. We’re working hard to try to do just that. We benefit from our company’s long-standing “cross-selling” culture, especially as we expand more rapidly into other financial services.
WARING: We need to increase revenue while decreasing expenses. Some of the ways that we are trying to increase revenue include increased penetration of the underserved markets and increasing sales to existing clients. Pricing for an acceptable return on equity is crucial to increasing profitability. Expenses can be lowered by aggressive expense control, outsourcing, and managing risk. We also have an alliance to provide our agents with high-end products that we cannot manufacture on a cost-efficient basis.
ZLATKUS: The industry should focus on developing innovative and value-added products that serve the current and future needs of customers. Rational product features, pricing that provides an appropriate return on capital, and excellent risk management are essential elements for profitable growth. Additionally, effectiveness and efficiency in distribution and service and careful staging of technology investments are critical to sustaining competitive advantage. We are focused on all of these areas to increase profitability.
Highlights from the Forecast
The members of LOMA’s Board of Directors who participated in Resource’s 2006 Industry Outlook survey had different takes on a wide range of industry issues, with some questions sparking more differences of opinion than others. Here are the highlights:
Sales, Premiums and Profits: Sales and premiums are expected to either remain flat or increase by 1 to 5 percent. Profits will likely face margin pressure due to spread compression, but if interest rates rise or prices increase in response to additional capital, they may get an additional boost.
Key Regulatory and Legislative Issues: According to participating board members, these include the proposals of the president’s Advisory Panel of Federal Tax Reform, the proposed amendments for life insurance reserve requirements, the optional federal charter, and the possibility of estate tax reform or repeal.
Mergers, Acquisitions and Consolidations: The ever-increasing pressure to boost profitability will ensure that activity in this area will continue, with the possibility of a big merger or two happening sometime this year.
Technologies: Board members say the high-tech tools with the greatest potential to help our industry aren’t cutting-edge breakthroughs not yet in the mainstream, but technologies we already have but need to either refine or use more effectively. These include Web-based customer service, electronic forms and signatures, imaging, wireless technologies for field support, automated workflow management, and enhanced data mining.
Human Resource Challenges: One of the greatest human resource challenges the industry faces by far is finding and hiring experienced and talented people—especially in light of the large number of baby boomers expected to retire over the next 10 to 15 years and a shrinking pool of qualified job candidates.
Increasing Profitability: According to board members, the best ways to do this include aggressive expense control, a stronger product distribution system, a consistent focus on work process improvement, greater penetration of underserved markets, and developing innovative, value-added products that serve customers’ needs, both today and tomorrow.
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