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From Resource, March 2008
The
Insurance Industry of the Future
Given the current challenges
and characteristics of the industry, business leaders look ahead to the future
and share their thoughts on what they predict for the industry in 10 years.
By Stephen Hall
The insurance and financial
services industry in the year 2018 will no doubt be very different from the
industry as it exists today. But what will be its most noteworthy differences?
What kinds of tasks and challenges will it face, and in what ways will it have
evolved in order to best meet those challenges?
Resource
recently invited industry leaders to make their own predictions about the
industry as it will likely exist in 10 years. Among the common threads in their
feedback were the following:
*
Industry consolidation will undoubtedly continue.
* The
mass exodus of Baby Boomers from the workforce will drive up the demand for such
financial services products as estate planning, asset protection, and income
accumulation.
* The
industry of the future needs to be capable of reaching a broader, more
ethnically diverse population.
*
Product distribution channels will evolve as the number of agents in the
industry declines, meaning, for example, that the number of Web-based sales and
other online transactions will increase.
*
Insurance products will need to be more simplified and packaged in a way that
makes them easier for customers to understand.
* The
availability of information on the Web will result in consumers that are better
educated about the industry and more discriminating about the products and
services they purchase.
Industry officials who
responded to the question include:
Lawrence
J. Arth, CFA, chairman and CEO of the UNIFI Companies in
Lincoln
,
Neb.
;
William
F. Glavin, Jr., co-COO of Massachusetts Mutual Life Insurance Co. and executive
vice president and head of MassMutual’s U.S. Insurance Group in Springfield,
Mass.;
Mark
A. Hug, vice president and chief marketing officer of Prudential Financial’s
individual life insurance business in
Newark
,
N.J.
;
Al
Meyer, CLU, ChFC, executive vice president of American Family Mutual Insurance
in
Madison
,
Wis.
;
George
S. Mohacsi, FLMI, president and CEO of Foresters, a fraternal benefits society
in
Toronto
,
Ontario
;
Susan
D. Waring, CLU, ChFC, executive vice president and CAO for State Farm Life
Insurance Co. in Bloomington, Ill., and vice president for State Farm Health;
John
W. Wells, FLMI, CPA, CLU, ACS, senior vice president of operations at Bankers
Life & Casualty in Chicago, Ill.; and
Lizabeth H. Zlatkus, president of
international wealth management and group benefits for Hartford Life, Inc. in
Hartford
,
Conn.
Their survey responses follow.
Q: What do you think our
industry will be like in 10 years, in terms of structure, products and
customers? Will it be drastically different, or similar to now? Please explain
how and why.
ARTH: Over the next 10 years,
industry consolidation will continue, and scale will become increasingly
important. It is likely that wealth management and estate planning will take on
an even more prominent role in the industry as the aging Boomers will look for
effective methods of transferring wealth and generational gifting. Guarantees of
retirement income levels will become a primary issue, and product design and
development that provides these guarantees will become paramount. The
environment over the next 10 years should offer tremendous opportunities to
those companies and industries that are able to provide the products and
services that will be in demand among the Baby Boomer generation.
GLAVIN: Obviously there are
several factors that impact what our industry will look like in 10 years, but
let’s focus on those items that we know to be true. First and foremost,
products that provide guarantees to help people through life’s uncertainties
from strongly rated financial institutions always have a place in consumers’
portfolios. At the same time, demographic trends will continue to influence and
change the way we educate, sell and service our customer base. For our industry
to be successful, it’s crucial that we reach a broader, more ethnically
diverse population and address the growing, under-penetrated markets as well as
the needs of the maturing Baby Boomer generation.
There are implied opportunities across all these customer segments for
core protection and retirement income products. It is also important to
recognize that consumers continue to be more educated and discerning buyers. By
focusing on true lifestage marketing, providing solutions versus products, and
offering guidance through the complex financial maze, we can continue to make a
positive impact in the lives of our customers.
HUG: First, let’s look at the
structure of the industry 10 years down the road. In 2005, there were 24 percent
fewer licensed insurance companies doing business than in 1997, according to the
ACLI’s 2006 Fact Book. I expect this consolidation will continue over the next
10 years, resulting in fewer insurance companies overall, and those companies
will be more strategically focused on their most profitable businesses. I also
see a greater push toward a more streamlined regulatory system through the
optional federal charter.
In
terms of distribution, the life insurance industry needs to fill the shoes of
the large number of life insurance professionals who will be retiring in the
next several years. We need to work diligently to recruit new agents and to
build a strong, diverse body of trained producers capable of meeting the needs
of consumers. We also have to provide those producers with the products,
services and technical capabilities they need to serve the market. As the number
of traditional distribution channels declines, growth will stem from
non-traditional delivery methods such as broker/dealers, wirehouses, banks, and
non-face-to-face channels. Distribution through these channels allows us to
leverage the access they already have to the customers we are looking to reach.
As far
as products, more and more consumers are using the Internet to handle their
financial transactions as well as research and buy a whole host of products and
services. Offering the ability to purchase life insurance when and how they
want, and in the amount they’d like, is a natural outcome of this trend.
Consumers want simplicity, but they are also interested in products that provide
solutions to the multiple financial needs that are most relevant to them. As a
result, insurance products will need to be simple with a primary focus on
protection, yet they must continue to evolve to provide multiple solutions that
help individuals better manage and secure their financial future.
MEYER: Well, products will
always continue to evolve. There are certainly different products available now
compared to 10 years ago, and I don’t see how that will slow up. More creative
solutions will continue to be developed to meet the changing needs of our
customers. Certain segments of the population see it as strongly commoditized.
We serve the middle market, which is always a challenge, given the relatively
low margins, but it works for us because of the multi-line environment. I do
think the customers are continuing to see life insurance differently, especially
in the Baby Boom market, where they’re looking less and less at the
protection-oriented coverages and more at the accumulation and distribution of
their assets. That part of the segment is going to continue to change as they
move through the different life stages. There’s more and more information
available on the Web, and consumers as a whole continue to be more knowledgeable
on what the industry can offer and what it doesn’t offer. So I don’t look
for any shock going on in the next 10 years; it will just continue to evolve the
way it has.
MOHACSI: One of my favorite
books is Blue Ocean Strategy, by W. Chan Kim and Renée Mauborgne; for those who
haven’t read it, I strongly suggest they do. I don’t think anybody has found
a “blue ocean” yet for the life insurance business, but I think that in the
next 10 years, somebody will. And what I mean by that is, I don’t think
anybody has found a way to take the industry and compete on a totally different
basis. It could be a different basis in terms of the sales approach, or in terms
of the risk selection or the product design. I just think that in the next 10
years, someone or some organization—most likely from outside the insurance
industry—will come in, and using a combination of those three things—a
different sales channel, different risk selection, or a different product
design—they will find a very different way to offer insurance products to the
market. I don’t know what that way is; if I did, I’d invent it now. But I
really think someone is going to come in with a very breakthrough business
model.
Obviously
there will be continued consolidation; I think everybody would agree with that.
The Canadian market is already largely consolidated, although I think there are
a few more opportunities, but I think there’s a lot of opportunity in the
U.S.
And I
think the other thing you’re going to see is a fragmentation of the value
chain, where you’ll have specialty organizations that do a certain piece of
the life insurance value chain—for example, the outsourcing of new business
processing, premium collection or document preparation. There’s a lot of that
going on already, but I think you’ll see more and more of it. Insurance
companies will stick to what they believe is really important to their strategy,
and then look for partners to take on other pieces that insurance companies
typically did themselves over the last number of years. So I think we’ll see
more outsourcing, and we’ll also see the emergence of more specialty companies
that will provide these services.
Finally,
we’ve seen some very innovative financial products in the last few years, such
as exchange traded funds (ETFs) and indexed annuities. I think the development
of innovative financial products will continue as the Baby Boomers move into
retirement and are looking for payout products, as opposed to accumulation
products. And from a demographic point of view, that’s probably the single
biggest change in the next 10 years; you’ll see an increasing number of Baby
Boomers moving into actual retirement and needing to get retirement income, as
opposed to needing to save for retirement. Also, over the next 10 years,
you’ll see the spending power of ethnic markets increase significantly,
particularly the Asian and Hispanic markets. I think they have shown to be very
accepting of the products offered by the insurance industry. So I think it’s
good for the insurance carrier, and I think the companies who are good at
targeting those markets will have a higher likelihood of being more successful.
WARING: Ten years from now, in
order to acquire economics of scale, many medium- and smaller-sized companies
will enter into alliances or merge to obtain critical mass.
What is 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. Specialization will drive sales and acquisitions of specific
blocks of business.
Annuity
products that contain income features will create a large market opportunity as
the Baby Boomers continue to enter retirement and seek ways to attain an income
they cannot outlive. Long term care insurance and life insurance products will
become parts of combination products. Customers will become more diverse,
requiring more specialization to appeal to various segments of the marketplace.
Within
the next 10 years, data mining software will be readily available to the
consumer on their home computer systems. This, along with dramatically faster
computing and Internet access speeds, will make the Internet a much more
powerful consumer tool in learning about and shopping for insurance. Combine
these trends with the Echo Boomers becoming the largest segment of the economy,
and the Internet will be a critical component of any insurer’s business plans.
Additionally,
the manner in which potential customers access advisers will also change
significantly. Technology will allow shoppers to have face-to-face access to an
advisor via a broadband connection whenever and wherever they choose.
WELLS: We think the industry
will be very different than it is today. Consolidation will continue to reduce
the number of companies. New competition may come from non-traditional players,
including technology-based firms like Google. With growth in Web-based sales and
more companies selling direct-to-consumer, we anticipate fewer agents.
The agents who remain will have a changed role in providing value to
their customers. We anticipate that
independent marketing organizations will increase in size, and that worksite
sales will grow.
For
products, we anticipate more cost-sharing with the consumer. As a result,
consumers will become more educated and more selective about the health care
choices they make and about the health care plans they choose. There will
continue to be a strong need and opportunity for protection products, medical
“gap” products, HSA-type products, middle market products—low face term,
supplemental health—and worksite products. If government-managed health care
is introduced, there will be a bigger focus on individual supplemental-type
products.
The
industry’s customer base and customer profiles will change significantly in
the next 10 years. Most Baby Boomers will be in retirement, which will be quite
different than it was for their parents. We expect that some type of ongoing
connection with active work will be common, either by choice or out of
necessity, since retirement savings will not sustain the desired lifestyle for
many retirees. The next generation of buyers will have been reared on the Web,
requiring providers to go beyond 24/7 Web service.
ZLATKUS: The retirement market
will be the principal driver of growth and profitability for the financial
services industry over the next decade. Trillions of dollars will be set into
motion as millions of Baby Boomers throughout the world begin to retire.
Investable assets controlled by retirees and near-retirees in the United States
comprise slightly more than half of total personal financial assets and are
projected to grow to two-thirds by 2020, according to McKinsey and Company. In
Japan
, the concentration of wealth in the older population is even more pronounced;
today, approximately 80 percent of personal financial assets are held by
individuals age 50 and older. And while the populations are aging, there is also
increased pressure on government and employer pension systems. In 10 years,
there will be fewer workers supporting each retiree, and the situation will only
continue to worsen with lower birth rates and increased life expectancies. The
implications are clear: Consumers will need retirement savings solutions with an
emphasis on income generation and principal protection.
This
growing need for retirement savings products translates into a huge opportunity
for the financial services industry in the
U.S.
, Europe and
Asia
. In 2007, The Hartford conducted a survey of consumers age 45 and older in
Japan
,
South Korea
, the
U.S.
, the
U.K.
and
Germany
. One common theme was that participants in all countries surveyed were
concerned over having enough money for retirement. About two in three from the
U.K.
,
Germany
and
South Korea
were all at least somewhat concerned. In the
U.S.
, that level of concern increased to almost eight in 10.
Japan
was the most concerned: eighty-eight percent were at least somewhat concerned,
with about one in two being extremely or very concerned.
We
also found that consumers in each country agree that they themselves are most
responsible for their retirement income. But despite knowing they are primarily
responsible for their retirement finances, few had actually taken steps to
improve their financial situation. In fact, when asked “How have you improved
your financial situation for retirement during the past 12 months?”, the
number one answer was “I haven’t improved my situation.”
One of
the drivers of this lack of action may be that people need help in determining
how to improve their financial picture. Another theme we found in our survey was
the need for more financial education. While consumers are certainly educated
and know they need to take action, our survey found that they struggle with how
to take the appropriate steps to solve retirement financial issues. Consider the
following:
Forty-four
percent of the Japanese and 35
percent of South Koreans responded that they don’t know where to turn for
financial advice. The number one source for financial advice in
Japan
is the news media, and in
South Korea
it is friends, relatives and associates.
From
our 2006 survey to our 2007 survey, we found that in the
U.S.
and the
U.K.
, the number of individuals using financial planners for financial advice
declined by eight percentage points to 31 percent, and the number of individuals
using tax accountants for financial advice declined by 10 percentage points to
36 percent. In 2007, 27 percent of
U.S.
participants and 16 percent of
U.K.
participants said they did not know where to turn.
In
Germany
, one in four is relying on friends, relatives and associates for credible
financial advice, while 16 percent are relying on the news media.
In summary, people around the
globe are concerned about their retirement; they realize that they are
responsible for their future, but they are struggling to take action. In order
to seize this opportunity and grow the retirement savings market, our
industry—
in partnership with financial advisors and other investment professionals—must
play a role in educating consumers on our products and helping people determine
how to appropriately save and plan for a comfortable and satisfying retirement.
SIDEBAR:
More
Long-Range Views of the Industry
Rapid Change Ahead
By
Lorraine
Thompson, FLMI, ASC
Market Manager
Camilion Solutions, Inc.
The insurance industry is
undergoing rapid change. The
retirement market is booming. Distributors
are gaining more control and products are continuously changing.
Where will we be in 10 years? No
one can predict the future, but let me share a cocktail party conversation I had
with a senior executive from a Global Life Insurer.
Generation
Y is entering the workforce and will be in their mid 30s in 2018.
This generation, truly the first Internet generation, will dramatically
change the way insurance is sold and serviced.
They will look to new providers (Google Insurance anyone?) and
traditional insurers could experience difficulty reacting to these new consumer
demands. In this “new world”,
insurers would continue to provide the risk management, but use others to sell
and distribute.
10
years from now, we may see products evolve to an a la carte protection model,
where the consumer will be able to customize their policy with only their
desired options. This could include a financial product that covers their entire
life, investments, property and identity needs managed through the Internet.
Marketing
to this new generation of consumers would require a paradigm shift in an
insurer’s marketing approach. What
if marketing was done through online social networks?
What if the traditional insurance agent no longer existed?
What if consumers could choose their insurance on YouTube and purchase it
through Facebook?
By definition, the future is
unknown, but my prediction – the next generation will define how and what they
want to buy. The insurance industry
needs to be ready.
Ten Years, Ten Predictions
By Phil Hargrove
ImageRight
Predicting the future is an inexact science, at best.
Predicting the future of the insurance industry is even less precise,
with culture and technology proving the adage that change is the only constant.
Nevertheless, with tongue partly in cheek, we offer here our forecast for
the industry over the next 10 years:
—
2008: Increasing adoption of initiatives to support straight through
processing (STP) makes decision-making software ubiquitous.
—
2009: Increasing adoption of standards, paperless workflows, and process
automation brings an end to the outsourcing of back-office functions.
—
2010: Commoditization of STP and automating technologies makes
process-improvement affordable for all companies, not just the ones with the
largest budgets.
—
2011: Insurance companies are able to concentrate on service, rather than
servers.
—
2012: Insurance companies are able to concentrate on profits, rather than
process.
—
2013: Content management supplants technology as the key to the
successful enterprise.
—
2014: Insurance is dramatically easier to buy – and sell.
—
2015: The industry’s push for standardization finally supercedes its
predilection for regulation.
—
2016: The NAIC becomes a social club.
—
2017: Mammals and computers live together in mutually programming
harmony.*
The veracity of our predictions
notwithstanding, the complexity of change will yield simple truths: The
relationship of cultural change to technological change is chicken-and-egg.
Both will continue to change. Each
will influence the other. All of us
will be the better for it.
While
we can’t predict the future, neither can we prevent it.
We may as well enjoy it.
Phil
Hargrove is Insurance Technology Advisor at ImageRight (www.imageright.com).
Phil can be reached by phone at 770-860-0065, or by e-mail at phargrove@imageright.com.
* “All
Watched Over By Machines of Loving Grace”, by Richard Brautigan (1950)
Colonize Your Firm’s
Future
By Daniel R. Gattis,
Managing Director,
Jacobson Executive Search
In ten years’ time, insurers
will have organizational structures designed around two driving elements of
their businesses: the art and the science.
Science or technology will comprise the traditional organization made up of
task-oriented manufacturing and service, e.g., financial and tax reporting,
claims, simplified underwriting, customer service. Employees in this group will
work in diverse locations, including overseas and at home, and will be linked
virtually to the head office. More and more of the work will be machine-enabled
with human intervention on exceptions. These employees will have piece, hourly
or annual base compensation with portable, individually-tailored benefits
packages with flexible work hours.
The
art of business – e.g., new products, ERM, complex underwriting, investment
management, structured finance – will be populated by the firm’s most
creative minds, organized in face-to-face project teams (“project colonies”)
to define and enhance the company’s competitive position and to ensure its
present and future profitability. Top management will identify this talent and
will provide opportunity for challenge, for personal growth, for personal
reward. Project colonies will cut across all generational levels within the
company, will be flat and malleable, and will be led by the most qualified
individual on a project-by-project basis. Compensation will be both team and
individually based and benefits individually tailored. Work schedule and
location will vary with the project at hand.
Insurers
must free themselves from looking at the organization as a whole and begin
seeing each of its parts as separate organisms that comprise the whole being.
These organisms must be nurtured and grown distinct from one another recognizing
that each is unique, but fueled by talent.
Contact:
Daniel R. Gattis is Managing Director of Jacobson Executive Search, the
executive search and selection practice of The Jacobson Group. Gattis can be
reached at (800) 466-1578 or dgattis@jacobsononline.com.
Industry Will Adapt
to a Changing Marketplace
By John Carroll,
President,
TAI Life Reinsurance Systems
I believe the future is bright for the life insurance industry as a whole.
Companies will come and go through mergers and acquisitions, but the industry
will survive. Ten years ago so-called experts were predicting the demise of life
insurance companies and the creation of new financial conglomerates made up of
banks, insurance companies, and investment firms. While partnerships or
affiliations have occurred, there has been no “blurring” of the activities
by any one of these organizations. Insurance companies are still the best
assessors and predictors of risk.
What
we do see is a changing marketplace. Our business is now more international in
scope. Like the globalization of
other industries, insurance is no longer territorial. Many of those companies
that were local are merging or becoming affiliated with larger companies that
have international ties. In addition, with the advances in technology and
communication tools, barriers to these markets no longer exist. Countries that
were once third-world entities are becoming more educated and affluent, and need
the products and services insurance companies can provide.
Here
in
North America
, products and product features are continually changing. As our population
ages, the focus is on accumulation products such as Universal and Variable Life,
as well as Annuities; and living benefits such as Accelerated Death Benefits,
Critical Illness, and Long Term Care. Companies are making these products
available as stand-alone products or riders attached to traditional products.
Insurance,
with the exception of term with expressed limits, is a “long tail” contract
and requires the stability of a financially sound institution. Insurance
companies can bolster their stability through the use of reinsurance.
Reinsurance accommodates the transfer of large risks, can provide surplus
relief, smooth out lapse and mortality risk, and allow the cedent to utilize the
expertise of its reinsurers. Such arrangements not only contribute to the
stability and viability of the insurers, but also enable many to enter markets
that would not otherwise be available to them.
In my
opinion, there will continue to be consolidation within the industry, but the
insurance business will continue to be strong and viable in the future.
Predicting the future is always dangerous, because we do not know the risks that
lie ahead. However, I am confident that insurance companies and the creative
people they employ are in the best position to assess those risks and create
products that will meet the needs of the insuring public. The products may be
different but the results will be the same, providing needed coverage at a
reasonable cost based on sound assumptions and analysis.
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