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From
March 2009 Resource
Looking
Ahead
: The Industry in 5 Years
What
will the insurance and financial services sector be like five years from now?
For answers, Resource turned to some seasoned industry executives.
(also see Suppliers Outlook at end of main article)
By
Jennifer C. Rankin
At
the end of 2008, Resource
asked insurance industry leaders to share their thoughts on what the year ahead
holds for sales, profitability, technology and customer service. The executives
who participated in our annual forecast were:
Rachel
Alt-Simmons, research director,
Insurance, TowerGroup
Steven
Callahan, ChFC, CLU, FFSI, FLHC, FLMI,
senior consultant and practice development director, Robert E. Nolan Company
Robert
W. Clark, president
and CEO, Shenandoah Life Insurance Company
Al
Meyer, CLU, ChFC, executive vice
president, American Family Insurance Group
L.
John Pearson, CLU,
chairman,
president and CEO, Baltimore Life Insurance Company
Eric
S. Rubin, FSA, senior vice president
of Strategic Planning, New York Life
Barry
Stowe,
chief executive, Prudential Assurance
Company
Susan
D. Waring, CLU, ChFC, COO, executive
vice president and CAO of Life Affiliates and vice president of Health, State
Farm Insurance
Craig
W. Weber,
senior vice president, Celent
John
W. Wells, senior vice president of
Long-Term Care, Conseco/Bankers Life and Casualty Company
We published their
predictions in January (see “Forecast for 2009”). Now that you’ve had a chance
to ponder them, we bring you their answers to three questions with a longer time
horizon: What do you think our industry will be like five years from now in
terms of structure, products and customers? Will it be drastically different or
similar to today? How should the industry prepare for this future?
Here’s what they
had to say.
CLARK:
In the future, we will see fewer companies; simpler products for selected
markets; and a greater number of Web-based customers. To prepare, we must focus
on being market driven and respond to customer needs in a flexible manner.
MEYER:
There will continue to be more consolidation in the industry going
forward. I don’t think we will see drastic changes from the multi line
perspective. The view of some products as commodities will continue. Then the
only differentiator will be price or service level.
WELLS:
Consolidation will continue to reduce the number of companies. We don’t expect
to see a rush of new competitors coming from other industries, but rather more
partnering/joint venturing with firms like Google. We anticipate more growth in
Web-based and direct-to-consumer sales, resulting in fewer agents, who will have
a changed role in providing value to their customers. Independent marketing
organizations should increase in size, and we anticipate worksite sales to grow.
We expect to see products
that emphasize more cost-sharing with the consumer, resulting in consumers
becoming more educated and selective about the health care choices they make and
the health care plans they choose. Protection products will continue to be in
demand, as will medical “gap” products, HSA-type products, middle market
products—low face term, supplemental health—and worksite products. With a
new administration in place, government-managed healthcare is possible, creating
a bigger focus on individual supplemental products.
The industry’s customer
base and customer profiles will continue to change over the next five years.
Baby Boomers are entering retirement, but as retirement savings will not sustain
the desired lifestyle for many retirees, we expect that some type of ongoing
connection with active work will be common.
STOWE:
I do see a greater and greater shift to Asia as the real growth engine for our
industry. Over half the world’s population lives in the region and it is under
penetrated in terms of insurance coverage. Rapidly developing economies mean
insurance is becoming more and more accessible.
Within the products and
services we offer in Asia, I expect an increasing emphasis on retirement
solutions and the way we package our products and services to provide a more
personalized and holistic approach to an individual customer’s needs through
the whole cycle from accumulation to providing income in retirement and
addressing protection needs, particularly health incident related.
RUBIN:
The current financial crisis will have a lasting effect on today’s consumers.
We believe the flight to quality we are seeing today will be evident in future
years. Consumers will prefer the most financially strong, highly rated companies
and long-term guarantees will be front and center in their minds. Providing
products with long-term guarantees as well as products that limit exposure to
market volatility will become more prevalent.
The
arms race with variable annuity (VA) living benefits is not sustainable over the
long term and we expect more rational competition to emerge in the form of
higher rider costs and lower promised benefits. With the government under single
party control and pressure to find additional revenue sources, the industry will
need to be vigilant and engaged in the legislative process.
PEARSON:
Our industry is clearly failing the middle market. We know this market presents
an enormous opportunity, but the industry is not fulfilling its mission to meet
the market’s needs. The demographics of the middle market are changing by
becoming more multi-cultural, and the industry needs to find ways to more
effectively address this shift.
Industry-wide, we can
expect to see a more concentrated marketplace with fewer companies. The advent
of a number of new technologies will benefit the industry and our customers. A
federal regulator is also likely to be in place in the next few years, making
the introduction of new products much more efficient and economical. In turn,
these cost savings will be passed on to our customers.
WARING:
Within the next five years in order to acquire economies of scale and bolster
market share, many medium and smaller size companies will enter into alliances
or merge to obtain critical mass. Financial needs and specialization will drive
sales and acquisitions of specific blocks of business.
Principle Based Reserves
and International Financial Reporting Standards may allow more innovative and
competitive products to be developed.
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. Mortality will improve, but morbidity (health and wellness) will
decrease. Long term care and life insurance will merge and become a mainstream
combination product. Customers will become more diverse requiring more
specialization to appeal to various segments of the marketplace. The family unit
will continue to change and to shrink.
In the coming 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. Access to the Internet will be omnipresent,
immediate, and utterly routine. 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
broadband connection whenever and wherever they choose. The idea of a local
agent will erode substantially; human agents will be on-line and remote, but
accessible at the touch of a button. The concept of “shopping” without going
on-line will be completely foreign. Availability of information on rates will
dramatically narrow the pricing bands of companies on term insurance.
ALT-SIMMONS:
The globalization of insurance is here to stay. Carriers that continue to insist
that globalization is of relevance for only the very largest players in the
industry do not understand that it is now the very fabric of the industry.
Clearly, the financial services industry in its totality is now interdependent
and insurance executives must become students of all of financial services.
Utilizing a world’s worth of resources, both internal and external, will be a
key factor in managing talent gaps and financial stability. Even though the
current challenges are daunting and virtually all consuming, insurance
executives must maintain a vision for the future. The insurance industry is
fundamentally strong and resilient and will come out of the current crisis with
renewed enthusiasm. However, the industry will not look the same. There will be
casualties. Carriers that are able to apply technology to business problems in
new and creative ways will be the survivors.
Key insurance markets are
maturing and globalization provides opportunities for insurers not only to
diversify geographically but also to identify new target markets for
products and services. A new market-driven approach to the insurance industry,
facilitated by regulatory reform, has opened up new markets to foreign insurers.
A growing middle class in developing countries supplies insurers with a
previously untapped customer base for protection products. Global expansion
brings a host of challenges and risks in setting up new operations, including
navigating political and regulatory barriers, creating partner relationships,
and servicing new customers. As their business model becomes more complex and
geographic scope wider, many large insurers are wrestling with identifying new
opportunities and managing risk.
The
financial crisis may well see the emergence of megacarriers. The financial
crisis has wreaked havoc on insurance company balance sheets and stock prices,
and insurers who were perceived to be financially stable are reeling in the
current market environment. The strongest insurers are looking at acquisition
opportunities that at any other time would never have presented themselves. The
second area of consolidation will be centered on market segments and books of
business. While wholesale acquisition of firms will be extremely limited, some
institutions will see opportunity to acquire lines of business or books of
business from carriers that are retrenching back to core business competencies.
CALLAHAN:
For the insurance industry, five years is not really a long-range forecast. To
put that in context, it is a little more than one Presidential term, the typical
(though unacceptably protracted) duration of a major systems overhaul, just over
twice the shelf life of a term life product (2.2 years), or about the same shelf
life as a whole life product (4.7 years). Still, there are a number of major
trends that will start to bear fruit in this timeframe, creating some material
changes. The changes will not be drastic but rather more transitional in nature
as companies gradually move towards their future state.
From
a structural viewpoint, it is very likely that there will be a continued
consolidation within the industry driven by gaining economies of scale achieved
through mergers, book of business sales, and national expansion of successful
regional companies. Global expansion will also play a big role in this
structural shift as larger U.S. carriers move into countries like China and
India. There is less likelihood of significant global expansion into the U.S.
other than through acquisition given the relative saturation of the market
compared to other emerging markets. There will also be the successful
holdouts—the boutique carriers focusing on a specialized customer base or
product where they are able to create a sustainable differentiation. Yet in the
end there will be fewer, larger companies; fewer regionals; and a small pool of
boutique players. Along the same lines, distribution channels will shift to
broader blends of options as the Internet, bancassurance, and even retail
channels expand while the career channel continues its downward trend. As the
generations age, and as the pool of available experienced sales staff shrink,
alternative distribution will slowly grow.
With
respect to products, over the next five years a great deal of attention will be
given to meeting the needs of income over protection. Much of the focus is a
result of the aging Baby Boomers’ attention to structured decumulation,
driving the growth and variation of annuities as a key market opportunity. Term
life will also continue to experience the benefit of market attention as it
becomes an even more affordable solution for those who choose the “buy term
and invest the difference” path for personal protection. The attachment of
guarantees and related modified features will sustain the popularity of
universal life, which will continue to command the largest market share. There
will also be an expansion of note in two key areas: employer market voluntary
benefits as well as product combos where life and disability insurance (for
example, universal life and long term care) are bundled to meet a particular
market segment. The other changes within the product world will be quicker speed
to market, concurrent with a shorter shelf life, and the simplification of sales
and support materials to comply with readability and suitability requirements
that are gaining momentum. A transition to multi-language policies and forms
will also be part of the strategy for some companies as they recognize the
growing diversity of the U.S. market and build products specifically for select
markets.
Five
years from now, many of today’s customers will still be alive. As a result,
some of the same requirements for service and support will continue to exist for
companies servicing this generation of buyers. Increasing marketplace complexity
will be the result of new generations entering the market with their own set of
habits, expectations, and service demands. This will create a requirement for
companies to sustain multiple support structures as they sustain existing
relationships, while building new service platforms for new generations. The
support demands from newer generations will be challenging as they will require
accessibility to answers 24/7, immediate responsiveness, multiple methods (Web,
chat, phone, in person), and customer-aware systems that provide the basis for
individualized service. In some instances, the need for individualized service
will also cross language barriers that will have to be addressed across the
multiple methods as well as the distribution channels. The reality is that
customer-awareness and customer-centricity will be the key to market
differentiation and success. This is an acceleration of current trends more than
a drastic shift in a new direction.
WEBER:
Five years from now the customer
profiles will have changed only slightly, with the most obvious shift being
rooted in demographics—as a population we’re aging. But drivers will still
be buying auto insurance, and people with families will be buying life
insurance. Retirees will be looking for safe investments and ways to guarantee
that they don’t outlive their money.
But
the real difference will be found in customer behaviors and preferences. We
think that five years from now they will have morphed considerably toward the
convenience and ease that we see in other industries today. The buying
experience will be more real time, and less intrusive. The claim experience will
be shorter, and more effective. And channels will demand differentiated services
from their carrier partners to a far great degree than they receive them today.
Insurers need to prepare for this new world be cranking up their process and
system agility. They need to get smarter about how they use their own data, and
external data. And they need to set the bar very high on service.
Suppliers
Outlook
Several insurance industry suppliers had
comments on the long-term outlook for
the industry. Yes, there will be
challenges, but there are also opportunities.
Here is what they had
to say:
EDS:
Preparing for the Long-Term
By
Terry Schreiber, Principal Consultant, EDS
Given
today’s turbulent markets and murky economic prospects, it’s natural for
insurers—and their customers—to be focused on survival and stability: simply
getting to the “other end” of the downturn.
For many, the long-term future—perhaps 10 years away—will take care
of itself.
Or
will it? How can insurers prepare
for that long-term future while navigating the treacherous short term?
Successful
companies will aim to “get to the future first”,1
using near-term activities to build
competencies that create separation from competitors in both difficult and
favorable economic environments.
§
Viewed from the intersection of
business and technology, here are key elements positioning an insurer to get to
the future first:
§
Maintain a roadmap.
An ad hoc approach by governments to the financial crisis has resulted in
more questions than answers. It
won’t get insurers to the future, either.
§
Realign costs.
The insurance industry of the future must be more streamlined.
Its cost base will be constrained as never before.
Intelligent cost management, encompassing business processes and their
enabling technologies, will generate competitive momentum.
§
Build in agility.
A panel of industry executives and advisors recently concluded 2
that the industry’s biggest technology roadblocks are legacy
applications and traditional processing platforms.
Simultaneously dismantling these roadblocks and re-calibrating cost
structure will be a distinctive competency.
§
Choose effective partners.
A high-value partner will bring capabilities to support all these
elements as well as the strength to deliver in any economic climate.
With
disciplined execution of these elements, insurers will increase their
competitive separation in the near-term future.
Over the course of 10 years, these companies will reach the future
first…and reshape an entire industry.
ImageRight:
Use Nimble Focus Principle
By
Mike Fess, ImageRight Product Visionary
Insurers
gaze into the future every day assessing risk and return. Unfortunately, there
are no highly developed actuarial tables for the technology that will be the
next big thing. Assessing that risk and determining how best to guarantee a
return on technology investments in the long-term future are problematic at
best. The principle of Nimble Focus can guide insurers down this long-term path
with the least danger.
Technological
change is rapid and those changes can often reap devastating consequences.
Locking into a proprietary technology or solution can limit your ability to
respond to changing technologies. By the early 1980s, insurers around the globe
had determined that success in the future depended on heavy investments in
centralized mainframe computing power. With that investment made, insurers were
largely unable to reap the benefits of the shift to the PC and the
commoditization of computing power that has dominated the last generation of
technological change. Insurers had become less than nimble largely because of a
lack of focus—or more appropriately a focus on the wrong prize.
Businesses
too often make the wrong technology decisions and hamper their ability to be a
nimble enterprise because they focus exclusively on the technology and not the
business needs that the technology should serve. Constant focus on business need
directs you to the right technology decisions and prepares for the
future—whatever that future may hold. ImageRight’s nimble and insurance
focused approach to developing content management, workflow and business
intelligence is helping insurers prepare for the future by performing with
expense, loss and combined ratios dramatically lower than industry averages.
PDMA:
How to
Navigate Uncertain Times
By
Steve Herker, FLMI, Senior Business Solution Consultant, PDMA
The uncertain financial environment will present challenges for insurance
companies, just as it will for consumers. Frivolous spending will be replaced
with a keen focus on the “essential” expenditures.
Tighter budgets will require IT projects to have clear, demonstrable
benefits to cost reduction and the bottom line.
The
forthcoming economic challenges are also ripe with opportunity.
Forward-thinking insurers have an opportunity to align IT spending
projects with organizational goals. But, where do you start?
Here are four key questions for insurers to consider in IT spending
priorities:
§
Can we quickly and
cost-effectively bring new products to market?
If not, all bets are off. While
the current focus may be on guaranteed income products, it’s important to
remember that product preferences are cyclical. IT systems must offer broad,
rapid and flexible product support.
§
Are IT cost accurately
reflected in product pricing? The
most successful companies will use hard data to price new products.
The data will point to the IT costs associated with product rollout and
support.
§
Do we have a clear picture of
our customers? IT systems must allow
insurers to easily leverage client information and provide the type of services
customers expect, such as self-service via the Web.
§
Do our IT systems offer
sufficient interoperability? Insurers
must be able to leverage multiple solutions in an integrated fashion.
Addressing
these questions has never been more important.
Future success requires a precise vision for addressing the financial and
operational challenges of tomorrow.
McCamish:
Continuum of Services Model
By
Sam Thomas, Executive Vice President, McCamish
Rapidly
changing market conditions require fast response in product development in order
to gain or maintain market share. Additionally,
to stay competitive, companies must operate an efficient service model that
meets the specific demands of different markets and different distribution
channels by segment. Having the
flexibility to change the mix of high touch service and low cost outsourcing by
market segment and delivery model is necessary to match costs with
opportunities. The days of a
monolithic service model for success are over.
Increasingly
having the ability to dial in highly efficient, super-automated insurance
functionality without the expense and risk associated with buying and installing
purchased software means the difference between timely meeting of market demands
and being bogged down with inhibiting infrastructure.
McCamish
Systems operates an End-to-End Service Model for BPO and SaaS deployment.
The model facilitates a continuum of hybrid deployments, by segment, with
functions selected between BPO and SaaS, with the flexibility of modifying the
deployment over time.
For
a changing world, arming the insurance operation with the flexibility to meet
new product or distribution challenges as they emerge is an approach that fits
the times.
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