|
From Resource, May 2007
Copyright by LOMA
Strategic
Priorities in Transition
A survey of the life
insurance and annuity industry clearly indicates senior executives shifting from
an internal, operational focus to an external, market-driven one.
By Steve M. Callahan, CLU,
ChFC, FFSI, FLHC, FLMI/M
Senior Consultant
Robert E. Nolan Company
Increased regulation. Aging
systems. Shifting demographics. Product commoditization. Intensified
competition. Compressed margins. Distribution consolidations. Life and annuity
insurers are facing increasingly complex and challenging conditions as demands
for returns and profitability magnify the pressure on growth while
simultaneously creating an abundance of conflicting choices for executives to
sift through. How to optimally allocate the limited resources of time, money,
and people across service, support, product features, and returns has become a
focal point of many decision processes. Robert E. Nolan Company’s recent
survey of the life insurance and annuity industry clearly indicates senior
executives shifting from an internal, operational focus to an external,
market-driven one.
Survey
respondents’ characteristics show the extent to which these issues have risen
to the forefront of strategic consideration. Responses included nearly equal
representation from stock and mutual companies, with a little more than half the
companies at $500 million a year or less in annual premium revenue and the other
half split roughly evenly between companies over $2.5 billion and those between
$500 million and $2.5 billion. Another relatively equal distribution occurred
across the functions represented, with approximately one-fifth of the responses
coming from IT, sales and marketing, operations, and C-level execs each, and the
remaining fifth spread across underwriting, finance, and staff areas. Of
particular note are the titles of survey respondents—about 51% are EVP or
higher, and almost 80% hold officer titles.
Five significant trends stand
out as key differentiators:
Shifts in demographics
Implementation challenges with
expense management and technology
Leveraging sales and marketing
investments for optimal returns
Using service as a competitive
advantage
Focusing technology investments
Shifts
in Demographics
The change in consumer
demographics was identified as the number one trend demanding immediate
attention, specifically two significant opportunities: (1) the graying of
America
(95%) and (2) the growth in ethnic populations (88%). Regarding the aging
population, product features along with distribution and service techniques were
identified as focal to fully serving this exponentially growing market. Product
payout and maturity features and benefits tailored for older populations are
critical areas of opportunity, particularly with the diminished value of
government-sponsored programs like Social Security. Insurers will need a diverse
suite of products covering the full range of retirement needs, including cash
management, lifestyle protection, wealth transfer, and inflation protection.
Equally
critical in terms of magnitude but less obvious in terms of actionable
strategies is the impact of the growing ethnic diversity of consumers. Careful
evaluation of fit and the cost to effectively service each new segment should be
part of every company’s market evaluation, including consideration of the
multiple (and often regionalized) language and presentation requirements,
distribution methods, call center staffing, correspondence needs, and all other
major functions involved in the sale and service of insurance products.
Specifically, Hispanics were identified as the fastest-growing underserved
population, followed closely by Asians.
Despite
clear recognition of this trend’s importance, the industry has made only
slight progress improving its ability to service segments whose first language
is not English. Options range from significant internal IT investment or
outsourcing on the high end to minor translation of marketing materials without
supporting multilingual service capacity on the low end. The most successful
companies will be the ones that offer the full spectrum of multilingual
materials and services.
Implementation Challenges
Although 85% of respondents say
their companies have a clear vision, goal, and strategy, and over half believe
their expense ratios would significantly decrease in the coming years, the
surprising statistic is the number—80% of whom are company officers— unaware
of any company strategy or goal to reduce expenses. Absent a connection between
expense ratio, action plan, goal, and strategy, companies are susceptible to
uncompetitive prices, higher costs, and, ultimately, a gradual erosion of market
share and/or profitability.
Collaboratively
developed and clearly communicated visions, goals, and strategies help a company
transition to a cost-effective business model. Translation of these concepts
into actionable plans with measurable results is at the crux of growth and
profitability. Given the competitive nature of the industry and contracting
profit margins, managing expense ratios must be a key goal of any strategy.
Failure to tie, in some way, the impact of strategy execution to expense ratio
could easily constrain paybacks and limit future opportunities.
The
majority of respondents see the use of process improvement activities as an
effective way to bring about expense ratio reductions. Internal focus on
consolidations, simplifications, once-and-done services, and reduced handoffs
all contribute to a more profitable business. Even with these efforts, though,
only half of the respondents see expense ratios trending downward, putting even
greater pressure on product margins and competitiveness.
A
majority did say their IT departments are aligned effectively with the business
and generate measurable results. Aligning IT with the business continues to be
fundamental to realizing marketplace and operational benefits. Conversely, over
half either did not know or did not believe that IT is an effective enabler of
competitive advantage. A strong need for IT to act as the foundation upon which
future competitive advantage is built was expressed by most respondents, a need
made even more acute by product commoditizations and the narrowing of profit
margins. Building this foundation requires significant information sharing,
broad-based involvement, and, above all, common goals and rewards. Companies
should continue to invest in the necessary structure and communications to
ensure that they are clearly identifying, communicating, and supporting the link
between IT, results, and competitive advantage.
Leveraging
Sales and Marketing Investments
On the sales front, most
respondents see an industry-wide refocusing of distribution efforts as likely to
very likely. Optimizing existing distribution channels, enhancing existing
product features to provide competitive advantage and meet market demands, and
expanding the tools, techniques and training of the existing field force are
three specific efforts cited for their potential to optimize returns. All three
leverage existing investments and infrastructure, which translates to a desired
strategy of concentrating on the best lines and channels and eliminating any
marginally profitable or non-strategic ancillary lines. Simply put, compared to
the goal of becoming a financial supermarket, a back-to-the-basics approach is
gaining favor with senior management.
Along
these same lines, the majority of respondents feel niche companies will
outperform those offering a full array of financial services and products. Two
key factors influenced responses: each company’s current position in the
market (specialized versus broad) and its established distribution system(s).
Interestingly, companies with career channels, particularly in small towns and
rural areas, may need a broader product portfolio than those marketing mostly
through brokers. Given the focus on leveraging existing investments and economy
of scale challenges, it is likely these companies will white-label low volume
lines in lieu of manufacturing them to meet this need.
Overwhelming consensus emerged
for three areas of field technology that respondents plan to invest in soon:
1)
Providing access to Web-based production (84%)
2)
Web conferencing and e-learning (81%)
3)
Expansion of the existing
field force (74%)
Consistent with the themes of
optimizing and leveraging, each of these strategies take advantage of and build
on existing infrastructure, technologies, channels, and expertise.
Services as a Competitive
Advantage
Respondents indicate they are
working diligently on service delivery, technology, and structure as key
competitive differentiators to help offset the commoditization of products. Of
all the operations strategies being pursued, speed and simplicity are the
imperatives that respondents say hold the keys to success. Improved timeliness
intertwined with a broad range of access methods—phone, Web, e-mail, and voice
response—are the front-running service opportunities. In parallel, and
providing the economies of scale critical to technology investments, is a move
toward consolidation of common service functions in order to provide one face
and one-stop shopping to the customer. In combination, these strategies are
foundational to the effective utilization of service as a competitive advantage.
Many
respondents also indicated a shift toward implementing service tiers based on
either profit (consumers) or contribution to profits (producers). These tiers
allow companies to balance the increased cost of additional or more personalized
service with the profitability of a particular tier of producers or consumers,
allowing a company to pursue two separate approaches according to distinct cost
structures. Alternatives include scaling back the services provided to less
profitable consumers or producers, in effect creating a lower tier, or creating
a higher tier with added services above the current level like a “concierge”
line offering personalized support, direct access, expanded hours, and premium.
One drawback to the second approach, the “concierge level”, is that it would
add to costs as opposed to the first approach, which reduces services for all
but the top tier.
Reflecting
a diversity of planned strategies, responses were spread evenly across other
service options, including whether to organize by channel or by market and
whether to offer customers expanded hours. The most relevant finding here is
that, regardless of approach, most companies are reorganizing in some fashion to
improve costs, service, or both.
Focusing Technology
Investments
Technology remains one of the
most consistently supported strategies for enabling competitive advantage. As is
usually the case with IT strategies, however, companies’ abilities to
implement new platforms typically lag their intentions. Causes include limited
resources and the inevitable demands of regulatory changes, product line
extensions, organizational realignments, or high-profile maintenance
requirements. The end result is the existence of fewer complete implementations
and longer waiting times before new investments are fully operational.
Three technologies were clearly
identified as significant opportunities for investment over the next three
years:
1)
E-signatures and associated online applications (95%)
2)
Document management and workflow (88%)
3)
Web portals and online self-service for agents and customers (85%)
Although E-signatures and
online applications ranked highest, their associated support
technologies—electronic delivery of customer materials— ranked lower in
importance. It appears that online policies and e-mailed annual statements are
lagging in popularity as consumers work through electronic insurance’s
adoption curve. With expanded Web services, E-signatures, and online service,
electronic delivery will inevitably follow suit, albeit at a slower pace.
Trailing
close behind these three key technologies were two strategies that focus on
simplifying the core processes involved in issuing insurance and paying agents:
a common front end for servicing multiple products and lines (83%) and
consolidated commission systems with electronic payments (80%). Following
closely with rankings of 70% “Likely to Very Likely to Be Implemented” were:
Client Relationship Management
(CRM) single systems
Data warehouse/data mining for
customer segmentation
E-delivery of customer
materials
As with other top strategies,
the focus is on operational simplicity and efficiency achieved using broadly
accessible service options, consolidated operations, and functional economies of
scale. Systems are being leveraged to enable service as a competitive
differentiator, with mature technologies like document management, workflow, CRM,
and common front ends vying for investment dollars. Bottom line: invest now in
expanding service access and streamlining transaction processing systems.
Service is quickly becoming the differentiator.
Where Next?
The insurance industry is
becoming more complex and is in a state of flux, with the pressures on margins,
profitability, and performance greater than ever before. Behind these dynamics
are significant changes in consumer demographics and the market. The
across-the-table, trusted-advisor sale is rapidly being replaced by online
comparison shopping and electronic application submission. Consumers are more
informed today than ever before, with immediate access to vast amounts of
information via the internet. Even the very nature of the market is changing,
with greater ethnic diversity, a significant increase in aging consumers, and
the need for low-cost, readily available sales channels. Investments intended to
leverage technology, from electronic servicing to consolidated operations, are
the focus as competitiveness becomes more reliant upon economies of scale and
single-point-of-contact, once-and-done servicing.
The
challenges of an increasingly complex environment and an intense focus on
allocating limited resources demand executive attention. Combining leveraged
investments with the operational efficiencies achieved with process improvements
provides the basis for enhanced competitiveness. The net result for companies
taking advantage of the opportunities presented is a dramatic transformation
from an internal focus to a market-driven one based on operational
effectiveness.
To
survive and prosper in the changing world of insurance, the first step for any
company is to recognize the nature of the change and their relative position,
define the gap, and then put in place the necessary plans to close that
gap—fast—before risking getting left behind in the detritus of an industry
in transition.
To receive the complete survey
results, visit the Robert E. Nolan Company’s Web site at www.renolan.com.
The Robert E. Nolan Company is
a management consulting firm specializing in the insurance industry. For more
than 30 years, we have helped our clients achieve measurable improvements in
service, quality, productivity and costs through process innovation and
effective use of technology.
|
