From August 2009 Resource

Changes Ahead
As a result of the financial meltdown, changes are
coming to the insurance industry, and technology will play an important role. A report from the ACORD LOMA Insurance Systems Forum.

By Ron Clark

Change is on the way for the insurance industry. That was the message from the 2009 ACORD LOMA Insurance Systems Forum. The industry will experience many changes due to the financial crisis, but other changes will come from new technology and demographics.

Robert Kerzner, CLU, ChFC, president & CEO of LOMA and LIMRA, opened the Forum. He said the world has changed pretty drastically since the last Systems Forum.

"Simply put, the final quarter of 2008 was something that none of us want to live through again," he said. Wealth was destroyed at an unprecedented scale, and the crisis has had a serious impact across all our companies and the country. "While the P&C business has held up better, the life, health and annuity companies have been very hard hit."

"As a result of this financial meltdown, I believe our industry is in the process of what I’m calling transformation. And when the dust settles, it’s going to look distinctively different. What are some of the likely implications? There are probably going to be fewer companies, there is going to be consolidation, no question about it."

Kerzner said because of the shortage of capital, he does not think it’s going to happen quickly, "But over the next three to six months, we’re going to see the first big deal and then it will accelerate quite rapidly."

"We are also going to see companies making shifts in where they want to deploy capital, and they are going to make hard decisions about where they want to play…. You may see global players shift capital to other countries where they think they can have better ROEs.

"We’re seeing a significant change in product design, particularly in the retirement space. Some companies are pulling back on their annuity business, changing product features, re-pricing, and reducing guarantees. All this is being called de-risking, a new term. But other companies have even limited how much annuity business they want to write. If all this isn’t bad enough, we’re going to see an increased regulatory environment and likely will see some significant federal intervention even this year. You can expect to see a lot more change, particularly on the life and annuity side."

Kerzner said that everyone in the industry needs to do their part "to help restore consumer confidence that was lost when our financial systems melted down. The insurance industry took its share of blame, because people do hold us accountable, and they count on us to protect them during their lives, their death, and from the vagaries of life, accidents, fires and other disasters."

The impact of the financial crisis on life insurance life has been extremely significant, he said. The 4th quarter of 2008 was the single worst quarter for life insurance sales since 1951. The numbers for the 1st quarter of 2009 were worse. On the P&C side it was also a tough year.

But Kerzner added, "on the brighter side, equity markets have been rallying…I think at least we can be hopeful and that’s important, because optimism and how consumers feel about confidence is very important in pulling out of a recession. Things have been bad, but at some point they are going to get better."

Whatever the future holds, the role of information technology is still going to be critical, Kerzner said. "It’s likely some companies will be soon begin to increase their investment in IT. I think of technology and IT as the great enabler, because of the things it lets us do in our business. If we are to have future gains in efficiencies and productivity, then IT must play a major role. IT working in conjunction with standards makes it easier and more efficient for us to do business and provide better service to consumers."

"One thing that could have a far reaching impact on all Americans are the developments in health care. The Obama administration has already earmarked hundreds of billions of dollars to reform the health care system. There’s an IT component to this—the computerization of health records is a major part of that vision. The stimulus plan that was enacted in February includes more than $17 billion for health IT programs. Now the goal is to is to get 90% of doctors and 70% of hospitals to adopt electronic medical records within a decade. This would be truly revolutionary."

"While there are huge issues involving privacy and access, I see the potential for improving our ability to service consumers that are looking for life insurance and other health products, in a way we could never do it before."

"Our current underwriting can be frustratingly long. It takes time to locate all that medical information. How much could we speed that process and change our business if appropriate records were available at the push of a button? Also, converting to electronic health records is using IT at a macro level to solve a national, major problems. It could be a great enabler for us to speed underwriting and pay health and disability claims much faster."

Kerzner said that at LOMA, "we have been using technology on a different scale to revolutionize learning. In the past year, we launched the most advanced learning programs we ever created. They are called Need 2 Know, and are based on state of the art learning technology, including embedded video and other tools. The result is stunning, a streamlined, richer learning experience for all users. Our friends at ACORD will be using these courses as part of their educational offering. It is essential in today’s economy that people joining the industry get up to speed as quickly as possible on all aspects of the business and that’s why we call it Need 2 Know, people need to know it."

Noted futurist David Smith, CEO of Global Futures and Foresight, discussed predictions for future technology, demographics, and more. "The future is full of more change," he noted.

At present, trust is an issue for governments and business institutions, and trust has been declining in recent years. This needs to be improved, but it has to be earned through behavior, he said.

Even though the recession has hurt companies, it is not a time to do nothing, Smith said, nor is it a time to cut back. Some of the worst recession mistakes are to fire talent, cut technology spending, reduce risk, and stop new product development, Smith said.

On the contrary, recession is a time to get ready for new challenges, new growth and new opportunities, he said. Many well known companies got their start in past recessions. "If you are not getting ready for new challenges, your competitors are….things have changed, maybe forever, and new products and new distribution methods are required…innovation is needed."

In the insurance industry, he discussed drivers of change. On the global scale, these are the economy, completion, infrastructure, and new markets and consumers. Locally, drivers of change include regulation, talent, capital and infrastructure.

The insurance industry faces many challenges, including the financial crisis and recession, being competitive, increasing sales, implementing technology faster, getting rid of paper systems, meeting 24/7 service expectations, talent acquisition and retention, and response times.

Smith said the industry must deal with new entrants, customer demand for new products, and it needs better processes for managing risk and customers. Mobile devices, GPS, RFID, genomics and telematics all have implications.

The graying of the workforce is an issue—Smith said in the U.S. about 19% of the executives and management will retire in five years. The age of agents is increasing, and there has been a decrease in full time life agents.

The future insurance enterprise will look different, Smith said, referring to surveys showing 89% of insurance CEOs plan to make substantial changes in the next few years. "It’s not just changing things, such as technology, but also about breaking down cultural and political values."

Almost half of insurance CEOs plan to partner extensively and change their business’s mix of capabilities, and assets, and 81% look to redefine their
existing industry.

Looking to the markets of the world, Smith said the U.S. is only growing a small amount, Europe is declining, but Asia is where the growth will be. Millions of people in Asian nations are emerging from poverty each month, it’s a huge potential, he said. He asked how will the business world operate when dominated by China and India?

The Middle Eastern market also offers opportunities to insurers, but financial products for the Islamic market must be Takaful compliant, Smith said.

He said depletion of resources is a world issue. Shortage of potable water is a real concern in many areas. Global agriculture output must double in the next 30 years to sustain population growth. The generation of power is a concern. Environmental concerns of consumers make it important for insurers to look at adopting green technology, Smith said.

Business Change

Smith predicted the business environment will change fundamentally in the next 15 years. He referred to comments by Peter Drucker, who said the corporation as we know it, which is about 120 years old, is not likely to survive the next 25 years. "Legally and financially, yes, but not structurally and economically."

As the corporate model is re-invented, it will turn to new relationships and new business models. Consumers will be increasingly powerful, and convenience and quality will be expected. Disintermediation will occur, as people take more control and do not rely on others. As an example, he cited Zopa, a marketplace where people lend and borrow money to and from each other, sidestepping the banks. In the future, maybe social networks will become self insuring, he speculated.

Several workforce issues face insurers and other businesses, Smith said. In the U.S., the Fortune 500 companies will lose half their senior managers in five years as the baby boomers retire. In the EU, there is a growing shortage of skilled people. The top workforce trends are attracting smart talent; dealing with an aging population, more women and diversity in the workplace; developing high-skilled employees; and engaging with on-line collaboration, globalization and business process transformation.

Smith mentioned many future technologies such as 3D printing, stretchable silicon, and nanocrystal displays, but the challenge to companies is how to harness such new technologies.

He discussed social networking, and asked if companies are failing to see the collaboration benefits of this. The first generation that grew up using social networking tools is entering the workforce, and these digital natives will be impatient with the rules of traditional corporate IT. The challenge to companies is to balance letting employees collaborate with the outside world vs. the risks involved. Smith suggested that asking the digital natives to give up their social networking tools is like asking a boomer to give up the telephone.

The Internet is a very important tool for business, and the use of video on the Internet will increase. Smith said Internet traffic is growing at a rate of 50 to 60 percent a year, adding that traffic in 2012 will be 100 times larger than in 2002. Notably, 70 percent of that traffic in 2012 will be video. But the Internet could be made obsolete by The Grid, developed at CERN, which is 10,000 times faster than a typical broadband connection, he said.

Other technologies that can have an impact include cloud computing, which allows computing power to be consumed whenever it is needed, and smart phones, which are able to handle voice, data, multimedia and other applications. Fixed mobile convergence is growing rapidly and it will fuel more mobile internet devices. Second Life gives us the idea of how we may want to communicate in the future. Artificial intelligence may allow us to interact with devices just like humans.

The McLaughlin Group discussed the current political scene in the U.S. The group devoted considerable time to discussing the economic situation and proposals to reform the health care systems in the U.S. The economy is the main issue facing President Obama and his popularity and support will depend on how well the economy does the next several years, the panelists said. Several panelists said health care reform will be achieved, but it may not be all that Obama wanted.

The panel also discussed the question whether President Obama has taken on too many issues and is spreading himself too thin. McLaughlin cited Obama’s desire to take on health care, reform the financial system and other large tasks. Obama may be "overloading the circuits" but the economic crisis gives him latitude to do so, the panel said.

2010 ISF Date

The next ACORD LOMA Insurance Systems Forum will be held May 24-26, 2010 in Las Vegas, at the Mandalay Bay. For information, visit www.acordlomaforum.org

Contact Resource at resource@loma.org