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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
E-MAIL
Susan D. Waring, CLU, ChFC, COO, executive vice president and
This page to a friend CAO of Life Affiliates and vice president of Health, State Farm
Insurance
Enter recipient's e-mail:
Craig W. Weber, senior vice president, Celent
Send this page 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?
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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
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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
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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
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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
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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.
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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
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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
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