Forecast. Executive. Perspective. The

Transcription

1 Forecast The Executive Perspective Industry leaders predict what s ahead for sales and profits, structural change, information technology, customer service and more. By Jennifer C. Rankin 10 January 2014 RESOURCE

2 cover focus Life insurance companies continue to recalibrate in the face of new regulations, evolving technologies and customer expectations, and more. A difficult Congressional climate, particularly with respect to federal budget negotiations, adds to the uncertainty as executives work to position their companies for success. Another year of low interest rates is the most difficult challenge of all. It s against this backdrop that Resource asked insurance industry leaders to share their thoughts on what 2014 holds for sales and profitability, structural change, information technology, and customer service. We also asked them to identify the greatest challenge the life industry faces and how it should deal with that challenge. The executives who participated in our annual forecast include a cross section of the board of directors of LL Global, the umbrella organization for insurance industry trade associations LOMA and LIMRA, plus industry analysts and other officials. They are: Thomas A. Barefield, Executive Vice President, Distribution, Ohio National Financial Services Christopher O. Blunt, CLU, ChFC, CAP, President, Insurance Group, New York Life Mark Breading, Partner, Strategy Meets Action John DelPozzo, CLU, Senior Vice President, PGA Marketing, Ohio National Financial Services Esfand E. Dinshaw, LLIF, Chairman and CEO, Sammons Financial Group Scott Dolfi, Chief Operating Officer, Guardian Life Rino D Onofrio, President and CEO, RBC Life Insurance Michael R. Fanning, Executive Vice President, U.S. Insurance Group, MassMutual Doug French, Managing Principal, Insurance Actuarial Advisory Services Practice, EY Frank Gencarelli, Senior Vice President, Sales & Marketing, Legal & General America Charles Johnston, Director, Americas Life/Annuity & Group Practice, Celent Joseph R. Monk, ChFC, CLU, CASL, Senior Vice President and CAO, State Farm Life; Vice President, Health & Securities Products, State Farm Insurance Companies Robert F. O Donnell, President, Prudential Annuities, Prudential Financial David W. Simbro, FSA, MAAA, Senior Vice President & Executive Officer, Life & Annuities, Northwestern Mutual Tim Stonehocker, Executive Vice President, Individual and AIC, Ameritas Life Deanna D. Strable, FSA, Senior Vice President, U.S. Insurance Solutions, Principal Financial Nancy Winings, Vice President, Product Management, Legal & General America Here s what they had to say: 1 SALES What is your prediction for sales, premiums and profits for our industry as a whole in 2014? What products look particularly strong or weak? BAREFIELD: For the industry, expected sales growth is somewhere in the five to seven percent range. Low interest rates will continue to negatively impact margins. Indexed universal life sales should continue to take on a larger part of the overall universal life (UL) market share while whole life, due to its inherent guarantees, should continue to thrive. BLUNT: On a macro level, the nation is still struggling to achieve escape velocity in the wake of the debilitating Great Recession. A national survey we recently sponsored showed that, compared with a similar survey before the financial crisis, the gap in life insurance coverage that Americans self-identified has grown. In fact, Generation X, perhaps the most exposed group with young families and growing responsibilities, has seen its gap in coverage grow 24 percent from precrisis levels. With this as backdrop, it comes down to a tale of two cities if insurers have Text Continued on Page 14

3 2014 Forecast Participants Tom Barefield Ohio National FS Chris Blunt New York Life Mark Breading Strategy Meets Action John DelPozzo Ohio National FS Frank Gencarelli Legal & General America Chuck Johnston Celent Joe Monk State Farm Robert O Donnell Prudential Financial Forecast Highlights Key decision makers from a cross section of insurance industry companies participated in the 2014 forecast. According to participants: Sales, Premiums and Profits Expectations for sales, premiums and profits are modest due to another year of exceptionally low interest rates, uncertain equity markets, unemployment rates, a divisive U.S. Congress, the distraction of health care reform among producers and consumers, and the high fixed costs of doing business. The upside of this challenging business climate is that consumers are looking for safety, which increases the appeal of whole life, with its fixed guarantees; indexed life and annuity products; and guaranteed income riders. Hybrid products are another bright spot. On the life side, says one executive, the name of the game is product innovation. The insurers that can create new hybrid products and combine the right set of features to address specific market needs will be successful. As consumers look for insurance solutions that can meet multiple needs and contribute to financial security later in life, says another, we predict continued growth in products with living benefits, stable distribution, and linked benefits such as long term care services. Turbulent economic times also have led to increased interest in income protection products such as disability insurance during a consumer s working years and an annuitized income stream during retirement. Voluntary insurance that is, products purchased through the workplace is another growing market, say industry executives. Information Technology Technology is more important than ever, according to industry executives particularly analytics, social media, and mobile. Many tout tablet devices as effective tools for sales illustrations, on-demand underwriting statuses, client interaction, and other field force applications. They see social media as an effective branding and customer engagement tool. They are applying analytics to every aspect of the business, including marketing, actuarial, distribution, and on through the value chain. The use of big data and predictive analytics to understand policyowner behavior and build stronger relationships, says one, has great potential. Collaboration technologies among them, chat, screen sharing, real-time videoconferencing, document sharing, and wikis are a new focus area for improving the new business/underwriting process. Evolving technologies will not displace the agent-to-customer relationship say executives; rather, they will streamline and improve that relationship. The industry s focus has been on digitizing the application, underwriting, delivery and service processes, comment two executives, using electronic forms, electronic signatures, underwriting engines, electronic delivery and self-directed service platforms for far more efficiency and speed. But the technologies that have the most potential are those that blur the lines with media that can change the engagement model from a forms based model to a conversational model. Structural Change Industry executives do not expect much structural change in There may be some M&A activity on the distribution channel side as intermediaries look for scale, says one executive. On the insurer side, the business drivers for acquisition are not there. For the most part, any M&A activity would most likely involve large insurers acquiring smaller, less competitive insurers and/or strategically important blocks of business. We also may see more annuity buyouts, a trend 12 January 2014 RESOURCE

4 Esfand Dinshaw Sammons Financial Group Scott Dolfi Guardian Life Rino D Onofrio RBC Life Insurance Mike Fanning MassMutual Doug French EY Dave Simbro Northwestern Mutual Tim Stonehocker Ameritas Life Deanna Strable Principal Financial Nancy Winings Legal & General America that got underway last year when a handful of private equity firms and insurers bought closed blocks of pensions from corporations seeking to de-risk their balance sheets. Finally, Many companies will enter new product lines (combo riders, indexed products, income benefits) to meet consumer demand and spur growth [and employ] new distribution strategies (non-traditional retail outlets, direct-toconsumer approaches). Customer Service Stellar service is the linchpin of insurer success, according to industry executives. We have a remarkable industry that pays out $1.5 billion each and every day to beneficiaries, says one, but there is more we can do to make sure policyholders and other clients have a customer experience we can all be proud of. Over the past decade, customers service expectations have changed dramatically and are being set by companies outside the insurance industry. Among the components of superior service, say industry executives, are knowledgeable advisors; well-trained call center employees; sophisticated technology platforms; streamlined new business processes; and a variety of communication options for customers such as web self service, mobile apps, and . Finally, An expectation of customization and personalization is prevalent in all industries and this will require all providers to have a deeper understanding of their clients if they wish to succeed. Industry Challenges When asked to name what challenges the life industry faces in 2014, executives cited both industry-specific and macro issues. On the macro front, Low long-term interest rates, volatile equity markets and weak U.S. and global economic conditions will continue to be a challenge, says one, with low interest rates putting particular pressure on product and operational performance. Executives also cite a changing regulatory (solvency), fiscal (federal budget), and monetary (federal quantitative easing) environment. This uncertainty, says one, makes it difficult to plan and develop long term strategies. It also causes customers to delay buying decisions. Many also worry about a looming talent shortage. Improving operations, leveraging advanced technologies, and introducing innovation, says one, requires the right people. Finding new producers, underwriters and analytics experts will be the real challenge. Several executives are concerned about their aging field force. The aging agent demographic is critical, says one. Companies must find ways to attract, train and develop the new generation of life insurance agents. The struggling middle class is yet another concern. For our industry to remain healthy and growing, says one executive, we need a strong middle class that can avoid distraction from the one thing that really matters protecting the breadwinner s income from loss. A strong middle class will also mean a strong inflow of new agents and advisers into our system. Demographics shifts are another challenge. One executive cites three in particular: gaining relevance to a younger generation; addressing the shifting needs of older consumers; and coping with a shrinking middle class. Special Issues Survey participants also discussed what they think the insurance industry will be like in 10 years and how insurance companies can help solve the retirement challenge. Their views on these topics will be featured in the February and March issues of Resource. 13

5 The financial outlook of our industry for 2014 remains volatile, and sales and profits will likely continue to face headwinds. Continued from Page 11 strong distribution operations, you will be able to explain the products and solutions and make the sale. If you have weak distribution, the future may look like a Dickens novel. New York Life is on pace for a double-digit sales increase in life sales in 2013, and we anticipate a strong 2014 as well. BREADING: Let s face it, the economic environment and customer needs are not going to change substantially. It looks like low interest rates, the longevity challenge, and uncertainty in the financial markets will be with us for some time to come. And it s anyone s guess how the evolution of health care in the U.S. will affect accident and health (A&H), disability, dental, and other health oriented lines. Overall, this points to a slight increase in sales and premiums. Profitability will depend on investment returns and insurers abilities to continue to realign and manage their product mix. From a product standpoint, fixed-indexed annuities will probably continue to do well. On the life side, the name of the game is product innovation. The insurers that can create new hybrid products and combine the right set of features to address specific market needs will be successful. DELPOZZO: I expect modest growth of sales, premiums and profits. We expect whole life and indexed universal life sales to lead the way. DINSHAW: The current market is strong for life insurance and annuity sales. Individuals are looking for guarantees, mortality protection and retirement planning options more stable alternatives than the market volatility they may have experienced in the past. I expect sales and premium to increase but profits could be flat as declining interest rates reduce insurer profit margins. Products with increasing sales in 2013 will continue into the next year. These include whole life and equity linked life insurance and annuities along with guaranteed income riders. DOLFI: We expect the headwinds of low interest rates to continue, and with them the trend of ongoing growth in current assumption and portfolio based products such as whole life. As consumers look for insurance solutions that can meet multiple needs and contribute to financial security later in life, we predict continued growth in products with living benefits, stable distribution, and linked benefits such as long term care services. D ONOFRIO: We anticipate that sales with remain relatively flat due to economic conditions. The total amount of premiums will remain relevantly similar to The low interest rate environment will continue to have a large impact on insurer profitability. This low interest rate environment will likely have a greater impact on organizations that have higher concentrations of longer tail products and associated large inforce blocks of business. We anticipate a continued downward trend in universal life, with whole life and term life picking up for If interest rates climb we anticipate a re-pricing of universal life. FANNING: While the economy has certainly improved from where it was a few years ago, growth continues to be sluggish and the issues in Washington threaten to wreak havoc on the markets and consumer confidence. As a result, we could see sales in some markets affected as people decide to hold off on making decisions that could impact their bottom line particularly early in the year as Congress begins discussions on raising the debt ceiling. Despite the economic environment, I think the industry will continue to have a strong performance in People need the products and solutions that we offer to secure their future and protect the ones they love. Couple this with the fact that consumers are more aware that the entitlement programs they were relying on may look much different in the future. We re seeing a shift in mindset where people are now focusing on making sure they have enough income to retire and last a lifetime versus worrying about whether they are going to die too young. There will always be a need for life insurance; it s the cornerstone of our industry, but we are seeing more demand for income annuities as people look to ensure they won t outlive their retirement savings. Last year, we had record annuity sales of more than $3 billion, most of which came from income annuities. Whole life with its cash value features also continues to be another source of income to help supplement retirement. 14 January 2014 RESOURCE

6 Another product that I think we ll see resurge is disability insurance. For the last decade, disability insurance sales have been flat, but I think more people understand the importance of having a stream of income should they become disabled. Nowhere are we seeing this awareness more than with Generation Y. This group is more concerned about planning for retirement and protecting their income than previous generations, and we have a great opportunity to reach this demographic in 2014 and beyond. FRENCH: The financial outlook of our industry for 2014 remains volatile, and sales and profits will likely continue to face headwinds. As unemployment rates remain high in the U.S. at approximately 7.3 percent in October 2013, consumers disposable income remains stagnant, affecting their ability to buy insurance products. While we don t predict any economic changes that will significantly increase income for the average customer, there will be a modest increase in sales and profits for our industry as the industry tailors products to fill specific market gaps and continues to focus on low cost niche market opportunities and/or alternative distribution channels. However, profits will continue to be challenged because of the low interest rate environment and a disproportionately high fixed cost to run the business. Due to this market uncertainty, general account products will continue to face challenges because of the low interest rate environment. On the other hand, because of company capital and reserve requirements, equity index products will continue to sell well and there will be a resurgence in variable products. In addition, group and voluntary benefit products will get more air time as consumers work through their health insurance and protection needs under the Affordable Care Act, as much of their protection needs can be delivered through those products. In an effort to make such protection a more economical solution to customers, we will see channels for distribution change as more simple products emerge. GENCARELLI / WININGS: [We] believe sales for life insurance will be down, due to continued weak employment and due to the distraction of health care reform among producers and consumers. [We] believe profits will be down, in general, due primarily to the stubbornly persistent low interest rate environment and a regulatory environment that insists on strengthening reserves and punitive measures against companies (death claim reform and general scrutiny of captives). The interest rate environment has resulted in limited guaranteed premium universal life product availability, and also contributes, along with factors related to persistency and claims incidence and duration, to a paucity of standalone long term care (LTC). So these lines will suffer. Indexed universal life is the growth story of the year, and riders and benefits sold with life insurance that pay on the onset of critical illness and for long term care are increasingly popular. JOHNSTON: The life industry overall will continue to slowly grow premium on the order of six to eight percent in Indexed universal life, whole life and indexed annuities will continue to drive growth in the individual space. We expect the group and voluntary insurance space to grow on the order of 10 percent however there will be a significant re-alignment in products and insurer market share as the lines between true group and voluntary insurance blurs. MONK: We expect industry-wide life sales and premium to be down slightly in Profits will likely also be down based on continued pressure from the low interest rate environment. From a product perspective, we anticipate sales of whole life and equity indexed products to be strong, universal life to be weak, and sales of term life, fixed index annuities, long-term care and disability income to be flat. O DONNELL: Numerous variables impact industry sales and profits and many of these out of our control: equity markets, interest rates, economic growth, and regulatory changes, to name a few. If these factors are generally positive in 2014, sales and profits will be positive. Assuming no significant changes to the above factors, sales and profits should continue to increase. Companies have become more efficient by focusing on their most profitable businesses and by diversifying their risk and capital expenditures. With the changing demographics, life sales will struggle to show significant growth in the coming years. However, the future remains bright for retirement products including annuities and defined contribution plans. SIMBRO: I see little change likely in new money interest rates (from last year) or more access to customers via new distribution, so modest overall growth in sales. The one wild card is the equity markets. If significant softening in returns, it could dampen variable growth quickly. Equity indexed universal life (EIUL), limited pay whole life, and variable universal life (VUL) are likely to be the growth areas. Profits may be threatened by the combination of low interest rates and/ or limitations in further avoidance of reserve strengthening. 15

7 STONEHOCKER: Sales and premiums will increase in Profits will be flat to up a little. Indexed products and whole life will be strong. STRABLE: In 2014, voluntary and retirement income products will continue to remain strong in the current environment. Industry growth overall will continue to be modest due to external factors that impact both individuals and businesses. Low interest rates and consumer confidence will continue to have an industry-wide impact. Tax policy and health care reform present other unknowns, both with the potential to affect sales and premium levels. 2 TECHNOLOGY What new technologies have the greatest potential to help our industry and how can they help? How is your company using them? BAREFIELD: The continued growth of e-apps, especially on tablet devices, will help lessen the applications received that are not in good order and thereby speed up the underwriting process. Illustrations on tablets will also enhance client interactions because what-if scenarios will be quicker to show a prospective client. The ability for an agent to access on demand underwriting statuses on mobile devices will also enhance the customer experience. BLUNT: As social networks proliferate in our business and personal lives, we ve been looking for ways to integrate these platforms within our organization in the best way possible. By incorporating social networks into our business with a strong level of control that helps us to maintain our valuable reputation for integrity and fair dealing, we are bringing the best of the innovation and functionality that public social sites provide to create a better experience for our agents, field managers and the consumers we serve. For a company like New York Life, which is institutionally geared to compliance, the key is to allow financial representatives the expanded ability to connect and engage with customers in the social media arena, while closely adhering to the most rigorous standards for compliance, security and governance. BREADING: The three technologies with the most potential are analytics, mobile, and collaboration technologies. SMA research on spending and project plans shows that insurers already have significant focus and investment in analytics. Analytics are being applied to every aspect of the business, including marketing, actuarial, distribution, and on through the entire value chain. Regarding mobile, insurers are evolving their capabilities, with many projects on the drawing boards. Many insurers are in that stage of determining how best to provide mobile capabilities to their various distribution channel partners as well as to the policyholders. Insurers are exploring collaboration technologies as the next wave of technology to improve the business. Collaboration is a new focus area with great potential to improve the new business/underwriting process in terms of both efficiency and effectiveness. These technologies include a variety of tools such as chat, screen sharing, real-time videoconferencing, document sharing, and wikis, among others. DELPOZZO: Social media and web-based illustrations. We will be introducing web-based illustrations in 2014 and will continue our use of social media to help our agents build their business. DINSHAW: The popularity of social networking has attracted the attention of our producers as potential for new business opportunities and strengthening customer relationships. Social media has changed how we operate, communicate and build relationships as a society. Social media tools will not replace personal interaction but will be used as a tool to communicate, analyze, refer and recommend financial products. On a smaller scale, we have implemented a social media strategy through interaction mainly with distribution partners. In addition, our mobile application keeps our producers up to speed on pending business and policy status virtually anytime, anywhere. DOLFI: I see the greatest technology potential coming from tools that can enable the industry to be more mobile, self sufficient, targeted, digitized and collaborative. Mobile technologies can help sales representatives bring a more engaging experience to clients, while mobile account access can help existing clients access their accounts anytime, anywhere. An example is our Guardian Anytime SM Mobile app for both iphone and Android TM, which helps brokers, employers and members manage their Guardian benefit information. Mobile also leads to the notion of self service. Customers are looking for real-time customer service platforms where they can live chat with professionals about their account or other information at any given time. The ability to target new and existing customers effectively will come from our ability to more effectively mine our data so we can better understand our customers and their behavior. Digitization will allow the industry to serve customers more efficiently through tools such as electronic policies and signatures. And lastly, internal collaboration 16 January 2014 RESOURCE

8 tools will better enable our workforce to work anywhere and respond to customer needs in a consistent, informed and real time manner. D ONOFRIO: We anticipate that new underwriting automation will play a greater role in simplifying processes and fulfillment. We also anticipate online and mobile environments to play a significant role in engaging and communicating with the consumer. We anticipate a continued increase in behavioral analytics to play a significant role in defining and targeting consumers and predictive analytics in underwriting and pricing their policies. FANNING: Social media, big data and mobile are the biggest technology opportunities we see, with the greatest potential being in the mobile space. You can buy anything online today using a smartphone or a tablet, and we need to have this type of capability in our industry as well. We need to make it easy for people to buy our products, and that includes everything from researching solutions online to submitting business from their mobile devices. At MassMutual, we re transforming the acquisition process to make it easier. Early this year, we ll be introducing technology that enables our financial professionals to submit applications for some of our products from their tablets. We will also continue our focus on reaching consumers via social media. The percentage of Americans using Facebook and Twitter to get their news, let alone interact, is on the rise, so we ll continue our strategy of growing our presence there. Another area that has great potential is the use of big data and predictive analytics to understand policyowner behavior and build stronger relationships. For example, our industry could use big data to gather medical information from applicants and significantly streamline the acquisition process, make the best underwriting decisions, and help our employees and agents identify new prospects and opportunities to up-sell and cross-sell to our current policyowners. FRENCH: Based on a recent EY survey, Insurance in a Digital World: The Time is Now, we found that insurance is lagging behind other industries in digital technology; however, a desire exists to catch up. There will be much decision-making and activity around technology in 2014 with insurance carriers investing in new technologies as they look to transform their customer service to a more self-service model. Only 43 percent of insurance carriers offer a mobile app that can provide quotes, according to our report, but this number is expected to significantly increase in Social media will also play a role because carriers will begin to use it as a communications channel to get messaging out to prospects and current customers and allow customers to interact with insurance carriers. In 2013, the overwhelming majority (86 percent) of carriers used social media for branding and online presence purposes. However, in 2014, carriers will start to form strategies around different platforms in order to remain competitive in the space. While it is critical that insurance carriers improve their mobile functionalities and social media strategies, to truly maximize their investments they must build their analytics capability. Insurance carriers will begin to unlock the great potential of the data they have previously obtained in order to better understand, provide and gain insight into what s driving sales and purchasing decisions. Life insurers must also focus on improving the customer experience by getting to know and understand their customer better. Through the utilization of advanced analytics and customer segmentation insurers will be better equipped to enhance their relationships with their customers by improving the ease of doing business and having the information they need to be proactive in anticipating customer needs as they change over time. Based on another EY survey, Voice of the Customer: Time for Insurers to Rethink Their Relationships, we found that the customer s perception of the insurance industry was not significantly impacted by the recent financial crisis. This is not the time for insurers to be complacent. Insurers should take advantage of this positive perception and look at it as an opportunity to reinforce and build trust, through the simplification of products, improved customer service and the introduction of programs such as customer loyalty programs which have been successful in other industries. GENCARELLI / WININGS: Predictive analytics will become more important to life insurance underwriting. Though it will take some time to prove out, some of the information available about an individual s lifestyle will be helpful in determining risk profiles and the ability to get this information quickly through electronic searches will reduce time to issue. The industry s focus has been on digitizing the application, underwriting, delivery and service processes, using electronic forms, electronic signatures, underwriting engines, electronic delivery and self-directed service platforms for far more efficiency and speed. But the technologies that have the most potential are those that blur the lines with media that can change the engagement model from a forms based model to a conversational model. At LGA, we re a leader in digitizing the process, but we ve also succeeded in increasing the penetration of our advertising and promotional efforts using new media and limited social media (Twitter, Linked-In and blogs), and we re experimenting with a graphics-based, tablet/ mobile oriented customer engagement platform that results in a Pre-app initiated by the consumer. JOHNSTON: Key technologies for life insurers in 2014 focus heavily on analytics and distribution enablement. Insurers will begin to sort out their operational, strategic and predictive analytics strategies and begin to see even more significant returns on their big data investments. Distribution enablement 17

9 leverages the data investment for market segmentation but must be augmented by business process, portal and mobile technologies to enhance current distribution channels. We expect to see significant growth in e-applications, sales tools and integration between agency management tools and true sales force automation technology. MONK: Over the last year, State Farm has worked to better serve our customers through integrated use of new technologies. From call to click to mobile capabilities or face-to-face visits, we continue to provide ways for customers to interact with us when, where and how they want. We re continuing to make it easier for customers to shop, compare and buy our products while providing self-service capabilities with the value of face-to-face interactions. O DONNELL: The life insurance industry needs to embrace mobile technology on several fronts. First, we need to make dealing with a life company as easy as dealing with a bank or mutual fund company. Depositing a check into one s checking account is as simple as taking a picture of the check and depositing it via a mobile app. Doing business with an insurance company is not that simple. Apps will need to be developed to manage accounts and to potentially purchase products. Second, companies need to better utilize technology to make it easier for advisors to do business. Companies will need to build apps to submit business and track accounts, as well as utilizing social media and apps to better communicate with advisors. SIMBRO: Data analytics (big data) are at the early stages of potential impact, but pose huge implications and opportunities. STONEHOCKER: I m not sure it s technology but it certainly takes technology to make it useful or as we say make it live and breathe. Information and/or data and the ability to manipulate it, analyze and use it for the benefit of our agents, customers and the company. STRABLE: The two biggest technology factors that will have strong emphasis for us in 2014: online capabilities and data analytics. These two working in tandem will continue to benefit the industry by improving our ability to better identify and assist prospective and existing customers. Online capabilities will bring our industry closer to how today s consumer wants to do business, and data analytics will help us target potential customers as well as streamline some of our processes. Our collaborative culture helps make our business more effective and efficient, allowing us to get the right products to the consumer at the right time. 3 STRUCTURAL CHANGE Do you expect much structural change to the industry in 2014? Will there be mergers/acquisitions, new market entry or something else? BAREFIELD: We do not expect much structural change. BREADING: There will probably be more M&A activity on the distribution channel side as intermediaries look for scale. On the insurer side, the business drivers for acquisition are not there. Most insurers continue to look for organic growth and are trying to create a culture of innovation. While good expense management is always important, I don t see insurers looking at M&A to increase scale and cut costs. If anything, being more innovative and getting products to market faster would be hampered by a big acquisition. Of course, insurers are always on the lookout for smaller, strategic acquisitions to address a hole in the portfolio or to extend geographic scope. BLUNT: Well, for one thing, I don t expect that many mutuals will be going public; we think the mutual model s benefits have been borne out and then some by the severe crisis of Managing for the long term safety and soundness of the enterprise is more important than ever, and that means solvency and resilience are key search terms for consumers looking for a life insurance company. Profitable growth is where it is at, and so mergers or acquisitions for the sake of getting bigger probably won t be the answer going forward. Profitable growth will be the screen through which everything passes so M&A activity in our industry will likely be modest at best, certainly at New York Life. DELPOZZO: I think there will be less recruiting and financing of new agents by the traditional career companies. I see limited opportunities for mergers and acquisitions. DINSHAW: Typically, the insurance industry does not experience structural change but sees incremental change on an annual basis will be no different. Mergers and acquisitions will continue as companies look towards growth and expense management opportunities. DOLFI: From an organizational standpoint, insurance carriers will continue to streamline and focus on their core businesses, leading to opportunities for those companies that have a shared interest with the needs of their customers. We have seen private equity firms becoming more involved by buying companies or blocks of business and we may see more of this as foreign carriers face the dual pressures of accounting rules and low interest rates. 18 January 2014 RESOURCE

10 D ONOFRIO: We anticipate increased pressures to smaller organizations in dealing with cost containment and lack of scale; coupled with the low interest rate environment will mean opportunities for further mergers/acquisitions in this saturated and mature market place. Distribution trends suggest non-traditional retailers partnering with insurers to distribute commodity insurance products; e.g., Shoppers Drug mart. We also anticipate greater distribution of P&C and L&H products through the workplace environment. We anticipate increased forays [into] and strengthening of wealth management activities by insurers. FANNING: The regulatory environment and the economy will continue to be an open question for many in the industry. With some large carriers being designated as systemically important financial institutions, we could see changes as companies decide what businesses they want to be in. At the same time, we still have companies with strong capital positions creating the potential for M&A activity. FRENCH: There has been considerable transaction activity in the life insurance segment of our industry, much involving private equity or buy-out firms. The pace of these transactions accelerated over the past 12 months and we don t predict the pace to slow down; if anything, it will increase. Low interest rates are creating challenges on many blocks of business, such as deferred annuities and long term care, and companies continue to explore exiting those businesses. High reserve requirements and high fixed operating costs have made the mid-tier insurance market particularly vulnerable. These companies have been unable to realize top-line growth opportunities or make investments to transform their business model, rendering them financially attractive merger/acquisition targets. Globally, we will also see U.S. divestitures of those organizations who want to deploy capital in Latin America or Asia, for example. Many companies will enter new product lines (combo riders, indexed products, income benefits) to meet consumer demand and spur growth. New distribution strategies will also be employed by many (non-traditional retail outlets, directto-consumer approaches). JOHNSTON: In 2014, closed block management strategies must mature as much of the low hanging fruit in closed block acquisitions/divestures and reinsurance have been plucked. BPO and other operational improvement strategies must help insurance close that gap. We expect there will be some continued consolidation especially in annuity blocks and we expect to see some realignment in the group and voluntary benefits market as the two markets collide. MONK: Companies will continue to make decisions they believe will help them best manage the business, especially considering the marketplace, regulatory and legislative challenges. We expect there may be mergers and acquisitions based on those factors as well as the low interest rate environment and the need for capital. Annuity buyouts (relieving companies of the financial strains imposed by guarantees) and further shrinking of the long term care market as we know it could also occur. O DONNELL: We don t anticipate major structural changes in There is always some M&A activity, but there is nothing specific pointing to any major deals. While many companies are sitting on cash that can be utilized for M&A, companies seem to be focusing more on driving efficiencies within their organization. GENCARELLI / WININGS: We ve seen some of this already this year, with venture capital firms buying companies for the blocks of business only or for their presence in a particular product line or market. As long as there are companies trading well below book value, we can expect this trend to continue. Traditional acquisitions are more rare, as life companies in a challenging period are less apt to have expansionist ambitions. One exception might be companies subject to Solvency II standards, for the purpose of taking advantage of covariance in their risk profiles The insurers that can create new hybrid products and combine the right set of features to address specific market needs will be successful. 19

11 M&As were often driven by companies looking to expand into specific new products or distribution areas. However, the days of companies trying to be everything to everyone has passed. Companies no longer offer all types of products life, annuities, pensions, group benefits, 401(k) plans, and mutual funds and no longer sell in every channel. Because of this, companies are more selective in who they are looking to buy or merge with, thereby potentially limiting future M&A activity. It should be noted that there has been M&A activity as domestic companies continue to diversify their business across country lines and we may continue to see companies looking to expand internationally. There are several emerging trends that may impact the industry. Private equity firms have entered the indexed annuity market and several annuity companies have turned to reinsurers to help manage their risks. SIMBRO: The economic pressures of low interest rates, reserve pressures, and lack of distribution all point towards more consolidation. STONEHOCKER: We ll see change in the industry as companies continue to look at reducing risk and providing greater focus on their core competencies. There will be mergers/ acquisitions and/or divestitures at a similar pace to STRABLE: Mergers and acquisitions are a part of business, and 2014 will be no different, as companies continue to focus on their key businesses. Companies will strategically support business growth and continue to enhance and expand upon what they do best which opens the door for opportunities. Organizations may put a stronger emphasis on untapped markets throughout the world. Global expansion can be a key factor for company growth and profitability. 4 CUSTOMER SERVICE What is the importance of customer service and how can the industry make sure it provides the service that today s customers expect? BAREFIELD: The customer experience at all levels is important. From the beginning of the underwriting experience to the customer who has been with us for 30 years, it is essential that our service professionals provide accurate and timely information. The industry must continue to upgrade service platforms to help provide on demand data to tech savvy clients who want data as fast as possible. BLUNT: We have a remarkable industry that pays out $1.5 billion each and every day to beneficiaries, according to the American Council of Life Insurers. New York Life alone paid out more than $3 billion last year. But there is more we can do as an industry to make sure policyholders and other clients have a customer experience we can all be proud of. For us, it starts with having a human to talk to a knowledgeable adviser who can help you assess your needs and protect your number one asset your income for the sake of your family, their dreams and aspirations. Training is also a big emphasis for our call centers, so that when customers contact us for any reason, that experience is as good as the one they have with their dedicated adviser. We take all phases of this very seriously we have even pulled all customer correspondence forms to make sure they are as plain English and user friendly as possible. BREADING: Customers expectations for service have changed dramatically over the last decade. Expectations are being set by other industries and are a product of the rapid advances in consumer technologies. As an industry, we must offer the options for communicating that are widely available and expected web self-service, mobile apps, , etcetera. That does not mean that customer service will go all digital. In our industry, we have many touch points where personal interaction is vital. Certainly it would never be appropriate to respond to a death claim with an SMS text message. The challenge is to digitally enable producers and employees to provide great customer service, while also providing customers with the digital options they want for communications. DELPOZZO: Customer service is critical. The industry needs to find more efficient ways to make purchasing life insurance easy for the consumer. 20 January 2014 RESOURCE

12 Social media tools will not replace personal interaction but will be used as a tool to communicate, analyze, refer and recommend financial products. DINSHAW: Customer service is critical in meeting client expectations. Customers today expect professional and competent service provided with a smile. Insurance companies in particular deal with customers who are under considerable stress with the passing of a loved one so our quality and speed of service are paramount. In aggregate, the insurance industry has a reputation of providing good service to its customers. Ongoing training, attention to call quality, call tracking and coaching can assure appropriate service levels are maintained. DOLFI: Consumers are increasingly expecting more from all companies they do business with, and our industry is not immune to those demands. Anytime, anywhere access, 24/7 service, and online and mobile capabilities are no longer a nice to have, but the norm. Understanding the nuances of what makes a successful customer service experience and how to be truly customer-centric is critical. In the retirement industry specifically, while fees and investments can often get attention, research from Anova Consulting Group shows that customer service is one of the top drivers when it comes to choosing a new retirement plan provider. As a testament to how we are meeting customer needs in this market, Guardian Retirement Solutions was recognized for the third consecutive year for achieving An Outstanding Customer Service Experience from the J.D. Power Certified Call Center ProgramSM. D ONOFRIO: Customer service expectations have changed due to customer experience with other services, primarily services driven by technology. This is a world of immediate information and gratification. Speed of response and seamless interaction with direct insurers is key to meeting customer expectations. An expectation of customization and personalization is prevalent in all industries and this will require all providers to have a deeper understanding of their clients if they wish to succeed. FANNING: I can t emphasize how important customer service is. In our industry, many of our products and solutions are similar, so one of the primary ways for a company to distinguish itself is through service. At MassMutual, we are now more than two years into a transformation of our internal operations to ensure that everything we do is focused on the customer. We re looking at if we re doing everything we can to meet our customers needs efficiently, effectively, and in a timely manner. And if we re not, we re identifying what the barriers are and resolving them. We ve had great results from this work and have been able to improve the experience of our financial professionals and our customers. We ve reduced the time it takes to pay claims, onboard new agents, and process transactions, and I m really proud of what we ve achieved so far. We re not only creating a better customer experience, we re also realizing efficiency gains that allow us to grow the top line with our current workforce. FRENCH: Historically, life insurers have not led the field with high levels of customer service. However, insurance carriers understand improved customer service is key to improved customer retention. Simplification of processes, the ability to provide improved levels of automation, a consolidated and accurate view of the customer with increased accessible demographics and quality of delivery are all crucial improvements that must be made. Today, being paper and people intensive, the insurance industry is burdened with processes that curtail their ability to do things simply. By combining straight-through processing, increased customer acquisition and retention strategies and simultaneously decreasing per unit operating costs, insurers will realize increased top-line growth and bottom-line profitability. Insurers must seriously evaluate transformational change to remain competitive. To improve the overall customer experience, insurers are looking at best practices across industries. They are performing competitive analysis on how others are wowing their customers and they are determining what they can do internally to keep pace. Some are creating shared service centers and centers of excellence for the purpose of spreading those practices throughout their organization and replicating them across other lines of business. Others are looking at tailoring the customer experience to specific ages and demographics, enabling technologies of choice (e.g., self-service, voice, digital), targeting products and services to improve and simplify the customer experience and meet, exceed and/or possibly anticipate their needs. In addition, insurers are evaluating outsourcing alternatives, collaborating with multiple providers, for example, looking at service delivery outsourcing options, as a means to free-up capital and migrate from today s technology challenges. 21

13 Further, as evidenced in EY s recent survey, Insurance in a Digital World: The Time is Now, some insurers are looking to improve systems, tools, and processes for agents better enabling them to interact with customers and prospects. GENCARELLI / WININGS: Service has always received short resources in our industry. But as product designs become more intricate and complex, and as the costs or loss of benefits to the consumer due to mismanagement increase accordingly, a company s service capabilities and reputation are increasingly important. Also, in today s sharing, social market, bad service can quickly pollute a brand. To address service as a higher priority, investments in better technology, better people, and education are required. The opportunity is evident: having a reputation for great service is a greater and more lasting distinction than lower prices. Expect more mystery shoppers to get firsthand feedback. JOHNSTON: Customer service throughout the sales/service continuum is critical to success in the life market in As Millennials become the most attractive target market for protection and longer term investment products, expectations of service climb dramatically. The bar is now being set by Amazon, ebay and Mint, not competing insurance companies, leading to totally new customer engagement patterns. Preretirement Boomers are also being targeted as an under-served market for retirement services products which will generally require an omni-channel approach bringing together the best of personal agent service and e-channels. MONK: Providing what customers expect means we re enabling them to interact with us when, where and how they want. Customer expectations continue to change and the industry must keep up with those changing expectations. Whether it s real-time interactions or self-service on-line activities, making it simple for customers to do business with us is more important than ever. O DONNELL: Technology, technology, technology. We need to make it easier for clients and advisors to do business with us via mobile technology. Our industry is clearly lagging behind others in delivering mobile and web-based service. Customer service is not just the ease of conducting business, but also providing competitive solutions to our advisors and end clients. SIMBRO: This is directly connected to the distribution question who is the serviced provider for a given company. Technology is a huge enabler to streamline and redo processes. STONEHOCKER: It s a critical element of what we do. People often need our services most at a time of planning for their future and/or during one of life s challenging situations. We have to work toward better understanding our customers. We need to understand what services they may need, when they will need these services and how they want services provided. STRABLE: Service is absolutely a differentiator in our industry. The industry will need to continue to look at new ways to make transactions easy for advisors and customers. In order to engage new, younger customers, we need to figure out how to reach customers the way they want to be reached, rather than how we ve done it in the past. Advisors continue to play a critical role as the bridge between customers and providers. 5 CHALLENGES with this challenge? What is the greatest challenge the life industry faces in 2014 and how can it deal BAREFIELD: One of the greatest challenges the industry faces is the disappearing life insurance agent. With the average age of a life insurance rep somewhere in the mid-50 s, it is important that new associates are brought into the business. Further, newer reps are selling less (but bigger policies) and may be more interested in gathering assets under management than putting together a comprehensive retirement plan strategy that includes life insurance, annuities, disability income and investments. The industry can help address this through education and by encouraging and incenting seasoned life professionals to work with newer associates. BLUNT: The industry has a number of challenges, including recent statistics showing that the middle class is under continuing stress in the aftermath of the financial crisis of For our industry to remain healthy and growing, we need a strong middle class that can avoid distraction from the one thing that really matters protecting the breadwinner s income from loss. Because without that, dreams will almost certainly go unfulfilled. A strong middle class will also mean a strong inflow of new agents and advisers into our system, to help future generations protect their families and businesses. So good succession plans for retiring agents and advisers are crucial to help preserve the clientele and grow the agent s business, and help solidify the insurer s future as well. BREADING: The greatest challenge I see relates to talent. There are many challenges related to expanding and enabling distribution partners, improving the new business/underwriting process, leveraging advanced technologies, and introducing innovation. But these all require people with the right blend of knowledge, experience, and personal skills. Finding new producers, underwriters, and analytics experts will be the real challenge. The industry has a great opportunity to actively 22 January 2014 RESOURCE

14 recruit and learn from the next generation of employees, but it must find a way to leverage and transfer the knowledge and experience of the existing workforce before the baby boomer retirement wave hits. This is a pivotal time in the industry. Companies must make an investment in innovation. In the coming years it will become increasingly important to have both an architectural and a cultural foundation that incents and fosters innovation at all levels of the business. The pace of change and technology advancement is making it impossible to play a fast-follower game. DELPOZZO: The aging agent demographic is critical. Companies must find ways to attract, train and develop the new generation of life insurance agents. DINSHAW: The life insurance industry faces long term challenges, including low interest rates, uncertain regulation and low sales growth. However, the biggest challenge in 2014 will be the fiscal, tax and monetary policy. This uncertainty makes it difficult to plan and develop long term strategies. DOLFI: Persistent low interest rates will continue to be a primary challenge, with two separate but related impacts. First, companies are seeing increased capital risk as higher reserve requirements combine with lower investment returns. In response, expect to see carriers continue to exit non-core businesses, rethink their product portfolios, and reprice products for the long term. Second, sustained low interest rates and ongoing macroeconomic weakness are leading to a more intensive regulatory landscape focusing on insurer solvency. In the context of this environment, insurance providers must manage their business with an eye on longevity now more than ever. D ONOFRIO: The greatest challenges the industry faces today are (1) being relevant to a younger generation who does not understand how insurance fits into their financial well-being, (2) demographic shifts creating less opportunity for life insurance at older ages and greater needs for health, medical and long term care products and insurers ability to price these products given the inherent risk and low interest rate environment, and (3) a shrinking middle class and tradeoffs consumers are making on how they spend their disposable incomes. How to meet this challenge? Create products with more risk sharing elements. FANNING: One of the greatest challenges we face, not only as an industry, but as a society, is the number of underinsured and underprepared Americans. The statistics are troubling. Studies have shown that life insurance ownership is at a 50-year low, 35 million households have no insurance, and 57 percent of Americans have less than $25,000 in their 401K. Having people unprepared to deal with life s challenges can have a cumulative negative effect on our society and our economy. To counter this, we as an industry need to get back to the roots of what we do. Specifically, we need to do a better job of reaching the middle market and make it easy for them to protect their families and their future. In the coming year, we ll be launching new voluntary insurance products that consumers can purchase at the workplace. We re building these products to be simple and affordable, with the goal of reaching a market that has historically been underserved while also boosting the voluntary benefits employers offer. FRENCH: We believe there are two. First, understanding and preparing for accounting and regulatory change is one of the greatest and currently unquantified challenges the life industry will face in The new regulatory changes will not impact every carrier, but every carrier will have to monitor and understand the changes. Some will then have to prepare for the changes as they will be federally regulated. Proposed changes to the standards for accounting for insurance contracts, the strengthening of the NAIC, a recommitment around state regulations and oversight changes, and although we haven t seen it yet, the consumer protection angle, will also be a challenge in 2014 and these changes will impact all carriers. Early planning and preparation is critical as all of these changes will have tremendous impact on insurers. Companies should prepare themselves for the added time and cost of compliance as these changes will impact their finance and reporting functions and the systems that support them; business operations; people and technology. New distribution strategies will also be employed by many for example, non-traditional retail outlets and direct-to-consumer approaches. 23

15 Second: The insurance industry is the natural choice to dominate the retirement income market. However, aligned financial services industries, including banks, capital markets and wealth management firms are positioning to capture this market. Their ability to pro-actively hold onto the customer, building on their existing relationships and ease of doing business is creating a formidable competitor to the insurance industry. These companies are not burdened with decades of legacy processes and technology; they are able to quickly harness technology to continuously re-invent and improve the customer experience. It is critical that the insurance industry take notice and actively commit to the retirement income market. They must initiate efforts to understand their customer, their needs and experience and consider ways to leverage technology and other means to dramatically improve service and the customer experience. GENCARELLI / WININGS: For the foreseeable future, the greatest challenge we face is the declining incidence of ownership and the declining life insurance market (in real terms). Addressing this requires a change the world mindset, with a meaningful investment in new. Fighting among ourselves for share gains in a zero sum way does not address the issue. A secondary challenge relates to the life industry adopting the technology readily available in banking and P&C insurance allowing customers to readily access their policy / claim / payment information online and to transact business online. Not having this capability is in fact a hindrance to overcoming the major challenge above. JOHNSTON: The life insurance industry needs to recognize that life insurance must be positioned as a product customers want to buy. Employee benefits and annuities have become pull products especially as the mid-market is targeted and educated by both the insurance and investment space with education and focused sales programs. The protection side of the business must move to a demand model as protection and investment are better aligned to complement each other. Otherwise, new entrants that are not tied to the 200 year old life insurance model will overtake this market. MONK: Macro issues like low long-term interest rates, volatile equity markets and weak U.S. and global economic conditions will continue to be a challenge. The low interest rate environment continues to put pressure on product and operational performance as well as influence consumer behavior. The impact of the changing legislative and regulatory environment remains to be seen. To meet these challenges, our industry must deepen our understanding of the issues in front of us and potential impacts while also taking an active role in educating legislators. Additionally, we can tackle these challenges by positioning our products to help customers. Specifically, those solutions that create long-term financial security and peace of mind. Our industry is well-positioned to help customers manage some of their most impactful risks, and regulators and legislators need to understand and support the industry s role in guaranteeing customers financial future. O DONNELL: While the industry remains very strong financially, the industry continues to lose wallet share to other financial industries. Consider the following: Life sales have been stagnant for decades Lackluster annuity sales Dwindling number of advisors Fewer companies offering long-term care insurance Low consumer confidence in our industry Behind the curve in using mobile technology to do business Complex products Can 2014 be the year where the industry puts their collective heads together and openly discuss this? There will be shortterm issues in 2014 that will be more urgent, but in terms of importance, the industry needs to seriously address the larger picture: we are losing business to other financial industries. SIMBRO: Finding the intersection between marketable product solutions, long term profitability, and having satisfied customers long term. STONEHOCKER: Recruiting and developing agents and finding new ways to deliver our products and services are going to be critical to our industry as the demographics of existing and potential new consumers continue to shift. Traditional ways of delivering our products and services are no longer meeting the needs of all consumers. STRABLE: The biggest challenges for 2014 continue to be external forces. Changing regulatory, legislative and economic factors could cause customers to delay buying decisions and will impact how we do business. We cannot control external factors, but we can effectively manage our preparedness and response to these forces. We typically deal with these issues by staying abreast of them, working collaboratively internally and with our industry partners, and at the same time focusing on issues we can control. cover focus 24 January 2014 RESOURCE

16 cover focus By Steven M. Callahan, CMC, ChFC, CLU, FFSI, FLHC, FLMI/M Senior Consultant and Practice Development Director Robert E. Nolan Company Forecast 2014 A Closer Look Now that you ve gotten the big picture from the C-suite, it s time to delve into some particulars. Here, a seasoned industry consultant does just that. The economy continues to hold sway over insurance industry performance from a products, investments, growth and profitability perspective. Results for 2013 appear to be slightly better than expected, with unemployment ending at around seven percent versus the predicted 7.5 percent and real GDP approaching the expected 2.8 percent. Inflation remains unlikely and continued low interest rates a given, at least until either unemployment hits 6.5 percent or inflation expectations hit 2.5 percent. With low rates will come continued low investment returns, increasing in importance as more and more of the older, higher return investments mature and are replaced. As a result, 2014 looks like a continued pattern of slow growth and improvement with continued rigorous attention to guarantees. Steve Callahan Stock market improvements have rekindled consumer interest in investment products. An uptick in variable product interest was seen in 2013 as variable universal life (VUL) had a good showing and will likely continue into That said, the VUL base is relatively small compared to the growth that indexed universal life (IUL) has shown. IUL has benefited from accelerated growth and popularity as the product of choice by offering consumers market participation with upside caps in exchange for loss floors. Looking into 2014, IUL is likely to continue in favor absent regulatory involvement. The same trend is occurring in the annuity market as well as indexed annuities continue to gain market share and dominance followed closely by fixed annuities. 25

17 Overall the industry can look forward to a roughly four percent growth in net premiums. This is despite the fact that the policy count may actually continue to drop slightly lower, with a three percent YTD decline as of 3Q2013. The problem of serving higher value customers remains as the counts drop while premiums rise, indicating a disproportionate focus on the higher income market and a continued issue with serving middle America s needs. Unfortunately despite widespread attention, no immediate resolution is apparent. The underserved middle market remains a conundrum for the industry to determine how best to address. While these trends indicate some improvement, given exceptionally low investment income returns the profitability of companies is likely to remain close to the same as Given the high demands for technological investments, this will continue to put strain on budgets and expense discussions, and may lead to the unfortunate forestalling of key investments. Evolving Technologies The rate of technological advancement has continued to accelerate at a pace greater than nearly any time in the past, challenging companies to keep up with agile competitors, empowered consumers, and dynamic demographics. Many of the technologies available bring a variety of benefits to the pricing, operations, technology management and servicing of business. As companies move to integrate them into the operation, a focus on customer centricity and competitive differentiation remains critical; failure to recognize and address the diverse, individualized needs of today s consumers will result in forgoing the market advantages that these new technologies bring. With sales and service expectations being reshaped by generational, ethnic, religious, cultural and lifestyle differences, even optimized status quo is no longer sufficient. Know your customer rests at the core of leading companies decision matrix for evaluating products, implementing technologies, and defining service strategies. In fact, a new phrase has been coined to express the amount of personalized information available about consumers. The code halo refers to the invisible shell of personalized data locational, social, preferential, and even behavioral that can be associated with consumers by forward-thinking businesses who invest in accessing and harvesting The economy continues to hold sway over insurance industry performance from a products, investments, growth and profitability perspective. it. Solving the analytics implementation challenge should be at the forefront of companies strategic plan. Insurance has always been about leveraging data, the pooling of risk, the packaging of different benefits at an affordable cost, and the investment of premium for optimal returns. The flood of information available both on individuals and at an industry and environmental level would prove unusable without the advances in analytic tools and capacity; taken together, they result in a tremendous opportunity to truly optimize risk, price, and return. Although the track record so far has been mixed, arguably a result of legacy systems and data quality issues, those that have been able to integrate the advances in data availability and tools are slowly starting to realize the benefits. As an example, from a pricing perspective, research models have shown the ability to approximate medically underwritten results based on generally available behavioral and demographic information. Enhanced models have been built to better address asset liability matching and duration optimization based on a continuous review of discrete blocks of business. Location awareness with in-depth sales mix analysis brings insights into field force realignments targeted to improve results for distributors and companies alike. Trading systems are becoming so sophisticated that the difference between subsecond and millisecond response times can make or break a trade. Beyond analytics, many companies continue to face the challenge of legacy administration systems. Here, the increasing opportunities offered by cloud computing may start to gradually change the nature of the business. Why should insurance companies, where the core competency is supposed to be risk management, spend so much time and money on building, enhancing, running and maintaining systems? In the beginning, perhaps there were differentiating advantages to which companies had billing systems and which ones could rapidly process transactions; from that has grown an industry whose core purpose has been made subservient to a commoditized set of functions and a secondary solutions industry. If the billions and billions spent by each company on administrative and related systems was reconsolidated into supporting a cloud based, vendor provided set of 26 January 2014 RESOURCE

18 solutions, a tremendous amount of management overhead and financial resources would be freed up to focus on the business of insurance. Instead, the burden of attempting to stay current with rapid technological change and continuous system improvements weigh down many a company. All to handle what is increasingly a common set of functions outsourced to the same set of vendors but customized at a high cost by each participating company. Beware the inevitable entry of the virtual insurance company that fully leverages cloudbased external systems and solution providers while focusing on risk management, investment optimization, distribution effectiveness, and service differentiation. The potentially game-changing opportunities represented by big data, analytics, and cloud-based administrative systems may soon be joined in importance by an accelerated expansion in the use of personal computing devices. While unlikely to be a significant impact in 2014, there is an inevitable shift coming built upon leveraging the variety of health information and management already being integrated into personal devices. Remote heart and blood sugar monitoring solutions as well as personal fitness devices that integrate with apps to track habits already exist, to name only two examples. Consider the impact of usage-based data in the auto industry, and then reflect on what is possible once there is a convergence of the various health and behavior monitoring data with risk profile analytics within insurance companies. In fact, at a recent insurance conference, the concept of embedded devices in mirrors and commodes was introduced as a means to measure blood pressure (reflective skin tone), diet, cholesterol, sugar levels, and an increasing set of other health indicators. Time will be needed to address regulatory hurdles concerned with privacy, security, and applicability, but these hurdles will eventually be addressed. When that happens, companies that have fully integrated what is today labeled mobile computing or BYOD will likely find themselves advantageously positioned. The insurance industry has been struggling to harness an onslaught of technology amidst thin margins and low returns for several years now. It may be time to take a deep breath, assess the current effectiveness of what is in place, review the diverse options available and put together a roadmap that incorporates risk management, controlled maturation, and proactive governance. Structural Change The economic impact of very low interest rates and an extremely gradual climb back are unavoidable. Already the industry has seen a significant reduction in long term care options and a material repricing of popular guaranteed benefits. Distribution changes continue to occur as the current generation of career and independent agents reach retirement concurrent with increased growth in direct sales and multi-line exclusive agencies (MLEAs). Demographics are driving companies to formally expand their retirement services, acknowledged by creation of new affiliations like the LIMRA / LOMA Secure Retirement Institute, while at the same time requiring changes on the traditional accumulation side of the business to successfully appeal to the coming-ofage digital generations. Global opportunities are increasing as is the presence and influence of global competitors. All of these changes are further spiced by the continued increase in regulatory oversight and standards. In terms of 2014, there is likely to be an increase in product line discontinuations, block of business sales, subsidiary sales and mergers. There seems to be a bifurcated trend towards specialized companies that focus on specific geographic and demographic markets or select product lines and conglomerates able to spread their risks across a diverse portfolio while leveraging economies of scale. Both strategies bring complications; the specialty or regionals are disadvantaged by a lack of risk diversity and economies of scale while the conglomerates are likely to be subject to greater federal oversight, broader exposures and the amplified impact of errors due to scale. Of greatest national significance is the rapidly growing retirement market, which is bringing tremendous opportunity as a large portion of current policyholders retire and start to shift their policies from wealth protection to income creation. Expansions in retirement services, specialty licensing and credentialing, and customized products are all at the forefront of meeting these needs. The unique values and attributes of the retiring population are such that companies are faced with having to invest in processes and services specific to those markets that are limited in usefulness in dealing with wealth protection customers or the newer generation of buyers. This diseconomy creates pressure on ensuring the efficiency and effectiveness of addressing the retirement market, which in turn requires additional investments and oversight. The potentially game-changing opportunities represented by big data, analytics, and cloud-based administrative systems may soon be joined in importance by an accelerated expansion in the use of personal computing devices. 27

19 While the national shifts are a bit clearer in terms of probability and outcome, the globalization of insurance is a difficult one to foresee in terms of longer term impact, especially given the parochial nature of regulatory oversight. The larger carriers and conglomerates are showing increased international activity and expansion which will bring new opportunities and challenges. The risk of a nationalist action is hard to mitigate yet the opportunity and appeal of the international market is hard to resist. Despite the risks, a shift is occurring as larger companies explore international expansion. As their international presence grows, operational staffing and location strategies could change as well as the incorporation of practices or benefits required on the international front are brought back to the U.S. From a product perspective, the low interest rates will continue to play a major role in pricing and benefit features. As noted in recent announcements, the impact of guarantees has been felt and adjustments are being made as a result. Similarly, with investment portfolios continuing to mature and drop off higher earning investments, current paid rates and product pricing will be continue to be adjusted to reflect the dilution of earnings. Whole life remains appealing to a broader group and the ceiling/floor capped indexed universal life products have gained quite a bit of attention as indicated by increased sales. It is unclear whether the IUL products will maintain their preferred treatment (non-sec regulated) or whether changes in the investment market may profile fees and costs buyers did not pay attention to, both factors to be considered with care by companies looking to take advantage of the demand. As the market shows improvement and growth, variable universal life reflects that in growth as well. Other life products show mixed results without the fanfare of IUL or VUL. Annuities are showing significant growth as they are used to meet the needs of retiring baby boomer, and they will continue to increase in popularity as the rate of retirement grows. Other products will trend similar to Then there remains the issue of the underserved middle market, which remains high profile in conversations but low profile to date in terms of addressing the need. Research indicates that the challenge remains in finding a way to successfully distribute nationally given many on the sales side do not find the time invested / commission earned tradeoff worthwhile in this market. Distribution continues to reflect changing dynamics as many existing producers reach retirement while health care industry changes drive additional shifts in distribution options. Specific to 2014, there will likely be a growth in the direct and affiliate distribution as well as a gradual acceptance and expansion on the multi-line exclusive agent. The MLEA approach alters the sales process, though, as there is shift from product specific solutions towards a more holistic consumer need set of solutions. That said, the role of agent will remain important as the intermediary between company and insured, with the dynamic here more focused on product offering and target market. All in all, the most noticeable changes in 2014 will be associated with product and company consolidations. The other trends, although present, will remain more subtle for the time being. Service Differentiation With regulations, thin margins and similar distribution, true product differentiation over time is becoming more and more difficult. Companies, therefore, are competing based on their distribution channel quality and the accessibility, accuracy and speed of their customer service. In addition, as the market place becomes increasingly diverse, companies that are able to customize their service to address the individual needs of different consumer bases will be at an advantage. Having recognized this fact, many companies are addressing the demands of multilingual materials, field forces and service centers at an increasing rate. Hiring is also occurring from within the serviced segments so that a better understanding of cultural differences and representation of needs is achieved. Sensitivity, compassion, comprehension and delivery on expectations are the measure that consumers are using to evaluate companies. And when they find flaws, the power of social media has given every customer an international megaphone from which to project their displeasure. Reputational risk, while always a concern, has been amplified 10 times over by the use and acceptance of social media. Companies that are neither investing in their services nor monitoring social media may well find themselves behind the curve of growth. Unlike a decade ago when a service operation might have held a lower profile role, with product differentiation and field force quality taking the forefront, in today s world of raised In terms of 2014, there is likely to be an increase in product line discontinuations, block of business sales, subsidiary sales and mergers. 28 January 2014 RESOURCE

20 expectations of service quality, the service operation should no longer be considered a commodity function to be optimized for efficiency. The aforementioned concepts know your customer and code halo lead to what should prove to be one of the most influential sources of service improvement for the insurance industry, combining personalized data and rigorous analytics. Service operations empowered by a deeper view of the total relationship between consumer and company are positioned to deliver individualized service that resonates with consumers, creating a loyalty that will survive minor pricing differences. Interactive voice response, once thought to be the solution to call center efficiency, is now accepted by most as an annoying fact of life, one exacerbated by the frequent poor designs presenting multiple tiers of nine option menus frustrating even the most patient. Add the desire for personalized service that many in the retiring generation expect with the instantaneous, live-person expectation of the digital generation and you get a set of expectations that will prove difficult and likely expensive to address. Satisfying these increasing expectations with a shrinking workforce where the experts are retiring presents a very difficult but critically important challenge. The rapid increase in talent management executives and strategies indicates most companies have recognized the importance of better recruiting, training and staff management. That said, the job progression plans and compensation systems at most companies do not appear to have fully addressed the importance of the service staff role. In striving to differentiate by better engaging customers and instilling loyalty, the trend should shift towards staffing front end functions like call centers and other customer-facing functions with higher paying, more experienced staff. Properly implemented, the marginal increase in cost would likely be offset by improved retention. Unfortunately, the call center is often even today staffed as the starting point or training ground on the path to service specialist instead of the top tier role that it should represent. Granted staffing in this manner requires a restructure of call center logic and transaction flow; however, done right, the As companies continue to face limited funds and demanding timeframes, there is little room for error and a limited market tolerance for partial solutions. positive impact on customer satisfaction and reputation is well worth it. To quote Tom Peters, exceptional customer service is not about getting what you expected. It s about getting what you don t expect. It is hard to get the unexpected from the less trained or less experienced staff. Every transaction processed whether by phone or by computer represents a contact point. While more insulated and easier to personalize, non-phone transactions need to be considered from the perspective not of the specific request but what the customer is trying to accomplish. Processing should incorporate a reality check and escalation process that allows for personal attention to complex and possibly miscommunicated requests. Here the tradeoff is clearer; the number of resubmissions requiring reversals, adjustments, and corrections represent an opportunity for proactively eliminating the customer frustrating and costly process. Training and building a service center that is customer aware and proactive is a cultural endeavor that requires careful thought and an alignment of strategy, values, incentives and structure. Absent a cultural repurposing and a willingness to address the skills and compensation gaps, companies will find themselves losing ground as consumer expectations continue to rise. Complex Challenges The industry faces a wide range of challenges, all of them complicated. Last year s response covered the need for profitable growth, which remains a challenge as economics, distribution, regulation and competition converge. Yet in looking over the past year s efforts, what has become more apparent as an immediate need is the ability to effectively implement change, whether a new system installation, enhanced customer service, a new product release, or an organizational alignment around channel or market. For whatever reason, the industry s implementation track record is mixed in terms of success. While there are many examples of successful efforts, the challenge is with the breadth and depth of what will be needed in the coming years. Given this challenge, the immediate need is to strengthen the ability to plan, manage and implement change successfully. Methodologies abound, yet there remain pervasive 29