Facing The Future
Cost controls, customer service, niche marketing and integrated financial;services head the list of strategic concerns for life insurers.
The outlook for the life insurance industry over the next several years is like a swan swimming across a lake: The overall, broad picture is smooth and hardly changing, but beneath the surface, change is happening like crazy.
These are the conclusions of insurance executives responding to a new, in-depth survey, "The Future of the Life Insurance Industry: A Strategic View," conducted by the Robert E. Nolan Co., a management consulting firm specializing in the insurance industry. Responses of the executives suggested the following predictions:
--Independent producers will remain the primary distribution channel for life insurance products.
--The Internet will fundamentally change the way carriers serve their customers.
--Virtual companies will not represent a significant threat to traditional companies.
--Emphasis on cost controls will become even more intense.
--Two separate business models will be viable--fully integrated financial-services enterprises and organizations that will compete in specific niches.
--Fully integrated technology systems will provide front-end interaction with customers and back-end transaction processing with legacy systems.
The Near Future: More Cost-Cutting
The survey results clearly show that improving return on investment will remain a top priority. Three-quarters of all respondents felt that expense ratios will decline over the next three to five years at successful companies. In response to open-ended questions, the responding industry executives made it clear that companies will attempt to achieve expense reductions by "leveraging technology to lower unit costs." William J. Atherton, president and chief operating officer of Ameritas Variable Life Insurance Co., said, "Successful companies will have to optimize technology investment to reduce expenses."
Optimizing Technology
Attempting to lower costs through technology investment has been an industry trend for at least the last decade. But only 43% of the survey respondents agreed that life insurance companies have a good understanding of how to assess the value of technology and optimize it once the investment is made. This would seem to reflect the widespread problems that companies throughout the industry have had with major system-implementation efforts.
It is debatable whether life companies can actually achieve these projected reductions in overhead expense ratios. In spite of significant technology investment, the actual number of life insurance home-office personnel fell only 0.1% between 1989 and 1999. The number actually grew by 2.5% between 1998 and 1999. It should be noted that, according to the American Council of Life Insurers, there were 625 mergers between 1995 and 1999, which also should have reduced overhead. Carriers are certainly offering a wider array of customer services--call centers, for example--and more complex products, which require greater overhead. But technology expenditures have not automatically produced expense reductions.
Industry Structure
Respondents were about evenly split in answering whether the industry would shrink significantly due to mergers and acquisitions in the next three to five years. They also were evenly split in predicting whether banks and other nontraditional competitors will be major strategic threats over that time period.
A majority (53%) of the respondents felt that replacing state regulations with federal regulation would benefit the industry. In the past, executives were not willing to give up the entry barriers that state regulation provided.
A worrisome number (83%) of those responding felt that the inability of state insurance departments to quickly respond to changing market conditions endangers the life industry's ability to bring new products to market.
Marketing and Distribution
Two separate business models are predicted to do well: niche and integrated financial services. Two-thirds of the responding executives felt that niche companies will be successful. Examples of these companies include Aid Association for Lutherans, USAA, Woodmen of the World Life Insurance Society and Catholic Knights. A slightly larger percentage (70%) felt that successful life companies will be part of an integrated financial-services enterprise. Companies offering these integrated financial services include Citigroup, ING, Fortis, Principal and Prudential. Only half of those responding predicted that the life organization will be the dominant member of the holding company.
The independent producer will continue to be the dominant interface with the customer, according to almost 70% of the respondents. But executives also said it is important to develop channels that deliver products and services in any manner preferred by the customer.
Customer Sevice
While the Internet and e-commerce were not viewed as threats to the independent producer channel, three-quarters of the respondents felt that the Internet will fundamentally change how carriers serve their customers. The primary impact, therefore, will be in the area of customer and producer service.
Respondents were very clear about the importance of focusing on customers, identifying target markets and working niche opportunities. According to almost 80% of the executives, data mining and customer relationship management will become commonplace in the next five years.
Also, 70% of those who replied felt that class-action suits will change the way companies market and sell products.
Strategic Alignment
Many respondents spoke of the need to focus the organization on the customer. Ron Gendreau, executive vice president of Colonial Supplemental Insurance, said successful companies will be organized in a way that "aligns marketplace needs with the core competencies of the business."
The survey predicts that this type of alignment will be accomplished through product lines that report independently to executive management (57%) and/or subsidiaries that serve niche markets (53%).
Almost 90% of those responding to the survey felt that successful companies must have a goal and a vision that extend five years or more into the future. Two-thirds of the respondents indicated that it is imperative that business and systems strategic plans be aligned. Historically, the coordination of these plans has been difficult to successfully accomplish within the industry.
Systems Integration
Respondents viewed technology systems integration as the key to success in cutting costs and improving service to producers and customers. More than 90% of those responding felt that successful companies will invest in new technologies to remain competitive. Similarly, 92% of the executives felt that successful organizations will have integrated front-end and back-end systems. This calls for data and service interchange with both producers and policyholders.
In spite of this goal, only half the respondents felt that there will be a need to replace existing systems to deploy these technologies. Therefore, it appears that much of the growth in the systems area will be front-end, Internet-related technologies that interact with existing legacy systems for transaction processing.
Since 57% of the survey respondents did not agree that life insurance companies have a good understanding of how to assess the value of technology and optimize it once the investment is made, companies clearly must improve their ability to deploy technology more cost effectively. Many companies have had poor track records in this area in recent years, particularly in terms of customer relationship management and e-business infrastructures. Improvement in this area will require a more disciplined approach built on clearly defined links to business requirements. This approach will include more effective program management, improved methodologies to make technology operational and better measurement of overall results.
Survey respondents did not discount the impact of e-commerce technologies. While only 20% felt that virtual companies will threaten traditional carriers, 73% agreed that changes in products and customers' expectations will drive a move to 24/7 operations.
Half of those responding felt that e-commerce will force the insurance industry to create totally new products in the next three to five years. More than 85% said that services such as electronic applications and underwriting via the Internet will be prevalent within the next 10 years.
It appears that the Internet is likely to be a significant method for providing service, but in the near future, it will not be a major channel for the distribution of product.
Partnering and Reach
While 66% of the executives predicted that foreign ownership will increase dramatically over the next three to five years, the overall industry structure will look familiar. Three-quarters of those who replied felt that U.S. life companies will prosper without a global partner. In addition, only 22% felt that successful companies will have to compete on a global basis. But for the larger organizations, globalization is seen as a way to broaden business horizons and enter high-growth markets outside the United States.
Whether companies expand globally or not, they will have to compete with international organizations such as Aegon, ING, Fortis, Axa, Allianz and Zurich. Combined, these companies currently possess more than 12% of the market share in the United States, as measured by net written premiums.
Slightly fewer than half of those responding agreed with the statement, "At least 50% of all insurance companies will disappear over the next 10 years through acquisition or merger." Only one-third felt that life companies will have to partner or merge with banking or investment companies.
The survey results clearly show that industry executives feel they are doing many of the things necessary to be successful. But the rate of change is accelerating. Life insurance companies will have to become more flexible, expense conscious and open to new technologies and ways of doing business to succeed.
(Eugene Reagan and Ron Zimmer are senior consultants for the Robert E. Nolan Co., a management consulting firm specializing in the insurance industry, with offices in Simsbury, Conn., and Dallas).
