Innovate or risk oblivion, says one of the insurance industry’s leading thinkers.
In a stirring address to the 2010 LIMRA Annual Conference in Washington DC, Robert Kerzner, president and CEO of financial industry organisations LIMRA, LOMA and LL Global, put out a challenge to more than 450 senior US insurance executives. That challenge is to find new ways to adapt their product design, underwriting and distribution models in order to advance the life insurance industry, or risk obsolescence as the economic uncertainties combine with regulatory upheavals to roil the industry.
“Many of the fundamentals of our business are out of balance,” Kerzner said. “In the animal kingdom, failure to adapt means extinction. In the same way, companies need to significantly transform their thinking and adapt their business models in order to remain competitive.”
Kerzner emphasised the historical precedent of companies in many different fields that failed to adapt their business models, became obsolete, while those that had the foresight to identify weaknesses and as a result, innovate and change, often were the winners.
Lesson from other industries
Kerzner detailed a number of companies like Xerox, whose high barriers of entry fooled it into believing it had the copier market to itself, only to find a host of nimble competitors that outpaced it by offering personal copier technology.
From Blockbuster, which failed to keep up with changes in home entertainment, to retailer Woolworth’s, Kerzner recited a litany of failed business models killed by disruptive technologies. Complacency, he said, led these companies from market leadership to ruin.
On the other hand, Kerzner cited Coca-Cola, which went from dominating the cola market to realising that it was actually in the “fluids” business. Coca-Cola now has 500 brands in 200 countries, and non-soft drink volume that accounts for 25% of the company’s volume.
“They found a different business model by expanding their vision, and by accepting change,” he said. “They saw the business they were in shrinking and so they rethought the model.”
Kerzner said that the life insurance industry must ask itself the same sorts of questions.
“What business are we really in? We aren’t just in the death business – we are in the risk business. We are also in the savings business. When we saw the possibilities differently, we were able to advance,” he said.
“How do we get a bigger share of the overall savings dollar? We must not remain so rooted in what’s worked in the past, stressed Kerzner.
He added: “Annuities have been great for the industry, but the growth really took off when we found new distribution channels.”
Technology driving change
Kerzner said that people still want to buy insurance products face-to-face, but technology can change the meaning of face-to-face.
“Can we better leverage technology to build a different business model?” he asked. “Underwriting and issuance can be real-time, and we can close sales and distribute our product through new models.”
Kerzner noted the inversion of the risk/reward ratio that has developed in this new business environment, and its impact on insurers.
He outlined factors such as the low interest rate climate, the legislative and regulatory environment, unfavourable interest spreads, and higher operating costs that have led to greater risks for companies with potentially diminished rewards.
Kerzner also emphasised that regulators worldwide were changing capital requirements and accounting rules, leaving many companies with a capital conundrum of how best to deploy capital and what levels of capital to maintain.
He predicted merger and acquisition activity would intensify.
The “old model” featured less risk, lower face amounts and cash-value growth to offset death benefits, all of which meant double-digit return on equity industry-wide.
Today’s model features greater risk with lower potential rewards, larger face amounts, more expensive reinsurance, unpredictable lapses due to investor-owned life insurance and the volatility of securitisation.
Add to that unfavourable interest spreads, higher operating costs, and the list just goes on and on, Kerzner said.
In the variable annuity space, the predominant risk once was the death benefit. The arms race of guarantees crippled earnings, bringing the risk-reward balance out of alignment.
“We have not added adequate new distribution,” Kerzner said. “We need to make a quantum leap forward — harnessing technology and finding innovative ways to get our products in front of more Americans.”
Recent LIMRA research found that half of US households (58m) believe they need more life insurance; but eight in 10 households currently do not have a personal life insurance agent or broker to turn and most of them say they never did.
With life insurance ownership at a 50-year low, Kerzner suggested that companies employ technological solutions to better reach this audience.
“We have too much manufacturing chasing too little distribution,” he said, adding that even annuity distribution is shrinking, and shelf space is more crowded than ever before.
According to Kerzner, all of these signs point to the need for more distribution.
“I believe we could be at a tipping point where there could be massive change. Never before have so many challenges come at us at one time,” he said.
A tectonic shift in business models is needed for the industry to adapt and evolve, he concluded.
“Those businesses that respond to the change – and even some who drive that change – are the ones willing to change their business models in real time. Change, or become extinct.
There is an amazing opportunity if we adapt to the new world, with new products and new channels of distribution.
We must change enough, adapt enough to avoid the mistakes that others have made, and not let the past keep us from seeing the future.”