Across the US life
insurance industry, risk management remains the number-one
priority. However, how insurers are tackling the challenge of
managing risk and other issues in the wake of the financial crisis
varies considerably, reveals a new wide-ranging study of insurers
of all sizes. Charles Davis reports.

 

A rare longitudinal look at
the US life and annuity market has found “striking” differences in
the way insurers are dealing with a number of vexing
issues.

The four-year study, An
Industry in Transition, conducted by consultancy Robert E Nolan
(Nolan), examines a broad cross section of the industry, including
mutual and stock companies.

More than a quarter (27%) of
respondents have fewer than 500 employees, 20% have 500 to 1,500,
and 53% have more than 1,500 employees.

A reprise of a 2006 study,
the latest study found once again that risk – its identification as
well as its management – is the dominant theme in terms of
differentiating winners and losers in the market.

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There are, of course, the
traditional risk issues, such as managing credit exposures,
regulatory capital levels, hedging techniques, foundational risks
(basis, gap, and volatility), asset/liability matching, and proper
reserves, but the study highlights less obvious but important risk
dimensions. These include the risk of not addressing the cost of a
product portfolio overburdened with complex features as well as the
cost of excessive underwriting of risks. Likewise, many insurers
are ignoring the cost of paper-based processes, a hidden risk when
so many electronic alternatives exist.

The same is true for
management reporting. The emergence of the functional data
warehouse, straight-through processing, and a sharper focus on how
customers view service outcomes, have all led to new and innovative
performance metrics, Nolan’s study revealed.

Nolan posed the question:
“How many companies have simply layered new metrics into their
existing measures and reports, thereby diluting those reports and
complicating the corresponding analysis, review, and
action?”

The consultancy added: “They
could have opted to replace outdated reports with new and improved
ones, and streamlined the process of knowing more than ever about
operational effectiveness. Just because you can measure something,
or once measured something, doesn’t mean you should.”

From the carrier’s viewpoint,
with the dramatic drop in equity markets and with interest rates
remaining at historically low levels, the appeal for variable
products, both annuities and life, dried up as buyers shifted to
whole life and term to preserve their assets.

Hedging and risk management techniques, combined with
unexpectedly underpriced guarantees linked to variable products,
put many insurers at an extremely high risk-exposure. This will
continue to play out over the coming year and beyond.

 

Advisers’ key role

From the distributor’s
perspective, Nolan noted that it is clear advisers will continue to
be important to the client, at least for the foreseeable
future.

Even surveys of younger
generations have shown that advisers are both expected and
respected. Changes ahead will be in the structural elements of
channels themselves, the blend of products offered and methods for
offering them, and how that expertise will be accessed, used, and
compensated. Due to channel aging, there is a potential for a void
as top producers retire and aren’t replaced by new agents entering
the system.

For consumers, similar to the
flight to quality experienced in the tech-bubble burst a decade
ago, the shift during this difficult market has been towards
permanent and term products.

“As we developed our
findings, the consistency of issues and observations relative to
the previous survey was striking, especially regarding the areas of
opportunity that exist for companies today,” stated
Nolan.

“While the fundamentals of
the business remain largely the same, the economic turmoil of the
past few years has amplified the payoff for those who act on these
opportunities, and has likewise amplified the price to be paid by
those who don’t. As each dollar of revenue and expense has become
more precious, one might say that any remaining slack has been
taken out of the operational ‘rope.”

When respondents were asked
about growth in life sales, they were asked to rank various avenues
as “probably,” “likely,” or “maybe.” Growth will probably come from
deeper penetration into existing markets (88%) or from expanding
distribution methods (83%).

Many companies believed that
growth would likely come from greater demographic and/or behaviour
segmentation (63% and 60%). About evenly split, growth may come
from acquisitions (58%) or expansion into new markets
(54%).

With regard to product composition, respondents said their
companies would be focused on value-based products with basic
features. To deliver this, insurers will be producing simplified
products with easy-to-understand guarantees and clear savings
benefits.

 

Treading cautiously

Nolan found that carriers
intend to be more cautious with product features and that
investment returns will affect pricing now that historical
assumptions have been challenged.

It is very likely these
changes will accelerate book-of-business shifts as well as
consolidations within the industry. The report predicts that many
of these will involve two-way global expansions, particularly in
China, India, Russia and other developing markets.

Barriers to entry into these
markets which offer “tremendous market opportunities based on
ongoing cultural and demographic shifts,” are falling, Nolan
observed.

Respondents said that with
respect to products, over the next five years, much attention must
be given to meeting the income needs of the older, larger
generations.

Aging baby boomers are
interested in structured de-accumulation, an important market
opportunity for income-producing products. Similarly, product
bundling and life-stage transition issues will become more
prevalent in addressing the demands of newer generations, whether
through indexing or event-driven riders.

As market dynamics change, the employer and middle market
will draw more resources and attention as their relevance grows.
The other changes within the product realm will be along the lines
of quicker speed to market, shorter shelf life, simplification of
sales and support materials, modularity and convergence, and
integration with technology.