9 reasons why Alan Greenspan is wrong about everything

These are all worthy issues to face head-on. Ideally, every insurer should do this all the time, but we all know that when times are fat and insurers can get by on their investments, complacency can set in. That might work during peacetime, but now it’s war, and it’s time to get lean and mean. Your competitors are already doing it, and when you do too, Kim implied, you’ll be a better company for it. This is all a good thing.

5. Alternative investments have earned a place at the table.

With interest rates so low, many insurers are embracing alternative investments. “It’s clear that we’re pushing the envelope in terms of adding yield, whether we’re going into higher-yield bonds, or CMBS, emerging market, debt, or commercial mortgage loans,” Kim said. Some insurers have already gotten into this space faster, but the entire industry needs to move to alternatives if they want their investment side to come back to life.

And indeed, it seems like more have than haven’t. “The entire universe of investors have gone alternative,” Kim said, noting that since 2005, traditional investment assets have grown at a compound annual growth rate of 5.4 percent. Alternatives, on the other hand, have grown at an annual rate of 10.7 percent.

Private debt, private equity funds of funds, private equity single funds, REITs, infrastructure, mezzanine debt, hedge fund of funds, commodities, hedge funds (single manager) are all expected to increase.

“This is powerful, but very dangerous,” Kim warned. “If you do not have the capabilities to analyze this, you could do very poorly.” He noted that New York LIfe, given its size and sophistication, does as good a job with alternative investments as anybody, but they don’t engage in a lot of common alternatives, such as single-manager hedge funds, because they view them as too risky.

That said, alternatives are here to stay, and they provide insurers with a strong avenue for yield, provided that they are engaged with a sober approach and a firm sense of risk management. Now is not the time to take a Wild West approach to alternatives. In fact, it’s probably never the time to take a Wild West approach to alternatives.

6. The U.S. middle class remains a largely untapped opportunity, especially for insurers.

Since the global financial crisis, Kim said, the recovery has really only been beneficial for the wealthy. From 2009-2011, for example, the average net worth per household for the top 7 percent of all households increased by 28 percent, from $2.5 million to $3.2 million. Conversely, the change in average net worth for the bottom 93 percent decreased 4 percent, from $139,896 to $133,817. Kim was pretty straightforward about it: “This has been one mother of a gift” that the central banks bestowed upon the world’s wealthy, and the social impact of this, in the long-term, will be profound. But, Kim stresses, from a financial and economic perspective, this might not be the worst thing in the world.

If you don’t look at it in terms of 7 percent vs 93 percent, but instead look at distribution of wealth in quintiles, there are lot of insurance sales opportunities in the 2nd and 3rd quintiles, which make up the middle class and upper middle class, respectively. The top quintile is already well served by banks, wealth advisors, mutual fund industry, and the like. And the industry should continue to serve that market, Kim said. But what New York Life likes are those 2nd and 3rd quintiles. There are a lot of boomers in those who are turning 65 at a rate of 10,000 a day, and who will retire at that rate for the next 20 years. This is a retirement tsunami, Kim said, and these people are desperately shifting to treasuries, bonds and various forms of annuity products and other conservative investment products that insurers do a better job of constructing and offering than anyone else.

So the wealth gap means more opportunity for selling to the middle class. Don’t give up on them.

7. The global middle class is exploding, and the U.S. is there to sell to it.

The opportunity of selling to the middle class is especially true if you look outside of the United States, Eurozone and Japan. “In many respects, the core fabric of our middle class going away is offset by the global growth of the middle class in China, India, Malaysia, and Korea,” Kim said. “In Asia, these people are going from the novelty of three meals a day to buying designer bags for the wealthy.” There is a once-in-a-lifetime growth in the middle class around the world, driven by a shift in the share of world GDP. By 2018, 54 percent of the world’s GDP will come from the so-called “developing economies.”

Concurrently, the world’s population is increasingly urban. There are already more people living in cities than in rural areas across the world, and by 2050, some two-thirds of the world’s population, buoyed by a huge middle class, will be concentrated in cities. This is a huge set-up for insurers in general and U.S. insurers in particular, which are uniquely well suited for serving both middle-class clients and urban clients. In fact, this might be a market development “perfect storm” the likes of which the modern insurance industry has never seen before.

8. Foreign oil? What foreign oil?

Getting back to points of strength on the U.S. economy, Kim spoke on the narrowing gap between U.S. energy consumption and production. Citing information from BP — “not the most credible source these days,” Kim joked, in reference to BP’s recent ruling of gross negligence in the Gulf oil spill — increasing domestic production could make the U.S. energy independent by 2030. But to back that up, Kim cited more conservative numbers from the Energy Information Administration that also suggested the gap between consumption and production would get very narrow by 2030.

Compare this to 2005, Kim said, when we imported 30 percent of our energy consumed on a daily basis. That is a huge improvement, especially in Texas.

Case in point: some 20 percent of new construction in the largest central business districts in this country is currently happening in Houston alone. Now, Texas has seen more than its share of boom and bust cycles, Kim noted, but in our chase for energy, Texas is having a boom that extends well beyond oil and gas. Other large economies in the region are benefitting as well. Most folks with an “East Coast mentality” don’t appreciate that, Kim said, but it’s a big deal, and its a big reason why the indicators in the U.S. are pointing up.

9. The U.S. has a huge new natural resource: Big Data.

200+ million hours of video uploaded to YouTube each day. 81 billion “likes” on Facebook last month. Nearly 5,000 text messages per month … from the average teenager. 15 billion tweets last month. The advent of “SoLoMo” — Social, Local Mobile. We are awash in data, and all of that data is coming from us – info or content that some 3 billion human users are volunteering.

But this is all just the beginning. There is an information supernova just getting underway as the Internet of Things — an increasingly vast array of personal items and technology that exchange and upload information on those who use it, such as GPS info, purchasing info, medical info — gets established. At the same time Kim gave his address, Tim Cook and his colleagues at Apple were unveiling the Apple Watch, Apple’s first wearable computing device. Given Apple’s ability to change behaviors in ways we never thought possible, Kim said, the watch could be a game-changer like the iPad, and deliver a new magnitude of ergonomic and health diagnostic information. “Remember September 9, 2014 not for what John Kim said, but for what Tim Cook said,” Kim noted.

We are at a point where we can quantify the positive impact of Big Data, Kim said, noting that as we realize some $300–$600 billion in annual cost savings and productivity gains from Big Data, the U.S. economy is building fresh GDP equivalent to about +1.5 to +3 percent … all from Big Data. The Economist noted that data is new big natural resource, analogous to what steam was in the 18th century, what electricity was in the 19th century and what hydrocarbons were in the 20th century.

And the U.S. is driving it.

The big postscript to this is that not everybody is making the most of it just yet. Insurers are well behind the curve when it comes to implementing a digital strategy. In a world where there are currently five exobytes of information on the Internet (Google an exobyte to see how big it is), some 30 percent of insurance companies are doing nothing with it. Another 43 percent are trying to understand it. That means that three-quarters of the insurance industry are trying to figure out what to do with Big Data.

The truth is, few in the insurance industry have really used Big Data to their advantage — whether it’s because of constrained IT budgets or simply a lack of focus or understanding. Maybe 7 percent of insurers have a well understood digital strategy. Maybe 3 percent have fully integrated a digital strategy into daily operations. But the upside here is that when it comes to Big Data, Kim said, because so few insurers have harnessed data to their competitive advantage in a meaningful way, especially in life insurance, the only way to go is up.

“It’s like playing hockey in Costa Rica,” Kim said. “We’re all pretty good, considering the standards.”