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7 trends that will change the way we sell life insurance in 2015

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LifeHealthPro Senior Editor Warren S. Hersch recently interviewed Doug French, a New York-based managing principal of the Insurance and Actuarial Advisory Services of Ernst & Young LLP. The interview explored initiatives identified in EY’s 2015 U.S. Life Insurance Outlook” report the professional services firm believes should be top priorities for life insurers in 2015. The following are excerpts.

Hersch: The EY report explores 7 topics that life insurers needs to focus on in 2015. Can you summarize these for me?

French: In order of importance, the topics include (1) repositioning distribution strategies to expand market opportunities; (2) embracing digital as the new storefront; (3) developing simplified products to expand customer markets; (4) transforming the back-office; (5) enhancing data security; (6) adjusting to new competition from alternative capital sources; and (7) proactively addressing the still uncertain U.S. regulatory environment.

Hersch: Respecting distribution strategies what does the report call for?

French: The traditional advice model — the meeting with the customer face-to-face at the kitchen table — is extremely expensive and inefficient. Sooner or later the industry will need to change, like others, and make the distribution of financial products and services more efficient and economical.

It’s all about better serving your customer base. That could mean devoting greater resources to direct sales channels, boosting advertising or better leveraging the Internet and digital customer-facing technologies like Skype and telephone hotlines. 

The Internet has done a reasonably good job educating consumers about life insurance, annuities and other financial solutions. The industry is now migrating to the next distribution phase wherein consumers can not only do product research but also transact business through the Internet. This transition calls for new technologies that automate underwriting, policy issuance, as well as pre- and post-sales support.

Hersch: A common industry refrain is that life insurance is sold, not bought, and therefore requires face-to-face interaction with an advisor. If that’s the case, do online distribution and sales initiatives necessarily face limitations?

French: For low-cost products like term insurance, I don’t think this is a concern. A consumer who sees a TV ad marketing term insurance for $19 per month will say “I can afford that” and go online.

It’s a share of wallet issue. People will buy insurance products on their own if the purchase doesn’t entail a huge outlay of money.

As to high net worth individuals who need more expensive solutions, some of our research shows that even the affluent are underserved because there are not enough advisors in the field. Online distribution strategies can be helpful in serving this market as well.

Hersch: Why, as the EY Outlook report indicates, are more simplified products needed to expand customer markets?

French: The industry has many complicated products — solutions that people with basic needs don’t necessarily need. They need tax-deferral for their annuities and life insurance protection. So how complicated do the products really need to be?

If you’re going to advise and transact business efficiently over the Internet, then you need to simplify products. The Internet is the great equalizer, availing consumers of information they previously depended on advisors to provide.

Hersch: What products are emblematic of the product complexity you see in the marketplace?

French: Some of the equity indexed universal life and annuities products can be complicated for retail consumers; there are a lot of moving parts to them. Yes, sales of equity indexed products are doing well now. But I expect that they will need to evolve further if they’re to reach their full potential.

Hersch: Turning to the EY report’s discussion of back-off initiatives, what do you have in mind in here?

French: The industry is still using old technology on top of antiquated business processes. These need to be updated to achieve greater efficiency and expense reductions. There has to be a continuous focus on improving back office processes that impact everything from administration and customer service to underwriting, pre-sales and post-sales support.

The industry is driven chiefly by product design and product innovation. Companies have overemphasized the development and sale of new products and under-emphasized processes and technologies needed to efficiently service customers. Because the industry has for so long been driven by product design and sales priorities, it’s now reached a day of reckoning.

Hersch: This begs the question. Most insurers have chief technology and information officers who oversee their companies’ back offices. Are they not able to exercise a comparable level of influence with their company CEOs as their counterparts on the product development and sales sides?

French: Historically, insurance industry executives are paid on the basis of sales, not necessarily how efficient their back offices are. But now we’re in a low interest rate environment that is squeezing insurers’ profit margins. And this tightening of margins is forcing insurers to revisit their back office operations.

Hersch: What needs to happen in terms of enhancing data security, another focus areas of the EY report?

French: This is top of mind for all companies now, particularly in the wake of much-publicized data security breaches that have happened recently. This is the number one emerging risk in the world. CEOs at insurers probably have more than one board member asking about what is going on with their cyber security strategies and whether they’re world-class.

Hersch: Moving on, the report also calls for adjusting to new competition from alternative capital sources. Can you elaborate?

French: Here we’re talking about private equity firms bringing capital into the industry, mainly the annuity space, with a view to buying insurers’ books of business or the companies themselves. Whenever outside capital comes into an industry, it raises questions. Private equity firms bring a different perspective and may want to do things that established companies aren’t necessarily willing to do. And in some cases, the firms are borrowing practices from other industries that may or may not be a fit for insurers. So I think there’s reason for cautious concern.

Hersch: Finally, what regulatory issues identified in the EY report should be of concern to life insurers?

French: The issues span the gamut of industry regulation: solvency, product suitability, disclosure, taxation and the myriad of compliance requirements. Insurers and their advisors have to become more proactive about helping to shape the regulatory environment. Otherwise, they’re likely to face increased compliance and transaction costs, both of which can depress sales.