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The top 5 priorities for life insurers in 2015

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In coming years, expect to see more simplified and consumer-friendly products, including annuities tailored to young workers looking to build a nest egg. Life insurers’ back-office operations will also be better integrated, availing advisors of more cross-selling opportunities across product lines.

These developments are in the offing if carriers follow the recommendations of a new report from the Deloitte Center for Financial Services, “2015 Life Insurance and Annuity Industry Outlook: Taking the Longer-Term View.” LifeHealthPro Senior Editor Warren S. Hersch recently interviewed three Deloitte representatives — Gary Shaw, vice chairman and U.S. insurance leader; Sam Friedman, research team leader-insurance; and Howard Mills, national insurance investors senior advisor and a former superintendent of the New York State Insurance Dept. — to discuss the report’s key findings. The following are excerpts.

Hersch: What are the report’s most important findings? What were you endeavoring to achieve in undertaking the research?

Shaw: The report identifies 5 topline priorities for insurers: transforming for growth, addressing longevity risk, upgrading capital management, overcoming regulatory challenges and achieving what we call information fluency. The last item calls for implementing new data management and governance solutions to help carriers break free of outdated, siloed systems, while turning data into both a strategic asset and a competitive advantage. 

Securing these objectives will require, among other things, the hiring of data scientists, making greater use of analytics software and being more inclusive across disciplines when addressing business challenges.

Oftentimes, industry outlook reports focus on short-term issues like the state of the economy or whether markets are up or down. We’ve done this in the past, but this year we’re focusing on bigger picture items that are very high on insurers’ strategic agendas — and not just for the rest of 2015.

These issues will remain prominent for the next 3 to 5 years. One example: how insurers can become more efficient, productive and streamlined internally so as not only to better serve consumers, but also other stakeholders — regulators, ratings agencies, etc. We’re talking about fundamental changes that insurers have to undertake to better position themselves to be market leaders for the rest of this decade and beyond.

Hersch: What are the key market drivers underpinning the needed technology upgrades identified in the report?

Friedman: Much of the technology push is external in that insurers are reacting to the competition. And so we’re seeing much greater use of predictive modeling and advanced analytics software among life insurers.

These upgrades are, in turn, driving the demand for more data analysts and data scientists. Also, consumers are demanding of insurers more fluid service: 24×7 access to product information or carrier reps via the web, mobile devices and social media.

Insurers’ technology initiatives are also internally driven. As Gary indicated, there is greater demand for integration — information fluency — of still siloed IT systems across an enterprise. These silos are divided along both business line and function, such as underwriting and claims.

Absent the needed integration, it can be difficult to capitalize on data on a holistic basis — for example, by taking greater advantage of cross-selling or product development opportunities. All of these improvements require cross-departmental cooperation and systems that can be easily accessed by individuals in finance, marketing, claims or product development.

When you share data across functions and for different strategic purposes, you increase the value of the data exponentially. Right now, many insurers are information-rich, but knowledge-poor. So much more can be extracted from the data in an information-fluent organization.

Hersch: Does the information-fluency you talk about mainly entail greater leveraging of human capital or technology investments in solutions that can aggregate and interpret the now-siloed data within insurers?

Friedman: You’ll always need tech people to work on IT systems. But this is a broader issue, one that requires a commitment from company c-suites to push data fluency throughout their enterprises.

Companies also need a steward, such as a chief data or information officer, to coordinate efforts. We’re also urging insurers to not bite off more than they can chew because systems integration can be a very involved process. In some cases, companies may want to run pilot programs before rolling out IT initiatives enterprise-wide.

Shaw: Some of the more successful insurers are doing just that — taking bite-size chunks. They’re developing targeted business-use cases, then harvesting information to change how the company addresses a specific issue, rather than trying to tackle everything at once.

Hersch: Another market analyst I’ve spoken with suggests that C-level executives who oversee technology initiatives, such as CIOs and CTOs, don’t have as much influence as other senior executives in shaping strategic priorities because the return on technology investments is often hard to quantify. Would you agree with this assessment?

Shaw: To a degree. But at a growing number of insurers, the CIO or CTO now reports directly to the CEO. And they are in some cases disaggregating their roles into separate positions. These might include, for example, a chief science officer or chief customer experience officer, both of whom again report directly to the CEO.

These people are becoming more prominent across the c-suite. And so they’re better positioned to drive investments in new technologies and facilitate greater cooperation among systems managers and departmental heads to secure business objectives.

Hersch: Do you gentlemen have a sense as to the opportunity cost of failing to make the necessary IT upgrades? How much business are insurers failing to capture?

Friedman: I don’t think you can quantify lost revenue industry-wide because the ROI varies by company. To be sure, we’re not saying the industry is in the Stone Age.

Many insurers have already invested a lot in their systems. But they’re at different points of the IT maturity curve. Some are better integrated than others; some are not integrated at all. Ultimately, what the companies are trying to do is to streamline costs, in part by gaining a more comprehensive and holistic view of the consumer.

Though we can’t provide an ROI number, we can say this: If insurers don’t do these things — if their business units remain siloed — they’ll be hamstrung at a competitive level relative to insurers that have a more information-fluent organization.

Hersch: The Deloitte study also details the need for more consumer-friendly products. What do you have in mind?

Shaw: There have been attempts at developing simplified term life products. These efforts have been marginally successful. But it will take a lot of iterations to get this right; no carrier has cracked the code yet on product simplification.

Friedman: In research that we’ll be releasing in the spring, we’re finding that many buyers of annuities also purchase a second. We especially see potential in starter annuities, products tailored to younger consumers and that can meet different objectives — generating retirement income being only one — throughout an individual’s financial life.

We also expect to see the development of more hybrid solutions that can do multiple jobs, such as annuities that provide both a long-term care benefit and retirement income.  Consumer-friendly doesn’t just mean product-simplification. It also encompasses products that can fulfill different purposes.

Hersch: Turning to compliance, what regulatory challenges will insurers face in the years ahead?

Mills: There is a great deal of regulatory uncertainty, as we note in the study. In addition, there are more regulatory players, The Federal Insurance Office, the Office of Financial Research, among others.

Also, U.S. regulators are engaged with international regulatory bodies. Even insurers that are domestic-only writers are being impacted because U.S. regulators are reacting to moves by their overseas counterparts.

So compliance will become more challenging.  Insurers and advisors now run a greater risk than in years past of running afoul of regulators.

Regulators also are broadening their scope of activity. They’re examining everything from insurers’ capital reserve requirements and consumer protection to market conduct and cyber security standards.

In response, insurers are transforming their compliance programs to be more proactive in preventing regulatory problems before they occur. A complicating factor is the advent of social media, which has the potential to transform a regulatory issue into one that can negatively impact an insurer’s reputation or brand.

Hersch: What do these regulatory changes mean for advisors in the field? Should they expect increased paperwork, a more complicated sales process or a rise in product premiums to cover greater compliance costs?Deloitte's Howard Mills

Mills: Potentially all of the above. The distribution network is definitely a focus of many of these compliance issues. Advisor designations and product suitability are coming under greater regulatory scrutiny.

So insurers need to know who their distribution players are. And advisors need to be aware of potentially major consumer issues generated at the point of sale.

Hersch: What other issues and trends identified in the Deloitte report do we need to bring to the attention of our readers?

Friedman: Longevity risk was a substantial part of our report. Longer lifespans represent one of the biggest opportunities and challenges that carriers face. Cracking the code on how to price guaranteed income products will be tricky. Some carriers are now adjusting premiums and income guarantees to account for longer lifespans. For advisors, this change has to be top-of-mind.

This space is so potentially lucrative. Much of the industry’s brain power will be focused on how to crack the code of these products — how to price them with features that individuals want.