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The top 5 concerns of insurance executives today

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The results from EY’s 2015 Life and Annuity Executive Survey show a range of challenges – some longstanding and some emerging – that are shaping the strategic agenda for the industry’s senior leaders. The key findings from the survey highlight the five top concerns for the retail life and annuity sector from the perspective of top executives.

The survey is based on interviews conducted by EY’s insurance consultants with CEOs and senior executives from 20 U.S. life insurance and annuity manufacturers, distributors and reinsurers. The objective of the survey is to understand the views and concerns — and to outline specific opportunities and challenges – across multiple areas including consumers, agents/advisors and other stakeholders.

At first glance, the key findings may appear daunting or look like a compendium of bad news. However, it is important to recognize how effective strategies to address these challenges may result in important and necessary opportunities for those who act in a timely and decisive fashion.

1.       Ongoing macroeconomic sluggishness.

The global economy is still struggling to gain momentum as many countries continue to deal with the fallout from the financial crisis. Global growth in 2014 was lower than initially expected, according to the World Bank. Beneath the headlines, negative interest rates and devalued currencies trouble some major economies. Overall, global growth is expected to rise moderately to 2.8% in 2015, and average about 3.2% through 2017, according to the World Bank Group.

Although the U.S. and the UK are showing some improvement, financial malaise lingers in Europe and Japan. China is undertaking a cautiously managed slow down. Interest rates remain low, as do overall growth projections. Equity markets are highly volatile and fears about the next bubble run high.  There appears to be little optimism amongst our respondents that an uptick in the US economy will fully benefit the insurance industry.

While it’s not surprising that life and annuity executives express real concern across the full range of macroeconomic indicators, given the industry’s unique vulnerability to many of these forces, we also heard concern about global demographics.  According to one executive, significant demographic changes in the future will likely contribute to the macroeconomic ”headwinds” stating, “that [Japan is] going to experience a 40% decline in population over the next 40 years. Think about the town you live in if 40% of the people left. What would this do to local businesses, manufacturing, etc.?” 

The bottom line is the global economy will be an obstacle to growth for insurers, until the return of broad-based prosperity and wealth creation.  

2. Fostering innovation in the era of permanent disruption.

In an industry that has never been considered highly innovative or particularly nimble, advancements in digital technology have made innovation an imperative. The pace of innovation must accelerate as competitive pressures increase. One executive described the situation this way: 

“As an industry, we confuse innovation with product development…if we don’t learn the difference… and don’t learn how to become far more innovative much more quickly, we run the risk of being disintermediated by those that can run faster.”

So where should innovation come from and what form should it take? Life and annuity executives cite four main areas:

  1. Product and market: the industry must develop offerings that reflect the real-world needs for consumers, from affordable annuities for the middle market to more sophisticated life and health policies that leverage the Internet of Things
  2. Sales and service: the focus will be on driving customer engagement with well-integrated and personalized meaningful digital experiences
  3. Operations: accelerated or automated underwriting, the use of electronic forms and straight-through processing are just of the few ways insurers seek modernized and enhanced operations
  4. Technology: old legacy systems must be updated or retired, while better mobile apps, more advanced analytical capabilities and better data integration point the way forward. As on respondent put it, “In today’s world, everything has to be mobile first.”

While the tone of survey responses was grave – “innovate or die” was one executive’s perspective – many respondents reported significant progress on several of these fronts. Now that a few early adopters have demonstrated success with high-profile programs, more insurers identify themselves as fast followers than in prior years. Investments in innovative capabilities are likely to be significant, but respondents believe they can build substantive and quantifiable business cases based on badly needed performance improvements.  

However, insurers can no longer just follow their current competitors. Instead, they must be aware of the potential for major disruption from the entry of new players, such as Google, Apple, credit card companies and others. In one executive’s words, “Technology is fundamentally upending and allowing new competitors to come into and interrupt traditional business models … [none of us] are safe.”

3. Finding, attracting and retaining sufficient talent.

Talent management and human capital issues have become so critical to the industry’s future outlook that one survey respondent expressed a belief that the chief human resources officer (CHRO) will be the most important person in the C-suite.

The talent shortage affects every layer of the organization, with a lack of sufficient candidates to fill senior executive roles and significant gaps in technical skills. And then there are the generational issues; the insurance industry is simply not attractive to young people, executives believe. A few comments from survey participants sum up the reality:

  • “No one wakes up and decides that they want to go into insurance.”
  • “Financial services companies are heavily regulated and slow moving and we are competing against cool companies for talent.”
  • “[We have the] same problem attracting talent as attracting customers.”

In other words, the industry’s image as staid and risk-averse simply does not appeal to the brightest and most promising young people, who likely view technology companies as their employers of choice.   Insurers also seem less appealing to young people because their offices are typically located in less desirable cities and offer less collaborative work environments when compared to technology firms.

Executives recognize the deep need to find new talent – like data scientists and digital experience designers – is not merely about burnishing the industry’s image. Rather, there is a clear and pressing need to replace an aging workforce, especially in critical areas like underwriting. Taking a more strategic view, the talent issue reflects the need to foster innovation-centric and entrepreneurial cultures and to develop next-generation capabilities. Lastly, there is an opportunity for the industry to tell a clearer and more persuasive story about its mission and important societal role in helping individuals and families secure financial protection. The rising generation of workers is seeking such purpose in their careers and choice of employer.

4. Flexing and evolving distribution models.  

Economic pressures, demographic shifts and technology-driven disruptions are forcing change in the realm of distribution models as well. As one survey respondent put it bluntly, “Buying habits are changing, and we’re going to have to change with them.”

Current distribution strategies are neither reaching high-potential market segments (like the under-penetrated middle-income market) nor meeting the needs of many current policyholders. The fact is that little customer service and few interactions occur after initial sales are made. In many cases, premium invoices are the only communications policyholders ever receive from their insurance carriers.

This low-engagement model is not conducive to strengthening relationships with the broadest possible set of consumers. After all, today’s empowered customers have unprecedented access to information about products and benefits and, therefore, less need for a broker or advisor to guide them through the education and research portion of the sales process.

Survey respondents believe omni-channel distribution models, with consumers able to choose among self-service or in-person or other purchasing options, are destined to become the industry norm. Others are considering lifecycle selling, or re-engaging customers at certain points during their lives based on their stated preferences. Such an approach may open up cross-selling opportunities (e.g., integrating 401K plans with options for life, health, annuity or disability products). However, there will be challenges with this approach as well discussed in the next topic.

5. The evolution of consumer protection needs and requirements.  

There are many regulatory initiatives underway that are aimed at better educating and protecting insurance customers and executives are not particularly bullish on the outlook. Proposed rules from the Department of Labor regarding fiduciary duties and insurers’ obligations to “know their customers” are among executives’ top concerns. Everyone wants “common sense” protections against abuse and fraudulent behavior, but those threats must be balanced against the pressing need to provide the middle market, in particular, with advice regarding retirement products and services.  

Personal privacy and data security are other pressing matters. Executives justifiably believe “no one is safe” from the very real threat of data breaches, hacking and other forms of cybercrime. “It’s not a matter of if it will happen, but when it will happen,” said one executive.

Shifting regulations could fundamentally change how annuities are written, product information is disclosed and advisors are compensated and whether cross-selling opportunities can be realized. In the end, respondents believe there will be a pronounced shift away from commissions and toward fee-based relationships. Compliance costs are likely to rise. In the eyes of survey respondents, the effect of new regulations range from “destroying the business” and “massive impacts on operations” to “getting rid of commissions” to “more challenging to give financial advice.”

The bottom line

The life insurance and annuity industry experiencing a period of extreme turbulence is not breaking news. But the increasing focus of executives on the necessary steps toward innovation and transformation underscores their focus on fundamental change and strategic evolution. Our respondents summed it up this way, “When we do right by the consumer, we do well as an industry,” and “companies that think, innovate, experiment, fail and win will beat the relevance challenge.” As an organization focused on building a better working world, we at EY couldn’t agree more.