As the industry looks to 2012, eager to put a challenging year behind it, its greatest challenges may have yet to come. So says Doug French, Managing Principal of the Insurance Actuarial Advisory Services practices of Ernst & Young LLP in New York. According to him, the groundwork for the industry's future growth lies in five critical challenges that must be faced, and must be faced now.
First, managing companies to thrive in a low interest rate environment. "A lot of folks are saying we have it under control, but you just can't take your eye off of it," French says of the sustained low interest rates that, among other things, are making it difficult for insurers to raise the capital they will eventually need to pay off all of the annuities they have been selling. Rates might remain low through 2013, French says, while he notes that various economic pundits claim the low rates could persist for longer than that. Either way, "there is no way, as a management team, you can take your eye off it."
Second, the regulatory environment seems primed to change, French says. "You've got the NAIC solvency modernization initiative, Dodd-Frank rules continuing to be written, the FIO report coming out shortly, the whole FASB/ISB accounting deliberations…we don't know where the regulatory environment is going to bed down, but it will change."
French said that insurers should be mindful that the very nature of regulation is itself evolving, and could very well become even more intrusive. "What will the accounting regime mean if it moves to a market-consistent framework?" French asked. "How will that change our industry's business models? How will it change the products we sell, and the options and guarantees we offer to the consumer?"
Third, the industry needs to invest in customer analytic tools to drive improved efficiency and to improve its overall risk management, French says. The industry remains in a low-growth environment, competing for what French calls "share of wallet" while high unemployment also lingers. Anything that will drive efficiency and improve a company's overall risk profile, then, becomes hugely important. A key to these goals is the proper use of customer analytic tools. "We've talked about this in the past," French notes, adding that it remains as relevant today as it did before. "Insurers need to be able not only to underwrite through analytics, but to serve customers through them also. And, it has to drive efficient and expense reduction. Insurers have got to look to expenses, going forward."
Fourth, the industry needs to keep a sharp eye on developments regarding life insurance taxation. "We need to raise revenue as a country," French says, "and everybody's going to have to give their fair share." He adds that there is a very real chance that life insurance taxation will change, and not in the industry's favor, so insurers need to be prepared well in advance in terms of product design, placement and marketing.
Fifth, insurers need to embrace the internet. "I think as an industry, we have not fully embraced and learned how to use the internet to transact, educate and inform our customers,' French says. "Sooner or later, the industry has to get there. It just can't sit back and continue to think or study it when you see what other industries are doing with social media."
French says that the insurance world remains an industry that fundamentally continues to communicate with its customers much as it did 50 years ago, and the time has come for it to change. "it can't be that last industry" to adopt the internet, he says, likening online selling avenues to e-readers. There may be those who prefer a more traditional method of interaction, but ultimately, those who want their products electronically will get them that way from those companies willing to provide them.
"The industry as a whole is one that does not reward innovation and first mover advantage," French says. "The industry rewards a close follower strategy. But we are on the cusp of major changes coming to the life insurance industry over the next ten years. everything is pointing to it. The economy is pointing to it. The demographic profile is pointing to it. Technology is pointing to it. The relentless push on expense reduction and efficiency is pointing to it. There will be major transformational change in the next 10 years, and there will be winners and losers. The guys who win are going to break out and be a first mover in something."
When asked if these trends shaping the industry were likely to be changed by this year's presidential election, French brushed it aside. "These trends are independent of the presidential election," he says. "These are forces that are greater than any political party or agenda. These are really big, hairy transformational issues that need to be dealt with."
What do you think? French makes some outstanding points, especially on the use of technology. Is the industry up to the challenge? Or will 2012 be another year of wait and see? The comment box awaits, people. Fire away.
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