Contribution to panel discussion of the key changes to be expected in the insurance industry over the next five years from technology to product development.

1. Our Industry
in 5 Years
cover focus
10 March 2013 RESOURCE
By Jennifer C. Rankin
What will the insurance sector
be like five years from now?
Resource turned to some
seasoned industry executives
for answers.
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2. www.loma.org 11
t the end of 2012, Resource asked insurance
industry leaders to share their thoughts on what
the year ahead holds for sales and profitability,
information technology, structural change, and
customer service, publishing their predictions in
January (see “Forecast 2013”). Here, we bring you their
answers to two questions with a longer time horizon: What
do you think our industry will be like five years from now?
What opportunities does the future hold?
The executives who answered these questions are a cross
section of the board of directors of LL Global, the umbrella
organization for insurance industry trade associations LOMA
and LIMRA, plus other key industry players. They are:
Thomas P. Burns, CLU, ChFC, chief distribution officer,
Allianz Life
Steven M. Callahan, CMC®
, ChFC, CLU, FFSI, FLHC,
FLMI/M, senior consultant and practice development
director, Robert E. Nolan Company
Esfand E. Dinshaw, LLIF, chairman and CEO,
Sammons Financial Group
Robert Ehren, senior vice president, Life Product
Manufacturing, Securian Financial Group
Michael R. Fanning, executive vice president,
U.S. Insurance Group, MassMutual
Doug French, managing principal, Insurance Actuarial
Advisory Services Practice, Ernst & Young
Chuck Johnston, director, Americas Life/Annuity &
Group Practice, Celent, answering jointly with
Karen Monks of Celent
W. Kenny Massey, FICF, LLIF, president and CEO,
Modern Woodmen of America
Joseph R. Monk, ChFC, CLU, CASL, senior vice president
and CAO, Life; vice president, Health & Securities Products,
State Farm
Karen Monks, Research Analyst, Celent,
answering jointly with Chuck Johnston of Celent
David W. Simbro, FSA, MAAA, senior vice president and
executive officer, Life & Annuities, Northwestern Mutual
Deanna D. Strable, FSA, senior vice president, U.S. Insurance
Solutions, Principal Financial
BURNS: The insurance industry is a critical component of
the American economy. No other industry can provide the
lifetime income guarantees that are so important to the
majority of Americans who will be retiring, or planning
retirement, in the near future. In the next five years, there will
likely be increased pressure on the Social Security program
and even fewer companies with defined benefit programs.
Mutual funds and other investments can be good tools for
accumulating assets, but more consumers are demanding
insurance solutions that provide principal protection and
guaranteed income.
Therefore, I expect regulatory and market developments
in the next few years that result in insurance products tak-
ing a more prominent role in qualified retirement accounts.
All 401(k) plans will likely have insurance offerings that
provide guaranteed income options. New regulations will
encourage Americans to transfer a portion of their retire-
ment savings to insurance products as they near retirement
age. These changes will result in a more secure and stable
retirement for millions of Americans.
CALLAHAN: Economic baseline forecasts published by the
Congressional Budget Office (CBO) project a slow recovery
through 2015, with overall gross output remaining below
full potential through the five year horizon to 2018.
Unemployment is expected to exceed seven percent through
2015, dropping to an average of just over five percent by 2018.
Projected governmental spending is expected to average
around 22 percent of gross domestic product (GDP) through
2018 at least, which, while less than 2012’s record break-
ing 23.2 percent, still notably high, historically speaking.
Discretionary spending is expected to gradually drop from
2011’s nine percent to seven percent by 2018 and 5.6 percent
in2022,whilemandatoryprograms,includingSocialSecurity,
Medicare, Medicaid, and federal health care, are expected
to increase from 13.3 percent in 2013 to roughly 13.5 percent
in 2018. Last—and critically important to the insurance
industry, interest rates are expected to remain low, with
three-month Treasury bills averaging 0.1 percent in 2013
risingtoabout2.5percentby2018andten-yearTreasurynotes
averaging 2.5 percent in 2013 rising to about four percent
by 2018. These numbers all represent the CBO’s “baseline
forecast”, which includes a number of optimistic assumptions
about the ability to achieve the caps and reductions imposed
last year by legislation. Odds are good actual results will
be less ideal. The CBO’s 2012-2022 baseline forecast helps
set the economic context that will be influencing the
insurance industry over the next five years.
Working in conjunction with the economic influences,
three macro-trends will play a significant role in shaping
the industry’s direction between now and 2018. The first is
technology,whichwillaccelerateinnovationandnewapplica-
tions as well as deepen the impact of analytics, social media,
web-based service, mobile technology, and cloud solutions.
Thesecondisdemographics,whichwillincorporateanincreas-
ingly diverse population and the impact of Baby Boomers
moving to decumulation products.
The third is globalization, as carriers expand faster
into international markets and face increased regulatory
and financial complexity, multilingual servicing, and
likely consolidations.
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3. 12 March 2013 RESOURCE12 March 2013 RESOURCE
Each of these brings demands for new
skills, modified products, distribution and ser-
vice innovations, risk management advances,
and capital investments. All during a time
of very thin margins, low interest rates, and
increased risk of disintermediation as older
assets with better returns mature and have
to be rolled into lower return investments.
Not to mention increased diligence with capital
and reserves.
A good number of opportunities come
along with these challenges. The most obvious
and heaviest worked one remains the retiring
Baby Boomers and their conversion from
accumulation to decumulation. Here we have
the infamous conversion of over $30 tril-
lion in illiquid assets moving to income or
legacy investments, along with the large inforce
block of old term and whole life policies that
Baby Boomers will be looking to replace.
Guarantees, income streams, alternative cov-
erage like long term care and critical illness
are all relevant to this market. Existing client
retention and conversion units focused on the needs of the
retirees represent one option. The inforce base will become
increasingly fluid as more and more Baby Boomers reach
that point where they need to transition their portfolio.
Unprepared carriers will miss out.
Another tremendous opportunity for carriers is the
much-touted underserved middle market, a segment of the
population that both needs and can afford insurance but
at face amounts difficult for most of today’s channels to
cost justify. As was noted by one agent in a recent survey,
given the chance to make a three hour sale for a $1 million
policy or a two hour one for a $200,000 policy, they will
work on the $1 million one every time. Yet as noted by
LIMRA in October of 2012, the potential represented
by this market is approximately $1 trillion. Carriers able to
find a cost effective way to serve this market
willfindthemselveswithanexcellentsource
of growth. Options include cross selling
to more dynamic lines like personal auto
or homeowners, using telesales/web-based
campaigns, going after the worksite angle,
or using technologies like e-app, e-signature
and straight through processing to create
a “ticket” sale approach to the lower faces.
To date only a few carriers have started
to move in each of these directions, others
need to be fast followers to avoid missing
the chance.
Niche products and markets represent
the third opportunity, where carriers can
customize products for a targeted segment
of the market that is not currently directly
served. A number of carriers have done
this for the Hispanic market, developing
specific products, materials, and specially
trained agents to address the specific needs
of this population. There are numerous
other underserved segments that represent
a similar opportunity. Along these same lines, for the
larger carriers, the globalization of insurance is opening
doors around the globe. Extending the concept of insurance
to emerging markets can prove to be a tremendous boon.
Both Deloitte and PricewaterhouseCoopers have provided
supporting research and opinions on the opportunities
represented by select international expansion.
The fourth opportunity is an existing one that remains
only partially served. Carriers able to leverage existing
technologies in order to create an “order taking” approach
to buying insurance will find a wealth of opportunity from
middle market to younger markets to voluntary worksite.
The pieces exist, as proven by those slowly putting them
in place; carriers able to rapidly deploy a click and buy life
or retirement insurance product will find themselves riding
a large wave of success.
Tom Burns
Allianz Life
Esfand Dinshaw
Sammons
Financial Group
Bob Ehren
Securian
Financial Group
Mike Fanning
MassMutual
Doug French
Ernst & Young
Steve Callahan
Robert E. Nolan
Company
I expect
regulatory and
market
developments
that result
in insurance
products
taking a more
prominent role
in qualified
retirement
accounts.
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4. www.loma.org 13
What will five years bring to the industry?
Regulatory: The continued influence of the Federal
Insurance Office (FIO) combined with the increasing
similarities across states will result in a gradual convergence
of regulations around widely accepted standards.
Although still state regulated in 2018, regulatory trends
will tend to standardize around market conduct, suitability,
transparency, disclosure, compensation, guarantees and
licensing issues. Look to the indexed product market to gain
intensified attention resulting in either a revisiting of the
failed151Aregulationorasimilarchangeinlicensingrequire-
ments. There remain some surprises to come for consumers
who have purchased these products that may create a similar
flashpoint as was created with variable products when the
market fell (and these did require special licensing).
Products: There will have to be both a simplification and
a modularization of products to meet the changing market
demands. The variable products have proven to be very
specialized targeting a niche market, and will
likely continue in that role. A derivative of
indexed universal life (UL) that includes a
“fixed return” option while allowing other
options with structured market participation
willbeoneoftheprimarysellers.Itwillrequire
more competitive pricing and transparency
around fund management fees, but if the fixed
return option is done right, it may take over
part of the traditional whole life market.
Consumers have become much more sensitive
to self-directed investment management and
market participation than in the past, which
will drive increased popularity around low-
cost options that incorporate limited risk
market participation. Consider it like the
mutual fund industry’s evolution. Term will
continue to serve a key segment of the market
as well. In both cases, specialty plug-on rid-
ers will include long term care, accelerated
death benefit, critical illness and income conversions as well
as the typical spouse, child and accidental death benefit.
Secondary guarantees will have had to deal with AG38’s
reserve pricing impact and are likely to be more expensive
and less popular. In fact, many companies have already
either started raising rates on their guaranteed universal life
line of products, like Aviva and Nationwide, or are pulling
the products off the market, like Protective Life and Penn
Mutual. The shift to fixed indexed annuities will parallel
the shift in life. Single premium immediate annuities will
be enhanced with supplemental coverage and riders so that
they will be more appealing to the retiring Baby Boomers.
Distribution: Slow transformations will be occurring
on the distribution side of the insurance industry as the
channels start to blend. Look for increased focus on fee
based advisors, commission based specialists, worksite
agents, and telesales teams that support web applications.
The difference between independent and career will con-
tinue to dissolve as labor laws continue to put
pressure on the distinctions and as the agents’
need for income drives how they shape their
agency. In addition, given that the average
insurance agent is 56 and in 15 years more
than half of those selling today will be
retired, there is a need both to accelerate
talent recruitment, increase sales through
direct channels, reinvigorate the worksite
channel, and integrate life and annuity sales
with other distribution outlets like banks
and property casualty agents. The other
distribution shift will be towards a greater
“mixed media” sale that incorporates
an online presence for informational
purposes and initial contacts, the use of
web conferencing for interviews and ques-
tion/answer sessions, fewer in person
meetings but they will still exist, and team
based selling.
Chuck Johnston
Celent
Kenny Massey
Modern Woodmen
of America
Joe Monk
State Farm
Dave Simbro
Northwestern
Mutual
Deanna Strable
Principal Financial
Karen Monks
Celent
Slow
transformations
will be
occurring
on the
distribution
side of the
insurance
industry as
the channels
start to blend.
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5. 14 March 2013 RESOURCE14 March 2013 RESOURCE
Service: As competitive
differentiation continues to
be provided via the service
channel, companies will
continue to invest in enhanc-
ing their service methods
and staff. Some of the shifts
will include: broader hours
of coverage moving towards
24/7 for larger companies;
multi-mode communications
centers incorporating email,
fax, chat, web conference,
collaboration and calls; mul-
tilingual service staff and
materials; web portals for
insureds and policyholders
that include real-time ability
to handle transactions; and
single points of contact for
multi-product companies. The communications centers will
shift towards virtual, split shift staffing creating geographi-
cally dispersed call teams managed virtually. A single view
of the customer within the company will be used for business
intelligenceandbytheserviceteams.Therewillbeautomated
event and time triggered customizable contact points. Train-
ing of communications staff will be continuous and treated
as critically important.
Technology: Sales and service “pad” computers will be
commonplace and will incorporate apps for managing client
bases,enactingpolicytransactions,takingpayments,modeling
policies, field underwriting, taking an app, and “just-in-time”
training of the agent or communications staff. A consolida-
tion of select commodity services will be underway, offering
lower cost cloud-based solutions to carriers. For those still
converting legacy systems, there will be increased appeal to
outsourcing. Predictive analytics will permeate almost all of
the carrier operation, from discrete underwriting assessment
based on external as well as internal characteristic tags, to
agent placement and training, to product design and pricing,
to business review and problem escalation. Social media
will be commonplace and simply replace a portion of the
advertising, education, communication and service budgets
as the social platforms are used to simplify doing business
with carriers. Social intelligence—that is, information mined
from the various social platforms—will be a common source
ofunderwritingandclaimsinformationusingvendorsolutions.
Electronic sales and service will be in the refinement stage,
allowing apps to be taken, paramedicals scheduled, inquiries
made, and changes transacted all via multimedia devices.
Being in person will be reserved for the critical milestone
contact points like the close.
The time will fly, and 2018 will be here before it can be
imagined. Change is gradual but will be transformational as
well. The industry is faced with absorbing a good number of
majorstructuralshiftsoccurringfromproducttodistributorto
consumer,allenhancedbyaconstantflowofnewtechnologies.
For the carriers focused on growth and ready to take managed
risks, there could never be a more inspiring time. For those
morecomfortableintheircurrentmodeofoperation,remember
one of Dr. Deming’s famous sayings: “It is not necessary to
change. Survival is not mandatory.”
DINSHAW: Expect an increase in combination products—a
focus on meeting consumer needs, which will lead to less
emphasis on whether a product is able to be categorized as
only life insurance, or as an annuity, or as a long-term care
policy, and so forth.
EHREN: It is always difficult to predict too far out in the future,
as the economy and regulatory change can alter any plans,
no matter how well thought through. What I see emerging is
the combination of technology and the massive need of the
middle market for life insurance. The industry will find a
way to meet that need tremendously better than we do today.
FANNING: In some ways, I see what people fundamentally
value most in this industry remaining the same. The reasons
people go to an agent to buy insurance are the same as they
were a hundred years ago: to protect the ones they love.
However, as we all know,
the basis for this business is
relationships. Technology and
social media are prompting
a whole new generation of
employees and customers to
make purchasing decisions
in non-traditional ways. And
when you think about the vari-
ousmarketsthatnowcomprise
the broader insurance buying
population—multicultural,
women and Millennials, not
to mention the aging popula-
tion—the industry will need
to reach multiple audiences
through multiple channels and
possibly through products or
services that may not currently
exist. This is where companies
will need to be innovative.
Everyone
agrees
the lower
interest
rate
environment
will
continue
to pressure
each of us.
14 March 2013 RESOURCE
The
financial
health of the
U.S. life
industry as a
whole is
generally
good, which
positions
us well for
the future.
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6. 16 March 2013 RESOURCE16 March 2013 RESOURCE
Harnessing big data will be critical to addressing this
dynamic, as the insurance and financial services industries
probably have more customer data than any other industry.
Arming our employees and
agents with the right infor-
mation will enable us to find
new customers in targeted
segments, develop ways to
reach them, and ultimately
up-sell, cross-sell, and make
better risk decisions. That
willdrivetoplineandbottom
linegrowth,andmostimpor-
tantly,helpusmaintainmore
meaningful relationships
with our customers.
FRENCH: In five years from
now, the demographic shift
will be a central force in
the U.S. market. The 55+
and the under-35 age cat-
egories will be the fast-
est growing segments over the next decade. The 55+
group will be focused on accumulating assets and the
orderly liquidation of said assets over the course of their
retirement, while individuals under 35 will want simple
protection products and a digital distribution and advice
model. They will not want face-to-face sales and complicated
products. For 55+, opportunities will exist for retirement
income and wealth transfer; for under 35, it will be a more
transparent platform and consumer-friendly transactions.
JOHNSTON/MONKS:Thelifeinsuranceindustrywillshifteven
furthertowardaproductmanufacturing/non-owneddistribution
model with that distribution becoming more fragmented than
ever. Between on-line (and brick and mortar) retail aggrega-
tors incorporating insurance products into their product lines,
the broadening of employee benefits to include more non-
insurance products which are not overly regulated and
increased push of annuities into broad financial planning
offerings, insurers must align their business and technology
to work with multiple distribution business models, focus on
wholesaler and consumer media models to drive market share
and prepare to answer to regulators over market conduct and
product usage/funding requirements through much greater
use of big data opportunities. Celent believes that this trans-
formation will take more than five years, however. By 2017,
it will become clear that leading insurers will adopt these
models as part of a longer term transition strategy.
The best
opportunities
exist for
companies
that start
by solving
problems
rather than
leading with
products.
MASSEY: Unless the Federal Reserve’s policies reverse,
our industry will struggle to manage a profit. Everyone agrees
the lower interest rate environment will continue to pressure
each of us. My biggest concern: Since the Fed has intention-
ally worked to decrease rates, my fear is that they will simply
walk away from a hands-on approach and allow interest
rates to rapidly increase too fast versus managing the rates
back to a true market valued level.
MONK: As I think about the future, there is certainly a lot
to be excited about. First, customers will continue to need
help managing risk, recovering from the unexpected and
realizing their dreams. I can’t think of an industry better
positioned to do just that. People need our products and
services, especially as employer and government entities
have less responsibility for long-term financial planning
options and individuals take more ownership of their
financial future. Second, the financial health of the U.S. life
industry as a whole is generally good, which positions us well
for the future. And finally, our industry is of vital importance
to the economy and to individuals’ financial well-being.
According to the American Council of Life Insurers (ACLI),
life insurers pay out $1.5 billion every day through payments
from life insurance, annuities, long-term care insurance,
disability income insurance, and deposit funds used for
retirement.SocialSecuritypays$1.9billionperdayinbenefits
to U.S. households. That makes a statement and will well
into the future.
SIMBRO: Five years from now I would expect to see
fewer companies in the marketplace. Industry consolida-
tion will result in fewer companies, which means fewer
product options.
We may also see more regulation of our industry,
particularly at the federal level. Fewer companies and
greater regulation can lead to a loss in consumer trust.
Consumers are already concerned about a company being
in existence at time of claim. And they may perceive the
greater regulation, particularly at the federal level, as a sign
of industry weakness. It’s easy to lose consumer confidence
and very hard to gain it back.
STRABLE: Our industry must be innovative in how we
think about and present our products and services. This
includes not just how we commu-
nicate, but what we communicate.
The best opportunities exist for com-
panies that start by solving problems
rather than leading with products,
especially for those in under-served
markets. With consumer confidence
waning, we need to make insurance
solutions current and relevant. w
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