Carriers need to remain nimble and ready to innovate and adjust in a persistently difficult economic environment that is struggling slowly to regain its footing.
Deloitte’s “2013 Life Insurance and Annuity Industry Outlook: Considering new directions in a recovering economy,“ offers senior insurance executives 10 issues that they should contemplate as they navigate through 2013.
There are, however, macroeconomic issues that, although out of many carriers’ direct control, have a direct impact. The slow growth of the economy has rendered many consumers with little discretionary spending. Convincing them that this money would serve them best if it were invested into a life insurance policy or an annuity is exceedingly difficult even for sales-savvy agents.
The global economy, like the U.S. economy, is also mired in lethargy. The Greek and Spanish sovereign debt crisis is scaring the markets and reverberations are being felt far outside of the eurozone. Growth rates in China are also slowing down trade which hinders progress in the U.S. and global economy.
The authors of the report caution that many of the 10 issues are not new, however, they remain both relevant and essential to operating in the current environment.
The Deloitte research team broke the 10 important issues into four sub categories: financial, marketing, management and regulatory.
The first important issue in the financial category is: Picking your spots: Making hard decisions about where to compete. Deloitte feels that insurers need to put thought into reconfiguring their product mix, policy features and distribution options. Group life may be a potential opportunity for carriers as employers slowly but steadily expand and pension obligations continue to be transferred to insurers as part of a large group annuity contract. Insurers should look at the oft-documented and underinsured middle market as a viable target. Developing markets are another opportunity. However, carriers should perform due diligence when examining both cultural and regulatory hurdles. Carriers should also examine states within the country that are recovering quicker than average and focus their attention there.
The second issue under the financial category is: Mergers and acquisitions could change the insurance landscape. Due to the low interest rate environment for couples with new capital requirements, some life insurers may utilize their coveted capital and invest it in expanding business lines that drive growth. Due to pressures from a protracted low interest rate environment which limits investment income, thus presenting a challenge for insurers to fulfill their responsibilities as far as policy guarantees, carriers may also look to shed business segments that do not make enough money. As far as annuities are concerned, carriers may want to contemplate buying out unprofitable legacy contracts.
The third issue in the financial category is: Low yields prompt search for more lucrative investment options. The Federal Reserve has unequivocally stated that interest rates are going to remain historically low through the middle of 2015. Therefore, carriers must begin to think about ways to compensate for their diminished investment income. Carriers will most likely focus on assets that generate higher absolute returns, leading questions as to whether marginally improved spreads justify increases in portfolio risks and a potential for higher capital requirements. Deloitte encourages small employers to think about outsourcing alternative investment management to third-party asset managers whose expertise surpasses their own. De-risking should continue including the decreasing guaranteed benefit products unless carriers have sufficient investment income to fulfill their responsibilities. Deloitte feels that sophisticated portfolio management may become commonplace.
In the marketing realm the first issue mentioned in the report is: Special delivery: Expanding distribution options. Gaps in the distribution models for life and annuity companies are often discussed, yet, concerns linger. The underinsured middle market is a prime example. Carriers may need to rethink the incentives that they give agents to sell to this demographic as many avoid doing so due to low commissions. Direct-to-consumer marketing may be one way that carriers can reach this market. Carriers should also reassess their relationship with intermediaries in order to maximize productivity. Advanced analytics should begin to play a more important role as carriers look at what distribution methods drive the most growth.
The second issue under the marketing category is: Expanding the net: Bringing new segments into the fold. Carriers can no longer operate under the “business as usual model,” and the need to branch out from the overcrowded mass affluent market and look to underdeveloped new territory. In order to do so, carriers should look at their distribution networks and try and think of lower cost vehicles. Deloitte expects insurers to work with retail credit centers and health exchanges to ease the burden of doing business with the middle market. Innovation must happen, or insurers will not be able to survive the ‘new normal.’
The third issue under the marketing category is: Cracking the code on the retirement income market. U.S. consumers do not feel that they are adequately prepared for retirement with three out of 10 saying they feel secure. This presents a huge opportunity. Although consumers said that there are trust issues muddying the waters of their relationship with financial professionals, this is something that can be overcome easily with proper conduct. Educational material should be disseminated and insurers should then try and capitalize on this demographic.
The fourth issue in the marketing realm is: Health care reform may shake up life distribution. Life and annuity carriers need to closely watch the new manner in which health insurance is marketed and sold via exchanges mandated by the Patient Protection and Affordable Care Act. There are opportunities to be had as struggling carriers may be able to lower their distribution costs. Deloitte suggests that life and annuity carriers may also want to consider partnering with health insurers to market and sell their products through private exchanges.
Management or operations concerns were another category in Deloitte’s report. The first issue under this realm is: Solving the talent paradox: Switching focus to internal development. It is not breaking news that many insurers are having a difficult time filling critical positions. What is even more troubling is that this is going on during a time with record unemployment. The ‘graying of the insurance workforce’ coupled with lack of education about prospective opportunities at universities and graduate schools had made this an acute issue. Carriers need to take a deep look at their current workforce and examine ways to make this career relevant and important to younger people.
The second issue in the management category is: Tech infrastructure requires regular upgrades. Insurers need to begin to put more resources into technological advancements especially when it comes to predictive modeling and advanced analytics.
The issue under the final category of regulatory concerns is: Regulatory reform: Time to look ahead again. Insurers can be begin to crystallize their responsibilities as far as Dodd-Frank is concerned due to the re-election of President Obama. The implementation of the Risk Management and Own Risk Solvency Assessment Model Act, put forth by the NAIC will be a challenge that needs to be addressed. And, large multinational carriers will need to pay attention to various solvency regimes.