Though 2013 saw some measure of improvement in the operating fundamentals for life and annuities insurers, advances need to be made in several areas, including getting up to date with digital technologies to reach more customers and make better capital investments. Those were some of the points made in E&Y’s “2014 U.S. Life Insurance-Annuity Outlook” white paper.
Improve capital efficiency
Though life insurers have strengthened their capital structures post-financial crisis, the investment environment in 2014 is expected to be just as challenging. Still-low rates continue to drag down portfolio yields as maturing investments roll over, and if there were to be a sharp spike in rates, consumers may decide to lapse their existing insurance products and move to other investment options. Meanwhile, insurers are under increased pressure to balance risk and reward in their asset allocation strategies.
One method E&Y advocates for optimizing capital is through the use of captives. Yet the consulting group acknowledges these arrangements have come under heightened regulatory scrutiny of late. Therefore, utilizing captives “requires a careful balancing act with other risk capital approaches, such as diversifying product mix or using third-party reinsurance.” Further, better transparency regarding how capital is deployed will help in gaining the confidence of internal and external stakeholders.
Impacting the capital scaffolding of insurers are new regulations and accounting rules on the horizon. The E&Y report points to the NAIC’s Own Risk and Solvency Assessment (ORSA) rule that is slated for testing and rollout during 2014, and newly revised accounting principles released by Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB).
Time to go digital
To transform from a “product-centric” industry to a “consumer centric” business, E&Y recommends that insurers step up their digital and mobile technology game. Though the industry admits it must make better progress in the digital arena, many are held back by legacy systems and what it terms “cultural constraints.” In one E&Y survey, although 40 percent of respondents said there is support from senior management, 68 percent of life/annuity insurers indicated they spend less than 10 percent of their business and IT development on digital initiatives.
Though customers still prefer personal interaction, insurers must adapt their business to mobile technology, which is how an increasing number of people are accessing the Internet. To further improve customer service, insurers are advised to invest in automating the application process and integrating insurer/distributor back offices.
Likewise, the E&Y report advocates for upgrading data and information systems that would improve analytics, establish universal standards and policies under a common architecture; and protect data security against a cyber attack.
E&Y says that while many insurers have made strides in these areas, the approach is “fragmented and incomplete.” But those that do upgrade their data management systems will gain an advantage over competitors.
Streamline operations through shared services
Another way insurers can become more efficient is by implementing shared services centers. These centers combine underwriting, policy administration, claims management and other core business functions across a company’s product portfolio in one operational unit. This model, E&Y contends, is an attractive one for life insurance. Outsource and co-sourcing are other viable alternatives as well to improve efficiency.