Insurers Must Adapt Fast To Survive Changing Market

There are no widespread plans for producer channel disintermediation.

Profit will be a priority, possibly at the expense of customers.

Outsourcing will become more prevalent as companies strive for agility.

Information technology people are on notice to deliver measurable business results. Investments in technology will be more judicious and will be integrated with enterprise strategy.

The Internet and e-business will figure prominently in the future, but ultimately they just represent an additional channel and, in most cases, a means to enhance other channels.

Deregulation is on everyones mind, and federal regulation of insurance is strongly opposed.

Mergers and acquisitions, while clearly important, are not top-of-mind for most respondents.

Most companies will focus on U.S. markets, except a few large commercial lines players who will continue to pursue globalization.

Expect a flurry of new products, combinations of products, flexibility of offerings, and new ways of insuring risk.

Over 4,000 insurance executives, including CEOs, CFOs and COOs were asked how they believe successful p-c companies will address five key areas in the future: Industry Structure, Strategic Alignment, Partnering and Reach, Financial Attributes, and Products and Services. A total of 217 responded. (The breakdown of survey responses by size of company is shown in the table with this story.)

Among the highlights:

Industry Structure:

Over the next three-to-five years, we will see considerable change in existing organizational structures. The nature of that change is by no means uniform in the eyes of our respondents.

Some respondents will adhere to the status quo. Others will move to become more nimble, deeming "flexibility and quick response to policyholder-driven needs for special products and services" to be paramount. Some will focus on "local market differences." These are only a few of the possible changes.

The majority opinion of respondents is that the independent producer channel will continue to be dominant with the insured customer.

This same majority believes that the Internet and e-commerce will fundamentally change how carriers serve customers over the next three-to-five years. The Internet will not be an end unto itself. Rather, it will be a supporting piece of integrated strategies for serving customers and producers.

Industry consolidation will continue, but not at a pace that will alter the basic landscape. Less than one-third agreed that half of all p-c companies will disappear over the next five years through acquisition or merger.

Most respondents agree that the successful p-c company will be one of several sectors of an integrated financial services enterprise.

It appears that alliances and partnerships with non-insurance entities will become a viable alternative among the smaller players.

Demutualization will not be a big item over the next three-to-five years. Personal lines respondents and smaller carriers were especially adamant. However, differences in opinion begin to show as the scale of premium size increases. Respondents from the largest companies see demutualization as being very plausible.

The tide of deregulation is not over. More than one-half of respondents believe that deregulation will continue to have major effects on the industry. This is reflected in the stated belief that the Internet–or more basically, e-commerce–will change the way business is conducted.

Personal lines carriers led the voices against federal regulation replacing the current state-oriented regulation. About 60 percent of all respondents disagree that federal regulation would be good for the industry. Smaller carriers were even more averse to federal regulation, although commercial lines carriers seemed less adamant about this subject.

Also clear is that successful companies will focus more than ever on the customer and differentiate themselves with services and products that are appropriately priced. This will be due to higher-quality and timelier customer information.

To support such pricing, companies will devote unprecedented attention to ensuring that every dollar of cost brings value to the customer. The battle for customers will still be fought state by state.

Strategic Alignment:

Based on the results of the survey, successful companies must invest in and integrate new technology.

Over 75 percent believe that legacy systems will need to be replaced to cost-effectively deploy new technologies.

While commercial lines respondents feel more strongly than personal lines respondents, a similar proportion agrees that it is imperative to have a fully integrated and aligned strategic plan for digital and non-digital processes.

The majority agree that successful companies must invest in new technologies to remain competitive.

Roughly 85 percent of all respondents concur that the successful organization has a vision and goal for where it will be in three-to-five years. The daunting level of investment required, the extended duration of implementation, the lengthy payback period, and the necessary long-term commitment to the customer hint at extending some form of planning even farther into the future.

What registered most clearly is that the industry as a whole, both personal and commercial, needs to master the dynamics of longer planning horizons.

To plan adequately, executives who responded see a very distinct need to invest in technology–not as a cure, but as a business process enabler. Investments in technology will be tempered with a long-range view, positioning organizations to flex quickly for market shifts, and to maintain stability and continuity for the long term.

Aligning corporate and customer strategies with people, process and technology is no longer a discretionary means of differentiation in the marketplace. It is the ante required to be in the game.

Thus, technology investments must be consistent with enterprise strategies. In the future, respondents predict that truly integrated, enterprise-wide technologies will enable the fast-moving organizations of tomorrow.

Respondents held very different views regarding whether non-traditional competitors will be a threat. With the majority view that deregulation will still have a substantial effect over the next five years, it is understandable that the threat from non-traditional competitors is not well defined.

Despite the passage of the federal Gramm-Leach-Bliley Financial Services Modernization Act, much remains to be seen about the extent to which banks and others will affect the competitive landscape. There will be a period of time in which financial organizations will test the waters to see if the path is in acquisition or in partnering alliances.

Partnering and Reach:

The general view is that domestic U.S. companies will succeed without global partnerships. This view seems to be more suited to personal lines carriers than commercial carriers.

Only about one-third of the respondents agreed that successful companies will need to partner or merge with banks or investment firms over the next three-to-five years.

At the same time, a higher proportion–over 40 percent–agreed that foreign ownership of U.S. companies would increase dramatically over that same time period.

That said, there is a significant lack of opinion among surveyed executives about this.

Multiple marketing channels are also part of the future. Nearly 75 percent of all commercial lines respondents and over 60 percent of personal lines respondents agree that successful companies must create multiple marketing channels to compete effectively.

Multiple marketing channels means consciously putting existing intermediaries at risk.

Similarly, 80 percent of commercial lines respondents and almost 70 percent of personal lines respondents agreed that areas not within their core competencies should be outsourced.

Outsourcing decisions, however, must be driven by a full understanding of the relevant overall processes.

Based on the survey results, it is also clear that winning companies will successfully translate people, process and technology into an integrated system that maximizes their independent reach, and facilitates seamless alliances with well-suited partners.

Financial Attributes:

Industry executives expect better financial results. Executives of successful companies expect more stable earnings, in good times as well as bad, and will consistently manage to a risk-adjusted return on capital.

Underwriting and overhead expense ratios should, according to the survey, decline significantly. Yet, while executives state that they want–and expect–to see underwriting expense dramatically decline over the next three to five years, they are targeting an expense ratio that is higher than that of the industry for most of the 1990s.

Not surprisingly, executives from larger companies believe that success requires size, while those from smaller companies hold a different viewpoint.

As shown in the two bar graphs accompanying this article, commercial lines and personal lines respondents differed somewhat in where they believe ratios should be over the next three to five years.

This same disparity appeared regarding loss adjusting expense ratios. Fully 87 percent of commercial lines respondents mentioned LAE ratios of 12 percent or less versus 79 percent of personal lines respondents.

This is not altogether good news for insurance consumers. If carriers do not focus on reducing ratios from current levels, the consumer may be the one who funds carriers' desires to return to profitability. Furthermore, the industry may be doomed to continually repeat the pricing cycles of the past.

Products and Services:

As evidenced in other sections of the survey, p-c executives overwhelmingly feel that technology and automation will continue to be a key part of the future.

There was strong unity that the p-c industry should have fully integrated and automated front- and back-office systems. This would include direct data, claims and service interchange with both producers and customers.

Nearly 75 percent of the respondents agree that successful companies must automate their entire value chain. When it comes to claims, the vast majority agree that winners will enable policyholders to file claims and interact with claims staff online.

Two-thirds of respondents are of the opinion that state insurance departments hinder the industrys ability to respond quickly with new products.

Over 50 percent of respondents overall (and two-thirds of commercial lines respondents) believe that e-business will force the industry to develop, in the next three years, as-yet unimagined new products.

There is similar agreement that the Internet will worsen adverse selection in price-sensitive lines. Yet there is a sense that the Internet will not destabilize traditional channel profitability.

State insurance departments will need to recognize and anticipate the changes that are now taking place in the marketplace. Speed is becoming paramount, on the part of both the states and the carriers.

Companies will need to be able to quickly aggregate information, assess its impact, and then develop products with rates adequate to cover any and all exposures to meet the target of underwriting profit.

To paraphrase a management adage, when the rate of change outside your organization is faster than inside your organization, you are falling dangerously behind.

The rich data from this survey will continue to be analyzed and certainly even more options for success than those listed in the sidebar to this article will emerge.

It is clear from the survey results that the rate of change in the industry is accelerating. Successful companies will have to become more flexible, expense conscious, and open to new technologies and ways of doing business to succeed.

(For more information on this study, call 877-RENOLAN or visit www.renolan.com.)

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, July 6, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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