While managing short-term business needs is a critical role for insurer CIOs, another important part of the job is keeping an eye on the horizon to help insurers prepare for change. We recently contacted 70 insurer CIOs to ask them to look five years out and consider the biggest potential disruptors to their businesses. We also asked what steps they were taking today to prepare.
Most of the responses fell into into five major categories: regulatory changes, shifting market needs and expectations, the financial environment, increased catastrophes, and the emergence of big data and the increased importance of analytics.
As Yogi Berra famously said, “It’s hard to make predictions, especially about the future.” But for insurers, a highly probable future has more regulations, more demanding consumers, more challenging investment markets, more catastrophe losses, and much more data to be consumed, managed, and analyzed effectively.
For more, see our new report here: http://www.novarica.com/top_5_disruptors/
Mary Meeker of KPCB put out her annual “State of the Internet” presentation yesterday. If you haven’t already checked it out, it’s online here.
The most compelling section for me starts on slide 29, “Re-Imagination of Nearly Everything – Powered by New Devices + Connectivity + UI + Beauty – Where we are now…” Most of the slides in this section focus on media & content businesses, personal content management (photos, notes, scrapbooking), and similar areas that have been transformed by the ubiquity of the internet and mobile connectivity, but there are also slides on business collaboration, payments, and other areas.
For example, slide 68 is the re-imagining of personal borrowing and lending, comparing the bureaucratic bank lending process to the streamlined and flexible technology-enabled peer-to-peer lending process.
While Ms. Meeker doesn’t offer a slide on insurance, many of the slides in the Re-Imagining section spoke to coming changes in the insurance market, and resonated (for me) with my recent post on simplifying the customer experience and preparing to manage new levels of complexity in data and operations.
Slide 85 is titled “Magnitude of Upcoming Change Will be Stunning – We are Still in Spring Training.” While the focus is on info tech and internet businesses, many of the points Meeker raises here will have a game-changing impact for insurers, including
- “Fearless and Connected Consumers”
- “Unprecedented combo of Focus on Technology AND Design,”
- “Beautiful/Relevant/Personalized Content for Consumers”
Insurers need to be actively planning for how they will adapt to this rapidly changing world.
The Hartford Insurance just announced that they are exiting the Annuity marketplace on April 27th so that they can focus on their P&C business, Group Benefits, and Mutual Funds. The once giant in the Annuity Industry in the early 2000’s is now another casualty of the volatile equity markets of the past few years, low interest rate environment, and risks associated with expensive products and rich living benefits. Press releases by The Hartford indicate a desire for reduced sensitivity to the capital markets, lower cost of capital, and increased financial flexibility.
This is just another indication that the variable annuity marketplace continues to consolidate with a number of changes in players during the past few years. The consolidation of players has resulted in the top 5 insurance companies controlling roughly half of the market. Consider just a few examples, with potentially more to come:
- Genworth announced an exit from the variable marketplace in 2011
- Sun Life Financial exited the marketplace in early 2012
- John Hancock announced that it restricted its annuity distribution to a limited number of broker dealers
- ING stopped sales of annuities in 2009, and then took a charge of $1.5B in 2011 due to lower interest rates and stock market
- Metlife, Prudential, and Jackson National, all in a relatively healthy position, revamped their product suite and captured significant market share with sound products and effective risk management strategies
While all of this consolidation continues, CIOs should be preparing. For CIOs in businesses that intend to remain active in the annuity marketplace, they should look at how they can implement solutions to improve in the areas of risk management, hedging, and with their actuarial systems. For CIOs in businesses that are exiting the marketplace, contemplating an exit, or cutting back on annuity exposure there may be an opportunity to outsource their closed blocks of business to lower operational expenses and allow the business to focus on their core business strategy.
This should be a very interesting year in the annuity marketplace !
One of my Novantas colleagues will be previewing some of Novarica’s upcoming research today at the 16th Annual Small Business Banking Conference that shows more banks will be increasing IT spend in small business than in any other business area for 2012. (Read full press release here)
With small business consistently cited as a potential source of job growth, it’s exciting to see banks gearing up to support this critical sector with new technology capabilities. While much of the investment will be around channels (including online, mobile, and branch), we’re also seeing investments planned in analytics and straight-through processing, which should help banks expand their ability to loan to small businesses.
This research was conducted among CIO members of the Novarica Banking Technology Research Council. Full results will be published next week.
At the close of my 8th annual appearance on the ACORD/LOMA analyst panel on Monday, which was titled “Innovate or Die,” the very last question from the floor asked me and my colleagues from other leading analyst firms how we had innovated our businesses. It was a good question and a somewhat unexpected one. But I did have an answer:
We got rid of the salesmen.
In the expertise and advice business, the people are the product. So we give our clients and prospects direct access to the people. No service center, no salesmen. In addition, we’re the only research/advisory firm I know of that guarantees staff continuity in our contracts — if their favorite expert leaves the firm, we’ll give our clients the option to cancel their service.
Our innovation in the analyst firm business model is partly driven by the changes in information technology. In an age of information overload, salesmen are no longer the unique informational resource they used to be. And although valuable information still is often delivered in written form, written information is no longer as scarce as it was. What is still scarce, and valuable to our clients, is direct personal access to experts who can contextualize specialized information to their specific needs.
Putting this at the center of our business model is our innovation.
According to an article in today’s WSJ
, the top 4 annuities writers now control 48% of the marketplace. This is a huge sea-change in this marketplace.
The 2008 crash basically put a lot of the formerly high-flying companies out of the business. These companies had unrealistic perspectives on long-term market climate, and the rich benefits they were offering were almost speculative. The current leaders are those that had great hedging programs or really realistic pricing assumptions in 2008.
These firms are coming from a strong position and dominating a marketplace of badly weakened competitors. One of the current leaders basically went into a shell in 2008, and now they’ve got the dry powder to jump solidly into the top four.
From IT point of view, the critical capabilities for aspiring market leaders are:
- Ability to rapidly turn product around. Product features and capabilities need to be able to be implemented quickly to take advantage of new opportunities.
- Comprehensive hedging and financial market capabilities. These allow companies to get a product to market quickly. This requires massive existing technology capabilities, for example 1,000-node grids that do stochastic modeling.
- Strong predictive analytics. Especially around marketing and distribution. Companies need to know where their sales are coming from — distribution channels, market segments, geography, in order to exploit this moment in the marketplace.
These three capabilities are going to continue to drive competitive advantage, as the money currently sitting on the sidelines in the variable annuity market looks for a safe way back in. Incidentally, “Money On the Sidelines
” is the title of a new report about the mass-affluent published today by MetLife.
Changes will impact plan participants, sponsors, advisors and product manufacturers, resulting in an industry-wide reshuffling.
Register for Webinar on Feb 17 at 2 pm ET.
January 28, 2010 (New York) – According to a new report from research and advisory firm Novarica (www.novarica.com) , a new development in the 401(k) space may put trillions of dollars into play for advisors and plan manufacturers, while also exposing legal and fiduciary liability for plan sponsors. Due to the new BrightScope.com web site and database, the lack of transparency that has always pervaded the 401(k) industry is rapidly becoming a relic of the past.
Americans are relying more and more on their 401(k) plans for funding their future retirements. Bad or expensive plans are costing American workers too much in terms of delayed retirements and lower plan balances. BrightScope has developed a database and rating engine to score and benchmark plans, and provides detailed data that explicitly tells employees, sponsors, advisors and plan manufacturers just where their current plans fall short.
- According to the report, the roll out of BrightScope will result in:
- Sponsors moving to purchase more cost-effective and attractive plans to meet their fiduciary duty to plan participants.
- Participants gaining better investment and retirement outcomes from their 401(k) plans as they pressure sponsors to provide benefits and utilize lower-cost plans similar to others among their peer group firms.
- Advisors will be able to sell more-competitively based on the transparency of plan data showing the current costs of both the overall plan and the underlying investment choices.
- Manufacturers will be forced to develop lower-cost plans to reflect a more transparent and competitive marketplace. Due to the BrightScope solution, plan and investment option costs are projected to rapidly decline in the 401(k) industry.
Novarica believes that the BrightScope ratings will eventually have a similar impact to the Morningstar ratings on mutual funds, identifying future winners and losers in the 401(k) industry.
“America is looking to defined contribution plans, such as 401(k)s, to replace the defined benefit pension plans, and to take the stress off Social Security,” states Robert J. Ellis, Principal and head of Wealth Management at Novarica, and lead author of the report. “The problem was that, for most of the industry participants, the lack of transparency meant that plans were more expensive than they needed to be. Especially bloated were the fees charged on the underlying investments. BrightScope.com, combined with new Federal regulations, will change all that for the betterment of American workers’ retirement outlooks, but current providers will need to adjust to a radically altered marketplace.”
The 14-page report is available from Novarica at http://www.novarica.com/report_brightscope_401k.shtml . Mr. Ellis will also be hosting a webinar discussing the report on February 17 at 2 PM Eastern. Interested attendees may register online at https://www1.gotomeeting.com/register/760027265 .
Like Matt, I am speaking at and attending the summit, and one thing in particular has struck me: optimism. Not unbridled, 2006-type optimism, but more a sense of purpose, a sense of normal budget growth, and acceptance of the relatively recent responsibility place on IT to help drive growth back into the industry. It has come more in the form of nodding heads as we show the latest trends from our surveys that indicate a rapid thawing of L/H/A IT budgets and their renewed interest in core systems, or in the enthusiastic questions about core systems replacement.
It’s a subtle change, but an encouraging one. As our growing survey data set shows, this change is no fluke–I think 2010 is going to be a big year for insurance IT!
The Labor Department’s Employee Benefits Security Administration has killed a Bush-administration rule that would have allowed mutual fund companies to offer direct one-to-one investment advice to defined contribution (401k, 403b) plan participants. The announcement questioned whether the rule adequately protected the interests of plan participants.
This rule reversal has significance for providers of defined contribution plans who had geared up to provide additional plan participant education in the form of targeted individual financial advice, with the hope that such contacts could increase cross-selling of other investment and insurance products.
It appears that DOL prefers participants not know about how their retirement plan assets fit with other investments rather than being told about investments by firms that (gasp) make money off their current plan.
New video interview at I&T on the impact of the AIG crisis on the US insurance industry.