Revenge of the Mutuals?

Rob McIsaac

An interesting article came out over the weekend that delves into the consolidation that has taken place among publicly traded life insurance companies, and contrasts this trend with the relatively stable number of mutual carriers that are in the market today. We are now the better part of two decades past the period when there was a significant demutualization effort which included notable, name-brand, national carriers. In that period, we have weathered multiple recessions, one of them the worst economic downturn since the 1930s, and emerged into a world that has experienced persistent low interest rates. Taken as a whole, these factors have produced a series of economic outcomes which were outside of the planning corridors that many carriers executed against. As the article suggests, carriers face some very interesting challenges going forward. For those with long tail liabilities such as life and annuity contracts, the conflicts associated with quarterly earnings reports and maximizing shareholder value appear to be particularly daunting.

There is more to this story, however, which may suggest some additional advantages for mutual carriers. Almost without exception, life carriers are grappling with aging technology platforms which may date as far back as the Kennedy administration. The blocks of business on these platforms are themselves old, and may be closed to new business. But because they were at the heart of these businesses over multiple decades they have become, through the magic of cost accounting, blocks of business which absorb significant overhead for carriers. For many companies, these platforms represent a significant drag in terms of being able to implement new products and services effectively. At the same time, however, these platforms, if they are walled off, can become quite stable and relatively inexpensive to operate. This can meaningfully influence both operational and financial outcomes for carriers.

We recently unearthed a 1995 chronicle from MIT which provides a fascinating view of the first 35 years of policy administration utilization in North America. The fact that many of the systems that were deemed to be aging in that 22-year-old report are still being used by carriers should give cause for concern to some!

In any case, as carriers plot their technology strategy for the future, addressing these old systems and blocks of business running on them will become increasingly critical. The investments and planning horizon required to make them successful may be easier for mutually owned companies to execute than it will be for their publicly traded competitors given their respective focus on long- versus short-term results.

Even as market competitive threats loom large, it is not just a technology challenge that many life insurance carriers face. There is an accounting and a reporting issue which carriers would be well advised to consider as they put their strategic plans in place.

Are Young Insurance Agents Too Optimistic About the Future?

Rob McIsaac

A recent survey of younger agents highlighted a generally optimistic view of the future. In addition to reflecting positive sentiments about economic prospects, they also appear to feel good about the security of their positions, given the significant number of current producers that are expected to retire from the labor force. The average age of an agent in the United States is greater than 59 and there are forecasts of up to 25% of the current population of agents planning to retire by the end of 2018.

While there may well be room for optimism for those who properly frame a career in insurance distribution, the likely reality is that carriers will need far fewer agent relationships in the future. Increasing focus on self service capabilities, desires from consumers to be able to have direct interaction with the companies they do business with and greater commoditization will all put pressure on the industry to do things in a more efficient, less labor intensive, fashion. Distribution will hardly be the only function to experience this pressure. More automated underwriting and automated claims adjudication are two other examples.

This also ties to research Novarica recently competed on Millennial consumers. As a generation, Millennials will represent half of the US labor force by 2020. As a group, they have a strong preference for DIY capabilities.

This doesn’t mean that the agent role will become extinct but rather that it will morph and evolve. There are likely to be far fewer, but on average more highly skilled, producers in the future. They will be experts on dealing with complex and difficult situations which don’t lend themselves to a do it yourself model. That could be a very good place for producers to be, albeit with a substantially different business model, than is currently the norm. Carriers will want to be preparing for these changes sooner rather than later, given the speed with which consumer preferences can be influenced by the likes of Google, Amazon, Facebook and Apple.

The New Administration Could Roll Back DOL Fiduciary Standard, But Carriers Shouldn’t Plan on It

Rob McIsaac

One of the many regulatory and policy changes that could come with the new administration in Washington next year is related to the impending implementation of the Department of Labor’s Fiduciary Rule. The DOL mandate anticipates some sweeping changes for the retirement industry, which carriers and distributors alike have been preparing for since early 2016. These changes have a material potential impact on compensation programs, product features and responsibility for ensuring that products are appropriate for a particular clients. Given the sweeping nature of the changes, implementation was never something that carriers anticipated could be done quickly. Although the DOL did adjust the implementation date with their final ruling, an interesting wrinkle is that many distributors were not interested in running a “split year”. In other words, moving the implementation date to April 2017 did not materially impact distributors desire to make the changes on the first of the year. Managing a split year from a distribution perspective would be extremely challenging and could create new and undesirable compliance issues.

What happens next is open to interpretation. Earlier this week, a Wall Street Journal article suggested that the regulation could be rolled back, and insurers and distributors could avoid implementing the changes that are currently in flight. Other articles, including one that appeared in the journal Employee Benefits Advisor, suggested that a change in the rule was actually unlikely. For one thing, the administration will have other, presumably more important, things to do at the beginning of the transition. For another, some elements in the industry may actually favor these new rules which allow for addressing some compensation issues which have been a seen as opportunity areas for sometime now.

Clearly, there are differing opinions on how this will play out in the coming weeks and months. One issue, however, that is crystal clear, is that many carriers anticipate making the changes that their distribution partners requested come the first of the year. Lincoln Financial Group has said they are moving forward with the assumption that the rule will be implemented on schedule, and this week announced a new variable annuity targeted at fee-based advisors. The new year is barely 20 days away during a period that includes multiple major holidays. Carriers that we have spoken to suggest that while the news stories are interesting, they remain committed to delivering on the changes already in flight before the recent election. If things change again they will have more work to do to adjust but the risk of being out of compliance is too great to place a large “bet” on a retention of the status quo. That is a logical place for smart CIO’s and their organizations to be now.

EIS and Guidewire Awarded “AWS Financial Services Competency” as the Migration to the Cloud Picks Up Steam

Rob McIsaac

This week marked a very interesting development involving Amazon and two core systems vendors focused on PAS and adjacent capabilities supporting different lines of business, as both EIS and Guidewire were awarded Amazon’s “AWS Financial Services Competency”. Cloud computing continues to make significant strides in taking on key workloads for carriers, irrespective of size and line-of-business focus. Once approached cautiously because of concerns over things like security, when compared with traditional deployment methods, the cloud provider space has significantly matured in recent years. Today security, which was once considered to be an Achilles’ heel for cloud providers, is now considered to be one of the strengths for top-tier service providers. Many CIO’s now understand that the security that a provider like Amazon, Microsoft or Google (to name three) can deliver is better than what is available via company-owned facilities. To test this, and build organizational comfort and support for cloud-based solutions, carriers increasingly have moved key workloads such as email, HR platforms, CRM solutions and financial systems to cloud offerings. In fact, during recent Special Interest Group sessions (sample summary here) Novarica hosted with carriers from widely different lines of business, one of the comments that insurance CIO’s repeatedly offered was that it is getting increasingly difficult to procure non-cloud-based solution sets from companies like Oracle and Microsoft. The push is on to move ever more complex and mission critical offerings to the cloud.

Up to this point, there have been somewhat limited deployments of PAS suites in this space, such as Liberty Mutual Benefits’ recent and notable decision to move forward with an EIS deployment on Amazon Web Services. Which brings us to this week’s news about EIS and Guidewire. As the press releases noted, this is a differentiating event for these companies which should have carriers and competitor software solution providers taking note. While these two firms represent the start of something new, for properly architected solutions, we expect that this type of certification will be increasingly important. Given the increase desire of carrier CIO’s to leverage cloud-based computing, the certifications can be not only a means of achieving greater confidence in a particular solution’s ability to support their needs, but may also become a key differentiator when weighing alternatives for carrying specific workloads.

We’ve already seen a range of insurance applications, including underwriting workbenches and claims platforms, move to being delivered only as cloud offerings (e.g., ClaimVantage for Life, Disability and Absence claims). Having PAS suites join the mix of options is likely to be welcomed by many CIO’s and their teams as they move forward with key transformation events in their organizations.

Special Interest Group Meeting for Disability Income Carriers

Rob McIsaac

Last week, Novarica hosted a Special Interest Group session focused on Individual Disability Insurance carriers in Boston. These carriers, which frequently operate this business as an adjunct to either bigger individual life or group benefits lines, face some unique challenges (and opportunities) as they plan their go-to-market strategies for the future. The resulting discussions, which leveraged both Novarica research and carrier insights, were informed by the near finalization of budgets for 2017. The session was framed around a discussion which started with a presentation of the “Novarica Nine”. Accessible here, this report highlights the key elements that carriers need to address in organizing their plans for the future. The following key points summarize the day’s conversations:

Innovation is all around us but approaches to execution vary widely. In a business which has been increasingly commoditized, and where the next generation of targeted consumers may have a very different approach for connecting with external sources for gaining insight and recommendations, the concept of innovation is increasingly important. Carriers are approaching this in a variety of ways, from looking to create teams that can focus on specific activities, to hackathons, to purchasing innovation (or the permission to do things that the parent brand won’t allow), to establishing subsidiary operations. One of the challenges carriers face internally is from their own corporate “immune systems” which at some level keeps enterprises safe from wayward adventures, but can also work to kill off any semblance of real innovation. Getting away from the use of traditional business cases and the creation of dedicated R&D budgets can help, but this may not be sufficient to create something really new and different that can challenge basic business model foundations. Some companies, notably Allstate and Penn Mutual, have purchased separate brands to create more operational room and technical acumen. MassMutual has created a brand in Haven Life and located it far from the home office, in an ecosystem of innovation in a rekindled Silicon Alley (NYC). These are creating valuable new perspectives but also some new challenges for carriers to be aware of in execution. We also discussed evolving engagement models, including worksite and voluntary benefit exposure through employers as an increasingly attractive way to connect with younger workforce members who are connected with social media but for which traditional agent relationships may appear to be both disinteresting and uncomfortable. We also explored the value of learning that has come from initiatives such as MML’s creation of the “Society of Grownups” coffee shops in the Boston area. Such initiatives may not generate immediate premium results, but may provide a new window on opportunities to experiment with prospects that would otherwise be out of reach. There was also an interesting segue from innovation into bi-modal operations and the value companies are now finding (e.g., MetLife’s recent agreement with CSC) in approaching legacy technologies in a fundamentally different way than they think about future-state operations. Regardless of how carriers think about innovation, access to talent is an ongoing and nearly universal concern as 2017 plans begin to unfold.

Digital capabilities are key irrespective of how you define “customer”. The discussion related to the definition of “customer” is alive and well in carriers in this line of business, but the recognition is clear that both premium paying “units” and producers both require a significant upgrade in experiences to operate effectively in a broadly digitally-enabled world. The reality is that good experiences have already been defined in retail and banking access points that generally enable Omni-channel access. Carriers need to find ways to both understand this and make the investments needed to remain competitive and viable. Some of the lessons that banks have previously learned, including the power of focus groups and the importance of looking at the company from the “outside in”, need to inform strategies. Some carriers have begun to look at similar approaches with the creation of separate and distinct producer groups that are demographic cohort-based so that carriers can get better traction with Baby Boomers and Millennials concurrently. This leads to a recognition that traditional carrier mindsets around having “one size fits all” solution sets simply won’t work in a future state model. Millennials will represent 50% of the US labor force by 2020 and the intergenerational wealth transfer that will come in the succeeding decades will be significant. Carriers need to prepare for some of this reality now, which will require both experimentation and a willingness to be open to new ideas and concepts. Hunkering down with a bunker mentality on a hope trip — that the past will be returning in the future — appears to be something that carriers increasingly understand will not lead to long term success.

Generational change is upon us, with implications across the value chain. In 2015 the number of Millennials in the US population surpassed the number of Baby Boomers for the first time, a gap that will continue to grow ever wider. In addition, the average age of an Agent in the US now tops 59, and a whole cadre of technical advances have forever changed how relationships are framed and maintained. The implications for this across the carrier value chain are significant. Iconic brands that have a history of stability and success that extend back a century or more may find that those brands don’t have a value proposition that carries the same weight or cachet that they did a generation ago. Millennials gather and evaluate information in fundamentally different ways than their older siblings or parents, and may simply not value (or trust) the same sources of data that once were highly valued. As a recent Novarica study on the cohort illuminated, a variety of new sources that can be access in self-service form, with independent methods of confirmation, have replaced tools and approaches that evolved relatively gradually in preceding decades. This creates some notable challenges for carriers in the market for financial services products. The challenges don’t end there, however, since carriers find themselves in a highly competitive labor market for attracting and retaining the best and brightest talent. This can force added pressure on Human Resources organizations which may now need to be ready to go after top talent in some non-traditional ways (e.g., well prior to graduation via intern and other programs) and structure jobs to be much more accommodating to a working model that has employees creating their own careers as a series of experiences that may span multiple companies in three- to four-year increments rather than through a model that anticipates decades-long commitments locking in either employees or employers. The impact on how benefits are structured, institutional knowledge is managed and training programs are managed will be significant. Carriers discussed some of their own efforts on intern programs and how a new-found relationship with educational institutions can lead carriers to help reframe curricula so that they can more logically tie into the employment opportunities of the future. In some ways, this may reflect a “Back to the Future” moment, reflecting upon how engineering schools were closely aligned with manufacturing / transportation centers in the past. Aligning the consumers of technologists with the institutions that help produce them could be a notable value in the future, and we already see this happening in centers like RTP (NC), Silicon Valley (CA) and Amherst (MA). Ironically, since COBOL and other mainframe related technologies are not going to go away any time soon, finding ways to restack talent pools are also reported to be underway with many carriers. Internal training programs and partnering with both technology suppliers such as community colleges and 4-year universities were discussed at length during the sessions. All of this highlighted yet another aspect of bimodal thinking that will need to be part of a CIO’s portfolio in the foreseeable future. Novarica’s research on Millennials can be accessed here.

The future for cloud computing is bright and sunny. Once again, we heard loudly and clearly that carriers are very interested in cloud-based capabilities for a wide range of future state workloads. While some things have easily migrated there, such as dev and QA environments, it has until recently been a slower progression with full production workloads that carry highly sensitive data. Increasingly, however, top cloud-based providers are demonstrating that they likely have both better security and greater resiliency for DR/BCP plans than many carriers are able to deliver on their own. Many of the carriers in attendance at the SIG have moved or are moving email as a mission-critical app to the cloud, most typically with Microsoft Office 365. Publically announced moves by companies like MetLife, Guardian and Prudential have helped solidify this as a “smart” choice, particularly when carriers begin the process of winding down legacy environments (e.g., Lotus Notes) that come to end-of-life. Human Resources and Financial systems such as Workday are also joining CRM solutions, notably Salesforce, as being valuable capabilities in carrier portfolios. The relatively straightforward and easy upgrades to maintain currency with these applications stand in stark contrast to upgrades with traditional software, which many agree is much more akin to a “conversion” than anything else. The emergence of some mission-critical core apps such as Claims and PAS platforms that are delivered on the platform or hosted via Amazon Web Services were particularly interesting to participant carriers at the SIG. We expect the trend to implementation in this fashion to accelerate in the future as carriers look to make their technology investments more tightly coupled to changes in the business cycle and priorities.

Vended solutions in this space are maturing but successful core implementations require careful planning and execution. There are clearly success stories with the implementation of core systems solutions in the Life and Disability space, related to both individual and group/voluntary benefits. That said, the carriers at the SIG discussed a wide range of issues that need to be addressed before a carrier is able to successfully achieve the goals set out in a large transformational event. Understanding the corporate culture, making sure that the communications issues (both for sending information and receiving feedback) and handling and implementing the right supporting tools (e.g., for program management, testing and QA) while trying to minimize the amount of “On the Job Training” for support tasks were all mentioned as key factors for success. In addition, we discussed the importance of recognizing that, across both business and IT organizations, the probability of the team which starts a journey of core system replacement being the one that finishes the effort and enjoys the after-party being comprised of the same people is actually quite low. In that context, it is critically important that transformation teams and the executives that are responsible for sponsoring/supporting them must anticipate a clear change management process which anticipates onboarding new people at varying points in the future. Planning for these changes at the outset can have a remarkably positive impact as the effort evolves and matures. Organizations which fail to get this right frequently also fail to achieve the goals anticipated in the justifying business case for the transformation event. Another key aspect discussed included the notion that while many organizations are moving their development methodology to some form of Agile, there remain points where the potential for integration of methodologies between carriers and suppliers to fail remains quite high. Carriers need to factor this into their own planning and should avoid assuming that terms of art have actually been defined the same way between strategic partners. Some additional details on factors to consider when ramping up on this type of effort can be found this this executive brief.

Accounting has an important role to play in recognizing the value of technology investments. For many IT organizations, there may not be a full appreciation for the role that accounting can play in the timing of key strategic investments, or how accounting treatments in the future may change in order to accommodate the ever faster cycle times for technology advances, which create shorter useful lives for today’s investments. Many companies continue to employ management accounting systems which are themselves derived from the statutory reporting required by the State Departments of Insurance for evaluating performance and solvency. As a result, the cost accounting approaches used to allocate shared services to participating business units can be rough approximations at best. Determining how some of these allocations are done can be more art than science, with the result being that a determination to optimize a company at the “top of the house” can lead to a very different outcome than when optimizing at the business unit level. For IT organizations engaged in transformational efforts, understanding this may be critical not only for understanding what needs to be done, but also how it should be implemented. For example, understanding the basis for allocations can help to determine if a shared solution can even make sense for a smaller business unit or if, from a financial standpoint, they themselves are better off economically by attempting to execute their own approach. All approaches need, of course, to be considered in light of the desired business outcome. Another issue to be wary of is the period over which assets are depreciated. While long depreciation schedules can be very attractive at the outset by minimizing near term financial impact, they can also force a carrier to use an asset long after the useful life has really been reached (based on evolving technologies) simply because it is too expensive to write off a large impaired asset. As companies consider this carefully, one conclusion they may reach is that it is better to try and minimize capital expenditures for the future in favor of operational ones that don’t risk a large technology “hangover”. Technology investments cannot be made in a vacuum that doesn’t fully recognize how the accounting treatment will recognize them in a specific corporate context.

We particularly appreciate Principal Financial Group’s assistance in framing the agenda and for chairing the session. As we’ve said before, the future is already here … it just isn’t evenly distributed. We are now looking forward to our next set of Special Interest Group meetings as part of our 2017 Novarica Research Council event, which will be held in Providence, RI, on April 25-26. Additional information on the Research Council can be found at

Life in the Cloud is Now a Reality

Rob McIsaac

One of the more rapidly developing issue areas in the portfolio of items facing IT organizations is how and when to best leverage cloud-based services. Many carriers have moved important (but non-production) work loads into cloud based options, including both application development and testing. This has given carriers the opportunity to try the services out on important work, even while grappling with some of the more daunting issue areas related to establishing guidelines for using cloud based resources; the most common issue area CIOs and their teams need to address is security. Of course, for many carriers, as they explore top tier cloud providers (e.g., Amazon, Microsoft, Google, etc.) more deeply, they actually find that the security they offer can exceed what is associated with a carrier-managed environment. Armed with this insight, more carriers are moving mission critical workloads into cloud based offerings for an ever-increasing list of functions including email platforms, HR solutions, financial systems, claims processing and underwriting. At our recent special interest group meeting for Group/Voluntary Benefits carriers we noted the degree to which cloud based solutions were not only gaining traction but were looking increasingly attractive to carriers in this space. That all provides a good backdrop for this week’s story highlighting Liberty Mutual Benefits’ successful implementation of a core systems suite based on Amazon’s AWS offering. We fully expect to see this type of deployment gain greater traction in 2017 for a variety of reasons. We’re a long way from wondering if security issues can be “solved”. In the future, it is not likely that “running a corporate data center effectively” will be one of the IT skill sets that will create competitive differentiation for insurance carriers. Yet another example of the future already being here…but not evenly distributed.

Carrier M&A Continues, as Penn Mutual Recently Acquired Vantis Life

Rob McIsaac

One of the highly valued business assets for many companies is their very brand itself. Some brands can connote luxury, some can convey youthful enthusiasm and others can represent strength and durability. In a highly conservative industry such as insurance, which has historically been focused on making sure that it was possible to deliver on long-term promises, the brand strength conveyed by being in business for a period spanning generations has traditionally been a good thing. During times of transition, however, this can also become something of a liability. For example, as financial power is transferred generationally, the idea that “what worked for my parents won’t necessarily work for me” has the potential to become very real. This can be particularly true if the product and service offering that appeal to one generation are diametrically opposed to what another wants. A brand that tries to be all things to all people runs a real risk of landing in a marketing “no fly zone” where they fail to inspire anyone. Retailers and consumer goods manufacturers have realized this for years, but insurers have largely avoided this.

Until now.

Recognizing that even the most iconic of traditional brands may have trouble gaining traction in new places, MassMutual’s experiment with Haven Life had been broadly discussed. The new brand is able to go to places the parent brand can’t … and can do so without creating an unexpected or undesirable blow-back if an experiment goes sideways. No “New Coke” here!

So the recent merger of Penn Mutual and Vantis is particularly interesting. Penn Mutual acquires an existing brand that is already going direct to consumer. As a division within PM, they can continue to do this under the umbrella of the bigger and strong mutual. Experimentation can take place freely without risk of brand damage and as time goes on some of the more successful ideas can, presumably, make their way more gradually into the parent company offerings.

As Millennials grow in influence and purchasing power it won’t be surprising to see more companies buy or create flanker brands that allow them to new opportunities and different business models concurrently. At one point, GM tried to save an iconic brand by touting it as “not your father’s Oldsmobile”. Of course the trouble was that it wasn’t clear who the brand was targeting but it was pretty clear that it managed to alienate both traditional and new buyers alike. The brand was one of the first to be relegated to history as the industry framed a new path forward. Stay tuned; this promises to be a very interesting ride.

Group Insurance Special Interest Group Session Highlighted Opportunities and Challenges

Rob McIsaac

Recently, Novarica facilitated a Special Interest Group session in Wellesley, MA, focused on the issues, challenges and opportunities facing carriers in the Group and Voluntary Benefits space. Sixteen carrier participants made the trip to join in a session which provided for a wide-ranging discussion that was particularly timely, inasmuch as many carriers are now in the final stages of framing their plans and budgets for 2017. Earlier last week, Novarica published our latest annual survey of IT Budgets and Plans, which can be accessed at; the material featured prominently in some of the discussions that we explored through the course of the day. The session was hosted by Sun Life and we very much appreciate them making both their team and facilities available for the event. Some of the key discussion areas included:

The world is going “digital” and group carriers need to accelerate their efforts to keep up. Across the entire insurance industry, irrespective of line of business, one of the key topic areas is the evolution of digital strategies. Agreeing on what exactly is included in such a “digital” definition remains somewhat elusive, with varying interpretations of the term reflected in Novarica research. Interestingly, however, no one seems to want to discuss “analog” strategies, which would seem to be the natural corollary to digital capabilities, validating the general importance. Carriers focused on the Group / Voluntary benefits space are certainly feeling the pressure.

From the session, it was absolutely clear that Group carriers are aware of the rapidly changing “customer”, which has serious implications for the creation of valid and engaging experiences. Customer has multiple possible definitions for Group insurance. Clearly, plan sponsors are a focal point, and providing solution sets and experience which retain key players in the value chain (e.g., benefits managers and HR departments are key), but similar needs exist for distribution partners and plan members. Leveraging from other lines of business, there was a good discussion regarding the need to think about different tailored experiences for different demographic cohorts as well as the need to consider how “customer” expectations are being influenced by other parts of their lives, including banking and retail engagements. Being out of step with this creates added pressure on carriers that may have historically tried to optimize on “one size fits all” solutions; these approaches, however, risk become “one size fits none” answers. For example, mobile capabilities become increasingly important across the value chain, but as a complement to other tools, rather than as a replacement for other engagement points. A number of carriers noted that they are also considering how Omni-channel capabilities might impact them in the future, which led to a key discussion in this space: effective Omni-channel solutions reflect the ability for a customer to decide when and how they want to move between channels for getting things done, rather than treating them as parallel and non-intersecting runways.

Data management is an increasingly important issue for carriers. One other thing that is very clear from all of this is that data and the ability to turn it into insights that are meaningful and actionable will become increasingly critical in this line of business. That creates challenges for both the ability to extract data from existing legacy environments as well as to attract and retain the talent needed to be able to work with emerging tools and platforms. Most carriers continue to work with legacy solutions that have underlying operational data contained in silos which can be difficult to use for interoperating with other things such as unstructured data. As we explored issues related to data, the notion of governance became increasingly a focal point for the discussion. One key question here was, in effect, who owns the data. Varying approaches were described by different carriers, suggesting that there is not a singular right answer. It was clear, however, that success is dependent on having someone own the data and that investment is made around effective governance which encompasses both defining the data and creating rules of the road for how it is used. The notion that discrepancies in the interpretation of data should somehow be resolved in the CEO’s office was clearly understood to be a “bad idea” which should be avoided at all possible costs. A range of approaches to creating a data governance structure were discussed, which led to a dialogue related to finding the talent that can actually work with new and emerging tools. Several challenges exist here, including the fact that insurance companies may not be seen by graduating students as attractive places to embark on careers. There are also concurrent challenges associated with where carriers are physically located, in terms of being in markets that can attract the right kind of talent. A number of approaches to addressing this were discussed, including internship programs, efforts to engage with local universities to influence curricula and the relocations of key functional areas to places that naturally attract top talent. Examples of companies positioning themselves to be able to tap into talent pools such as Amherst (MA) and Chapel Hill (NC) were also discussed, further reflecting on the need to be flexible and adaptable in a rapidly changing world.

Properly armed with data, part of the next challenge becomes turning that raw material into actionable insights. Some businesses, such as health insurance, have been increasingly aggressive about creating more frequent, and more bi-directional engagement, giving them the ability to potentially weave themselves more tightly into consumer lives (e.g., wearable devices). The unanswered question becomes how Group life and DI carriers can also do this. One avenue explored included leveraging technology to become better and more effective about managing claims for disability and absence management. This has also shown signs of success in the workers compensation space. It remains clear that this (data and analytics) is a space where there is no such thing as a notion of being “done”.

The lack of standards for the exchange of data is an increasingly troublesome problem with no “silver bullets” in sight. An ongoing area of concern for Group and Voluntary Benefit carriers is the lack of standards for exchanging data between enrollment platforms, distributors, carriers and others in the value chain. This particular line of business lags significantly behind the progress that has been made in the P&C world, for example. While carriers have long understood the issues and challenges resulting from the lack of standards there has been remarkably little progress made in this space for years. A number of industry bodies, including ACORD, LIMRA and the Open HR Standards group have tried, but the results to date have been characterized as “disappointing”. There are several efforts underway now but none appear to have the kind of immediate traction or sense of urgency which would lead to a change in circumstances in the near future. One of the challenges is that this business line has a different set of “players” in the value chain than you see in places like individual life insurance and annuities. As the Group and Voluntary Benefits arena has become more competitive, and faces increased margin pressure, new entrants in the value chain have moved to disintermediate carriers and distributors alike. Specifically, enrollment platforms which view the employer as their customer have moved to take on an increasingly important place in the delivery of these products. For them, the employer is the key client relationship and they really have very little interest in helping address issues specific to the insurance carriers which are providing products and services “behind-the-scenes”. As much as carriers would like to influence what the enrollment providers do, the reality up to this point has been that they have very little influence on decision-making at that level. The key to creating a more effective ecosystem for this line of business will be in figuring out the “what’s in it for me” issue for the enrollment platform vendors. Short of that, carriers and associations they belong to may have relatively little leverage in this space. Some carriers, recognizing the immediate challenge associated with this, have moved to create a series of technical tools to ease the ingestion of enrollment data. While this is neither easy nor inexpensive, it can be effective in terms of creating an internal mechanism for a carrier which mitigates the challenge of different formats of data coming in from the myriad of platform providers they work with.

A number of carriers mentioned that one of the major insurance trade association (ACORD) organizations believes they are making some progress in this space. The details on that remain confidential until later in the year but it seems clear that any solution which will be effective must address a broad set of issues for both insurance carriers and enrollment platform providers. Until that is done carriers will likely continue to play a relatively weak hand in this space, particularly for Group insurance benefits which employers see as being part of a suite of solutions being made available to plan participants.

Core systems remain a major concern but the pace of transformation remains modest. For all carriers at this meeting, the subject of core systems and their future direction remains an important “hot topic”. The nature of the business is that few have embarked on sweeping core system replacements today, although many expressed interest in seeing how the vendor community anticipates supporting this need in the future. A more common approach for most carriers now is to address some of their peripheral system needs, such as claims, compensation or underwriting, leaving the heart of their systems environment to be addressed another day. For many carriers, part of the issue remains that the low interest rate environment continues to be an impediment to new investments. There also remains a strong desire to see platforms successfully deployed at other carriers before some are willing to make a local plunge. Given the risks associated with these types of projects, and the lack of the kinds of success patterns which have colored the property and casualty space in recent years, some of this reluctance is not surprising. There are, however, emerging success stories with things like underwriting and claims which carriers in our view should be mindful of. One question came up regarding new entrants in this space. While there have been some newer technology vendors in recent years, the number is actually very small; this situation is unlikely to change significantly since the Group and Voluntary benefits segment is very highly concentrated with relatively few buying units. That generally keeps the number of new players down, particularly since part of the decision criteria carriers use for purchasing the systems is some form of track record that they can count on, creating a classic “Catch-22” situation. That isn’t to say, however that there are not good deployment examples for carriers to be aware of, particularly in support of the Voluntary benefits lines. The session gave us an opportunity to discuss a number of these. We also expect that 2017 will continue to show more progress by existing software vendors attracted to this space. Given the challenges, including significant technical debt, associated with current platforms at Group carriers, we do expect that the latter part of a decade will see a significant ramping up of investment.

Cloud based solutions are increasingly viable … with some caveats. For many carriers the use of cloud-based solutions across the technology stack is an option which looks increasingly attractive. In addition to allowing carriers to transition from Cap-Ex to Op-Ex spending, which can more closely align IT spending and business cycles, this can be a way for carriers to also reduce the long depreciation periods associated with traditional deployments, which can risk having solutions become obsolete before the depreciation schedules expire. This can lead IT organizations into unfortunate circumstances where impaired assets with significant residual value can need to be written off before new replacement projects can be implemented. As a result, carriers have increasingly turned to cloud options for peripheral systems such as e-mail, Human Resources platforms, CRM, and Finance capabilities. As many of the carriers at the SIG noted, these solutions can be both flexible and highly functional for critical workloads. Historically, cloud-capabilities had raised security related concerns for carriers. Today, many carriers have accepted that top-rated solution provides such as Google, Amazon and Microsoft (to name three) probably can provide better security than they deliver internally. As such, this allows carriers to consider these hosted solution options as viable alternatives for functions at the core of their operations, including claims and underwriting. We also discussed how cloud-based capabilities have become more commonly used for core functions in other parts of financial services, notably in banking and P&C insurance. One special challenge that may be faced by group carriers, however, is that there may be special requirements for data management and control that are established by the plan sponsors. Employers, potentially concerned about a range of issues associated with the personal and confidential information for employees, appear to have created challenges that group carriers are continuing to struggle with getting past. As a general construct, group carriers appear to have a very similar understanding of the issues as their individual insurance counterparts, but the concerns or restrictions raised by plan sponsors appears to be creating some added headwinds for cloud adoption on core capabilities. It also appears likely that this is a temporary, rather than a permanent, situation. For one thing, many carriers note that key infrastructure providers (including Microsoft and Oracle) are making it increasingly difficult for companies to acquire their technology for deployment outside of the cloud options. This is something that employers / plan sponsors will likely be facing themselves.

Agile is increasingly important but there are some clear challenges to achieving the desired outcomes. All carriers at the session noted that they are actively moving to use Agile as the preferred approach to software development. The degree of deployment varies significantly between carriers, however, with some having already moved to fundamentally change their work environments to support the collaboration needs associated with the evolving SDLC methodology. As much as carriers are looking forward to the potential benefits of Agile, there are some problems. For one thing, working with vendors that have themselves moved toward this development approach, may have very different definitions for Minimum Viable Product than the carriers themselves do. This makes it difficult to ingest work done by vendors and integrate it with development efforts being done by carriers on their own. This type of integration issue was mentioned by several carriers, highlighting the need to think expansively as project plans are developed and implemented. With the move to Agile, many carriers appear to be moving away from traditional office spaces and more toward a “hoteling” approach which has work spaces available on more of a ‘first come / first served” basis. This appears to have many advantages for carriers, but is something that is accepted at differing paces by employees from different demographic cohorts. Others noted that Agile is something that needs to be a joint IT and business undertaking, not IT alone. The change management efforts required to address both these issues is crucial to the ultimate success of these initiatives.

The level of engagement during the session was terrific although there were clearly more issue areas than we could discuss in a single day meeting. The group agreed that we should continue these sessions in the future and we’re pleased to be able to report that The Hartford Insurance Group will be our host for the sessions we plan to conduct in 2017. As always, if you’d like to discuss any of this in more detail, please let us know. Insurance technology is becoming ever more interesting … and critical to the success of the carriers focused on this line of business.

Zenefits Launched a New Line of Products for Small Business

Rob McIsaac

The smaller employer market has many of the same issues and challenges that larger companies do but it can be a difficult market for suppliers to get traction is because of a lack of economies of scale and, at times, a lack of technical sophistication. Solutions which can work well in larger environments where there is potentially a greater dedication of staff on the employer side to functions such as human resources and benefits management, can struggle in a world where the employer-side of the equation is represented by individuals that may wear “many hats”. Technical issues can exacerbate the problem, requiring extra effort from the supplier side, subsequently depressing margins. Zenefits’ announcement this week of a suite of HR and payroll apps targeting this market represents a potentially interesting approach. Although the product, known as Z2, is not necessarily a completely new concept, the idea of creating a function specific “app store” that brings together diverse capabilities including payroll, absence management, performance management and expense management through a series of key partnerships could prove very attractive in this space. One particularly interesting element would be further extending the idea of a user experience that is both intuitive and easy to engage. While the target now is very clearly small business, it isn’t hard to imagine this going up market over time or helping to further redefine how benefits can be delivered to plan members in the future. The idea of an “app store” experience can also be extended in many different directions as both efficient for delivery and familiar to end users.

Merrill Lynch will be Cutting Commissions for IRAs

Rob McIsaac

The impending implementation of leading aspects of the DOL Fiduciary rules continues to have significant implications across financial services, including insurance and related business. Recently, we noted that Nationwide’s purchase of Jefferson National gave them an important new asset in the fee based product / RIA space. At the same time, Merrill Lynch has announced that they will be cutting (flattening) compensation for IRAs, moving this business toward a fee-based model that is consistent with enduring compliance with the “client best interest” provision of the regulations. This move by the wirehouse is significant both because of the implications for its own business but also for the pattern it may set for other firms. Many have been watching for patterns with the expectation that some major distribution players would drive the path forward. This appears to be an interesting and relevant example of just that.