From Resource, January 2005 
Copyright by LOMA

Forecast for 2005:
Changes and Challenges  

What lies ahead for the industry in 2005? According to members of LOMA’s board of directors, sales of universal life and variable annuities look promising, with mergers and acquisitions likely to continue at a modest pace. But with that outlook comes a multitude of issues that promises to change the rules all over again—including the possibilities of an optional federal charter, lifetime and retirement savings accounts, and continued scrutiny by regulators.  

By Stephen Hall  

If you thought doing business in our industry in 2004 was challenging, be prepared for more of the same in 2005, but with additional complications from regulatory and compliance issues.

Resource recently surveyed members of LOMA’s board of directors to solicit their views on where they see the industry headed for 2005. Most of the participating board members seem to agree that sales, premiums and profits are poised to continue the modest growth witnessed in 2004, with universal life and variable annuities looking particularly robust. In addition, the general consensus is that the ongoing pressure on companies to reduce expenses and realize economies of scale will keep M&A activity moving forward. But as for the strategy of referring to your organization as a financial services company, board members seemed divided between those who deem it necessary to compete in the future and those who see it as the folly of a company spreading itself too thin—and setting the stage for massive customer dissatisfaction.

Not surprisingly, on the question of regulatory and legislative issues that will preoccupy the industry in 2005, a pattern emerged in board members’ responses that can be summed up in one word: Spitzer. Many board members seem to agree that New York Attorney General Eliot Spitzer’s investigations of brokers and insurance companies will have a profound impact on how compensation, disclosure and product marketing, among other functions, will be handled in the future.

Board members who participated in the 2005 forecast are:  

 David M. Holland, FSA, MAAA, president and CEO of Munich American Reassurance Co. in Atlanta , Ga., and LOMA chairman;  

 Lawrence J. Arth, CFA, chairman, president and CEO of the Ameritas Acacia Companies in Lincoln , Neb.;  

 John M. Bremer, CEO of Northwestern Mutual in Milwaukee , Wis.;

 Robert E. Chappell, chairman and CEO of Penn Mutual Life Insurance Co. in Horsham , Pa.; 

 C. Joe Dahl, FLMI, CLU, FALU, vice president of underwriting for Sun Life Assurance Co. of Canada in Toronto, Ontario;  

 Marla G. Friedman, FSA, senior vice president of Allstate Financial in Northbrook , Ill.;

 John O. Gilbert, chairman of the board for Thrivent Financial for Lutherans in Minneapolis , Minn.;

 Louis G. Lower II, president and CEO of The Horace Mann Companies in Springfield , Ill.;

 Thomas H. MacLeay, FLMI, CFA, chairman, president and CEO of National Life Group in Montpelier, Vt.; 

 David J. McFarlane, FSA, FCIA, vice president and COO of Wawanesa Life Insurance Co. in Winnipeg, Manitoba;  

 Don M. Royster, FLMI, CLU, RHU, president of the United Insurance Co. of America & The Reliable Life Insurance Co. in Maryland Heights, Mo.; 

 Clyde C. Schoeck, CLU, ChFC, LLIF, president of Modern Woodmen of America in Rock Island ,  Ill.;

 Susan D. Waring, CLU, senior vice president of CAO life affiliates at State Farm Life Insurance Co. in Bloomington , Ill.; 

 James W. Zilinski, chairman, president and CEO of Berkshire Life Insurance Co. of America in Pittsfield , Mass.  

The questions and responses follow. A separate discussion of regulatory issues is at the end.

HOLLAND : Life will be a challenge in 2005. Term products and universal life products with secondary guarantees will find it increasingly difficult to justify the exorbitant reserves that such products now require. Even though the 2001 CSO will provide some relief, the reserve strain on these products will be enormous. As reinsurance capacity for this business dwindles, companies will continue to search for other solutions from sources such as the capital markets. The Wall Street Journal has already reported cases of increasing premiums and stricter underwriting for these products. If premiums increase, there may be a drop in sales with a corresponding reduction in lapse rates from replacements.

UL products with guarantees (in particular, lifetime secondary guarantees) will continue to be the hot product. I expect companies to continue to focus product development resources in this area. However, companies will struggle to finance the strain associated with these products. Variable life sales will rise and fall with the fortunes of the equity markets. Many investors are still reeling from the recent losses in their equity accounts, and it remains to be seen when they will feel comfortable enough to use variable life products to buy their way back into the market. Whole life will continue to have steady sales fueled by the companies who rely on this product as the cornerstone of their permanent life portfolio. Companies will continue to look for untapped niches for alternative products, distribution and underwriting as a way to boost profitability and sales, such as Executive Bonus Plans, Worksite, Banks, etc. Demographics argue for the expanding need for long-term care (LTC) insurance. However, 2004 has suffered significant declines in LTC production, and the outlook for 2005 remains clouded. Life insurance profits have lagged behind other financial service providers, but should improve as companies put increasing focus on bottom-line profitability.  

ARTH: I do not anticipate much growth in sales, premiums, or profits for the overall life insurance industry in 2005. However, there likely will be shifts in market share toward those fixed and variable life and annuity products that offer secondary guarantees as more and more companies begin to offer these features. This shift could occur both in terms of new sales as well as for in-force business. Unless the level of interest rates increase, profit margins will continue to be under pressure, making it difficult to show much improvement in the overall levels of operating profits for the industry.  

BREMER: The recent surge in life sales, attributable to very strong secondary guarantee universal life sales, will likely moderate in 2005. Variable life sales will improve with the economy. Total life premium growth will remain in the low single digits. Annuity sales will likely remain strong, 10 percent or higher, benefiting from favorable demographics and a strengthening economy. After two consecutive down years, LTC sales will turn around as consolidation leads to a stabilizing of premium rates and demographics continue to apply pressure. DI sales growth should remain in line with recent historical growth, about 3 to 4 percent.  

CHAPPELL: Life sales should continue to be on the upswing in 2005. If the stock market shows some sign of strength, variable sales will have a good uptick. If not, fixed products will outpace last year’s increase in both fixed and variable products.

The level of interest rates, along with sales levels, will determine the industry’s profitability. For example, fast rising interest rates would hurt, slow rising rates would help, and falling  rates would be bad.

Another factor that has helped the industry in the past, and that will hopefully continue into next year, is improving mortality. As always, expenses will push profits down unless we can get them under control or even reduce them. The year holds promise, but also significant risk.  

DAHL: Sales will likely be flat for 2005, as will be premiums and profits.  

FRIEDMAN: Overall, we expect total premium and deposits to grow in the mid-single digits, about the same as in 2004. Universal life and variable annuity (VA) sales will be relatively strong, while variable universal life (VUL) and long-term care product sales remain weak. Fixed annuity sales growth should be slightly positive in the low single digits, as interest rates begin to increase in 2005.  

GILBERT: Sales, premiums and profits should all show moderate growth in 2005. Accumulation products and variable insurance sales will likely remain strong in 2005. Product margins will continue to be under pressure.  

LOWER: I expect flat to declining life insurance sales and premium as opportunities for replacements diminish. I also expect declining profits as low interest rates continue to erode margins, with crediting rates up against contract guarantees. Even in this environment, there will be winners who capture share at the expense of others. The winners will also show earnings growth through temporary actions such as portfolio reinsurance, outsourcing, and other expense take-out strategies. Annuity sales will continue to grow, but earnings will not keep pace with sales due to similar spread compression issues.

UL with strong secondary guarantees has captured the greatest share increase in 2004 and will continue to do so at the expense of UL products without such guarantees, and VUL. As VUL carriers seek to add similar guarantees to their products, a new powerhouse could emerge—especially if supported by a stock market similar to 2003. Term sales will likely be relatively flat, as reinsurance support for long-term guarantees has been diminished by consolidation among reinsurers and the increasing cost of letters-of-credit, needed to take associated reserves offshore. Annuities will continue to be a primary source of industry growth, with equity indexed annuities leading the way at a time of stock market volatility and low fixed interest rates.

Another product that has been well-received by the marketplace has been variable annuities with a guaranteed minimum withdrawal benefit (GMWB) feature. To the extent that individuals remain cautious about investing in the equity market, the protection features of variable annuities will continue to be a key selling point.  

McFARLANE: In Canada for 2005, I see a continuation of the strong profitability the industry has seen in 2004. I believe this is due to the significant impact of the large stock life insurers, who not only have dominant market positions but who have been benefiting from the significant cost savings they are seeing from their acquisition activity over the past few years.

For individual life insurance, I see marginal sales growth over 2004, reflecting a mature market and an aging population which is increasingly focusing more on satisfying retirement needs. Within this category, universal life products will see stronger sales, at the expense of term to 100 and whole life, as consumers become more confident with the equity options of UL plans. The area where I think the industry will see the strongest sales growth will be in living benefit products—most notably, individual supplementary health and critical illness plans. The individual supplementary health market will continue to benefit from the growth trend of self-employment, small businesses, retirees, and continued government de-listing of covered Medicare benefits. Critical-illness products started in Canada about 10 years ago, and today, virtually all companies in Canada market such CI plans. An aging population and increased consumer awareness of these protection plans should lead to increased market penetration and strong sales growth in the future. The other areas where I see strong sales activity are individual annuity segregated fund products as consumers seek retirement products, which provide a balance between investment growth and capital protection.  

MacLEAY: I predict that 2005 life insurance sales will probably grow in the range of 2 to 5 percent, and that annuities will grow on the order of 10 to 12 percent. Strength will continue in variable annuities, as long as companies continue to offer living benefit guarantees, and in equity indexed annuities. New designs to address retirement income planning will be introduced, but sales will probably start slowly. Term life sales will probably be sluggish or even down if pricing begins to firm as expected. Permanent life sales could shift toward variable products if the stock market recovers and companies add secondary guarantees. If not, then UL will probably lead even in a low interest rate environment. Equity indexed UL designs will gain more strength.  

ROYSTER: My prediction for 2005 is that sales and premiums will be up, but profits will be flat. Products that look particularly strong are annuities and long-term care.  

SCHOECK: Life insurance sales should increase by 5 percent in both premium and volume. With increases in interest rates and the stock market, variable annuities and life should be strong. Portfolio funded fixed annuity sales will be weaker than they were in 2004. We should see strong moves to variable products if the economy continues to grow.  

WARING: Assuming the recovery continues with a rising interest rate, we’ll likely see a less than 150 BP (basis point) increase in 2005. VUL will likely grow its market share at the expense of UL, with other life products maintaining their market share. We’ll likely see a shift of annuity premium from fixed to VA. Life premiums will be up between 3 and 4 percent. Overall, there will be a modest increase in profits, although margins may be unchanged.  

ZILINSKI: We’re in a decent economy, and I predict continued growth, about on a par with where we are this year. However, that’s a product-line-by-product-line question. We’re predominantly a disability company, and we’ve entered the long-term care (LTC) business, so we have a little bit more perspective on that. And of course, we’re part of The Guardian, so we’re pretty close to the life business. So those are the three that I’ll speak more about.

I’m expecting to see between 2 and 5 percent growth in new sales of disability income. That’s the continuation of a trend: As an industry, we are up about 6 percent on DI sales year-to-date.

Long-term care insurance sales are down. I think there’s a lot of significant activity that’s gone on in that particular product line. Part of the reason for its sales being down is that they had pretty substantial growth in the federal government program. But we’re also seeing a consolidation in the long-term care business, which means there are some pullbacks on the product. We’re also seeing some substantial price increases going on. Sales at mid-year 2004 were minus 27 percent for LTC, so I’m expecting it to see between zero and 5 percent growth next year as a little bit of the settling-in goes on around the events that drove the drop.

As for life insurance, I think what you’re going to see is a continued shifting in the mix of product. I think whole-life insurance will be flat, universal life (UL) will be slightly down from this year, and variable universal life (VUL) will be slightly up from this year. But again, I think we’re going to go through some product changes, which will be driven on the pricing side by the reinsurance environment that we’re in, and by the life business, where there have been pullbacks on some of the guarantees that have been put into some of the products, particularly in UL. As the reinsurance market settles in, some of the favorability of that product may taper off a little bit.

HOLLAND : From 1993 to 2003, the number of U.S. life insurance companies declined from 1,844 to 1,123. Currently, the top 100 life companies have 86 percent of the admitted assets of the life insurance industry. Consolidation has to continue. Smaller companies will be under considerable pressure from expenses and the need for distribution channels. There will be continued mergers of companies who aren’t in the top 100, and even some of the larger companies may find it advantageous to merge. Tremendous scale is needed in order to pursue certain strategies, such as expanding globally.  

ARTH: The improvement in the credit quality of corporate America in 2003 and 2004 removed some of the pressure on the insurance industry’s balance sheets, which reduced some of the immediate incentive for certain individual companies to enter into merger discussions in recent months/quarters. However, many fundamental issues remain which will result in continuing industry consolidation for the foreseeable future. These fundamental issues include lackluster top-line growth, meager profit margins and economies of scale challenges. The industry continues to suffer from excess capacity.  

BREMER: The market’s increasing pressure on profitability will continue to drive mergers and consolidations in two ways. One, companies will continue to divest non-core and non-performing operations as industry convergence has not been proven successful. Secondly, companies will also continue to seek scale to improve efficiencies. The suspension of IRC Section 815 will also create a motivation for certain companies to restructure their businesses. As a result, five years from now there will be fewer yet larger players, but there will continue to be a market for select niche players.  

CHAPPELL: Mergers will slow down for a while, since most of the companies that wanted to merge or be acquired have done so already. This means there is less opportunity, no matter how much desire a company may have to make an acquisition. As the past three or four years have shown, there are no life insurance companies too large to be acquired. However, there are fewer companies in our industry, and many of the remaining companies are determined to not merge.  

DAHL: I believe mergers and consolidations will continue. Five years from now, we’re likely to see fewer, larger, integrated financial services organizations.  

FRIEDMAN: We expect that consolidation will continue at a modest pace due to several reasons, including a highly fragmented industry, required capital pressures from the rating agencies, and ongoing regulatory pressures which increase the fixed costs of doing business.  Fewer, larger players will become more dominant in the life/financial services landscape.  The bigger players have the ability to squeeze margins and muscle distribution shelf space, giving themselves significant advantages in the market.  

GILBERT: Mergers and consolidating in our industry are likely to continue. There is over-capacity in the marketplace, and critical mass will continue to loom large in the competitive arena. I continue to believe, however, that companies with distinct niche markets can continue to be successful players, even in a consolidated industry.

Five years from now, the number of insurance companies will have diminished, and the share of market commanded by the largest companies will have increased further.  

LOWER: M&A activity is likely to continue as companies seek to obtain scale—something that’s difficult to attain organically, especially in an industry not experiencing significant overall growth. Over the next five years, the big will get bigger. Small companies will need to find niches or seek merger partners of their own.

Additionally, merger activity could accelerate once interest rates start to move off of current lows. Merger activity will always be driven by companies seeking to obtain scale, but near-term merger opportunities may be driven by companies seeking additional distribution channels. I also believe that future merger activity may be driven by foreign companies wishing to establish a new or expanded base—with a unique distribution system—in the United States . Companies that do not operate in a niche market will be significantly impacted by their ability to launch new products—at the same pace as large-scale players—in order to capitalize on consumer demand for guarantees. As a result, companies not responding to new product features may seek merger partners of their own.  

McFARLANE: I don’t expect we’ll see much further life insurance consolidation in Canada over the next few years. Over the last 10 years, there’s been a significant consolidation in our industry, resulting in a very mature, concentrated industry dominated by a few very large insurers. The one change I do see happening are mergers between Canadian banks and insurance companies. In the next year, it’s expected that the finance ministry will be releasing the long-awaited ground rules for any bank merger activity the government will permit. The new regulations may allow bank-insurer mergers, as the chairman of the Government Financing Committee has said that mergers between banks and insurers are going to happen if the financial services sector requests it. I also expect we’ll continue to see international acquisitions by the large Canadian stock companies due to the significant cash position they hold and the lack of Canadian opportunities.  

MacLEAY: Mergers and acquisitions will continue, but at a slower pace. Maybe we’ll see one very large deal (like the Hancock/Manulife transaction) and a few smaller ones in 2005. More common will be sales of blocks of businesses or operating business lines, like Prudential’s acquisition of Cigna’s retirement business. In five years, the big players will be bigger, and the smaller players (fewer in number) will have staked out niches where they can deliver value to customers and avoid head-to-head competition with scale players.  

ROYSTER: Mergers and acquisitions will continue, but on a smaller scale. It is unclear how the industry will look in five years.  

SCHOECK: Most of the mergers have probably taken place. We will see some consolidation, but much less than in recent times. I think that in the next five years, as companies work to reduce costs, we will continue to see companies sharing back-office operations, and possibly also product development and investment departments.  

WARING: There will likely be some pickup in activity, as currency (i.e., stock value of acquirer) has increased. Also, it will be interesting to see whether some of the large former mutual companies will be acquired by non-life companies as the five-year protection from hostile takeovers wears off.  

ZILINSKI: Mergers and consolidations in our industry will continue. I think it will be a programmed pace that we’ve been seeing in the last year or so. I think it will not only be a consolidation of companies, but of blocks of businesses. People will continue to look at blocks in businesses that they’re in and be making strategic decisions about whether to increase or decrease their stake in a particular business. So really, there are two kinds of consolidation that are happening: One is company-to-company, and the other is block-to-block.

Five years from now, I think you’re going to see a continued dichotomy between specialist companies and generalist companies. That’s the net effect of companies moving from one business where they don’t have a strategic advantage to another in which they believe they do. A great example: In 2000, Standard Insurance Company sold some of their businesses and bought Minnesota Life’s DI block. They continued to concentrate and specialize more and more in a particular business. Now, they’ve become more of a specialist as a result of less diversity of product lines and more specialization within the lines. So today, we’ve got a range of companies whose strategies are going to end up changing fairly substantially, partially driven by distribution. The degree to which they change will be determined by three factors: what kind of distribution they have, what kind of distribution they desire, and what kind of distribution they can actually achieve. There’s a substantial distribution revolution that’s been going on now for 10 or 15 years, and that will continue to shape company strategies as to whether or not they perceive that, as a manufacturer, they have a viable set of outlets that can get them to marketplace, and what the cost structures of those distribution outlets are. So sometimes, mergers and acquisitions are driven by product manufacturer-oriented strategies, and sometimes they’re driven by virtue of the nature of what’s possible or where you currently stand in your distribution capability. As you know, Berkshire and The Guardian merged almost four years ago. It has been a great combination. We have some experience with this issue.

HOLLAND : For years, the life insurance industry has longed to be part of the financial services industry. Given the level of competition from other sectors of the financial services industry, this may be a case of “be careful what you wish for.” Ten years ago, life insurers controlled about the same amount of assets as the mutual funds industry, if you include money market funds; today, the mutual funds have more than doubled the amount of assets of the life insurers. Over this period, mutual funds grew at about 13 percent per annum, compared with a corresponding growth rate of around 7.5 percent for life companies. As a life reinsurer, my company has concentrated on mortality and morbidity risk; however, we are part of a large global financial services group.  

ARTH: Ameritas Acacia is a “financial services” company in that we are diversified across several financial services businesses, including individual life and annuity, group dental and vision care, retirement plans, banking, mutual funds, and investments. This strategy provides us with revenue and earnings diversification and tends to insulate our organization from the economic factors that may be impacting one or more segments of our business at any given time.  

BREMER: A financial services strategy can be a viable business model for those few firms that choose to offer a wide array of products and services, and have the scale and experience to make it successful. However, recent history has shown many firms find this structure rather unwieldy and ultimately unprofitable. We have not adopted a one-stop financial services strategy. We are focused on providing financial security by providing a wider array of personalized, valued-added products and services and on building enduring, trusted relationships with clients.  

CHAPPELL: Many companies have tried to adopt a “financial services” strategy, but to date, companies that have started out as insurance companies have not effectively executed this strategy. The amount of coordination required to successfully implement this strategy is daunting, so execution is difficult. However, the term “financial services company” is a good descriptive phrase, and most audiences can relate to it. We are not taking that route  at Penn Mutual.  

DAHL: I think this is a good strategy. As banks, for example, leverage their client base by selling insurance and funds, then if the life industry is to compete, there is no alternative but to do this.  

FRIEDMAN: Allstate is arguably one of those insurers that considers financial services to be one of its strengths. More specifically, The Allstate Corporation’s strategy is to become better, bigger and broader—that is, better and bigger in our core businesses and broader in our financial services.

Our Better strategy focuses on operating efficiently, improving the customer experience, and improving agent relationships. Our Bigger strategy is profitably growing market share by attracting more new customers in our target segments, retaining more customers, and meeting more of our customers’ needs. And our Broader strategy is expanding to be more things to more people, not all things to all people.  

GILBERT: For many companies, perhaps most, “financial services” is a more accurate description than is “insurance company.” Having said that, companies that describe themselves as financial services companies show wide variation in the products and services they offer under that umbrella term.

At Thrivent Financial, we look to continue helping our market understand their need for insurance products. Nonetheless, the changing demographics of our market means that a good portion of our sales are accumulation products. The reality is that “financial services” is a better description of our business today than is “insurance company.”  

LOWER: Horace Mann has historically operated as a “financial services company.” The adoption of the term is fairly new to the industry, but the underlying business models have not drastically changed. This strategy makes sense as we offer our target market a spectrum of product offerings. What we cannot manufacture ourselves, we provide through partnership with other providers. This is consistent with our mission of providing for the financial well-being of our clients.  

McFARLANE: I agree with this strategy; when you look at the statistics, this certainly makes sense. In North America , life insurers have seen a declining share in overall personal financial assets, having dropped from 11 percent in 1991 to 8 percent in 2003. If North American insurers are to reverse this trend, they clearly need to focus more aggressively on the total financial services arena. It’s also consistent with the needs of today’s consumers, who are seeking financial solutions which embrace many types of products, including living benefit protection products as well as investment and pension-type plans.  

MacLEAY: Except for companies that seek to be the low-cost provider of a product (term life, UL, etc.), life companies should consider themselves financial services firms, in my opinion. Our company adopted that strategy several years ago, and it has served us well.

ROYSTER: This strategy is fine, but they must be able to deliver on the broad services that the name implies. Our companies are not adopting this strategy.

SCHOECK: Previous attempts, especially when a company tried to mix property & casualty with life & retirement products, showed little success. I feel financial services as it relates to fixed and equity-type products that relate to protection and retirement will show much more success.

At Modern Woodmen, we built a full-service broker/dealer three years ago to make variable products and mutual funds available to our membership. We also started an Internet bank two years ago. We have been very pleased with the success of both of these subsidiaries. Our middle-income rural market has a need for these services. They also help us to recruit and retain agents.  

WARING: I believe companies will need to move this way, either as manufacturers or with an alliance. Our organization has adopted it.  

ZILINSKI: The Guardian, our parent company, sees itself first and foremost as a mutual life insurance company. We have a very substantial presence in the group insurance business, and the dominant businesses of The Guardian are risk management businesses. We also have a broker-dealer, we have a mutual-fund complex, and we are into the variable annuity business, and certainly those are all tightly related to the needs and requirements of our distribution system and our end customer. So therefore, we are into a fuller set of financial services than just being into traditional life and DI and risk management products. But I don’t think you’ll see us characterize ourselves as a full financial services company, like a Citigroup might, or like a number of other companies are moving toward doing. Therefore, that probably means we’re best described as a boutique player, as opposed to a full financial services company. I don’t think you’ll see us dramatically widening product lines into bank-related products, or even into property & casualty insurance. We have a very focused, affluent and high-quality client base, with very strong group lines and a very strong commitment to individual life being a core piece of the company’s fabric as a mutual company.

HOLLAND : Although the concept of Business Intelligence (BI) has been around for a decade, it continues to be a hot topic. A survey conducted in 2003 ranked BI projects among the top three projects that delivered the highest ROI. The same survey indicated that 42 percent of property/casualty and 63 percent of life insurers surveyed considered BI projects high priorities. “In-line analytics”—the process of taking information from BI systems back into operational systems—is considered leading-edge in the BI market. Companies will continue to deliver Web-based services to improve customer satisfaction. Two of the most common strategies are Web-based customer self-service, and initiatives to consolidate customer data (customer data located in multiple silos is one of the most important challenges in improving customer service).

Voice over Internet Protocol (VoIP) utilizes the Internet for telephone communications and provides significant cost savings over traditional telephone lines and telephone systems. Improvement in disaster recovery capabilities is also a key benefit. VoIP is being utilized in some cases to allow a visitor to a Web page to click a button on the Web page and speak to a customer service representative through their PC or via the telephone.

Compliance with Sarbanes-Oxley will force companies to improve data management practices, accounting systems, financial control systems, and information security in order to properly measure and document exposure while protecting the privacy of customers.  

ARTH: Electronic commerce continues to offer significant opportunities to our industry to improve our levels of service to our customers and our distribution partners, while at the same time reducing the cost of providing service for all concerned. We must continue to exploit the Internet, which will help make us easier to do business with, speed up service, and lower costs. Information to our partners and customers must be available on demand, on a 24-7 basis. This information needs to be secure and Web and wireless available.  

BREMER: Enterprise Content Management (ECM) will help our industry to manage and share information across the enterprise using secure and consistent processes. Managing all forms of content (i.e., documents, Web content, graphics and video) will be required to comply with federal and state regulations related to security, privacy, terrorism, and particularly compliance. Business Process Management (BPM), in concert with Enterprise Content Management, will also be important to insure that processes are secure, consistent, and integrated with records management practices. These technologies will also enable business process efficiencies with better integration across departments.

Wireless and mobile computing will become more important in maximizing the effectiveness of financial representatives wherever they are. Initially the technologies will aid representatives in being more productive between appointments by allowing them to read e-mail, manage calendars or handle documents. An even greater potential for our industry will be in taking electronic applications in the field using wireless broadband connectivity, digital signature capture, and possibly tablet PCs or other capture devices. Taking electronic applications will reduce the number of errors in the application itself, reduce the number of times that the representative will need to return to the customer for signatures or additional information, and reduce the time that it takes to issue the policy.

Advanced analytic technologies may be applied to improve both customer service and risk mitigation. These technologies could be used to quickly analyze huge volumes of data to determine whether customers were satisfied across all key interactions, and then predict how they might be better served in the future.  

CHAPPELL: New systems are being developed that will make it possible for much of what we do today to be done with faster speeds, better service and less expense in the future. More work is being done to develop systems that will help us deliver faster, more predictive underwriting and greater client service capabilities. These improvements will be challenging to implement and to keep current, but they offer great gains.  

DAHL: The Internet can be utilized to enable clients to perform an increasing number of service functions themselves.  

FRIEDMAN: The combination of Service Oriented Architectures (SOA) based on XML / Web services and recent developments in grid computing provide the greatest potential to help our industry. Service Oriented Architectures (SOA) that use XML / Web services allow us to do three things: build new and more sophisticated front-ends that leverage existing technology assets; integrate new application functionality into our business processes with greater ease; and streamline the electronic data exchange between our distribution partners and back-end systems. Grid computing has significant potential to lower the cost of processing by leveraging unused capacity, as well as provide on-demand availability when it is needed.  

GILBERT: I didn’t think it’s so much about new technologies as it is achieving the full benefits from technology already existent and perhaps already installed. Full integration of customer data so that it is readily accessible to the distribution system is one example. While speech recognition technologies have held promise for years, it now appears that some real benefits in customer service are about to be achieved. I still have a dream that end-to-end processing of business can be better automated and streamlined, with much of the “friction” of the typical life insurance transaction eliminated.  

LOWER: Providing customers with more options to access information and service is a win-win outcome from technology. We see four areas that hold great potential for the industry: (1) imaging and workflow, which will allow the streamlining of processes for dollar savings, processing-time improvements and records retention; (2) document management, for the same reasons as stated above, including time to access and reference; (3) telephony, which will open many new opportunities for being able to speak and compute simultaneously and impact support of sales activities; and (4) wireless technologies, which are already revolutionizing access capabilities for support of field activities. We expect big impacts in convenience and some improvements in customer service. This capability allows anybody to operate from a virtual office, anywhere in the country.  

McFARLANE: I think the greatest potential for advanced technology is in improving the distribution of our products. This includes all aspects of distribution, including distribution management, application processing, selection, and policy issue. Industry product distribution costs remain relatively high and need to be reduced, especially in view of the increased competition that we’re likely to see in the future from the banking sector. Additionally, business processes need to be streamlined to improve turnaround times. I also think the Web will play an increasing role in the delivery of our products. Web technology will continually improve, and costs reduce at the same time as consumers’ and distributors’ reliance on the Web increases.  

MacLEAY: The Internet is a huge facilitator of communications. It will continue to be leveraged to support marketing, distribution and customer service in the future. A significant breakthrough in policy admin systems could materially reduce costs in this industry and facilitate consolidation. Specifically, the large number of customized policy admin systems in companies today adds significant cost burden and inhibits customer service and marketing. If technology emerges that allows for the conversion of these systems to a common platform—like the securities industry—it would be a significant step forward. But I’m not holding my breath.  

SCHOECK: Anything that will help speed up the issue process, cut down on paperwork and number of employees. We are into imaging and electronic workflow.  

WARING: There are six areas of technology that I think have the greatest potential to help our industry: Web-based customer service, imaging for document retrieval, wireless technology for sales representatives, electronic signatures, electronic forms, and voice recognition.  

ZILINSKI: Obviously we could talk about the Internet in that regard. I would describe it not just as the Internet, but as the entire communications infrastructure that’s building out, whether it moves through an Internet or whether it’s a continued telecommunications technology that links to it. But networking and the availability of something like the Internet go hand-in-glove as continuing vehicles that we can’t live without. They are critical parts of our sales support structure and our service support structure, as well as our internal operations. So every person needs to be one-to-one with a keyboard these days. Technology will continue to be more and more a part of every process in the company and out in the field force. We’re doing a lot with imaging technology now and linking that together with key applications of technology, like straight-through processing. Another area we’re spending a lot of time and money on is the whole area of security regulation and privacy. We’ve probably got a number of major projects and are spending a lot of money in that area. Another major technology issue for us in the Internet protocol (IP) area is information life cycle management. We’ve got tremendous proliferation of data and information that’s driving storage costs up, and finding ways to better manage the information life cycle will be important in the next few years.

HOLLAND : Our greatest HR challenge is developing appropriate leadership skills at all levels of the organization. Today’s managers and executives face the challenge of managing employees with different generational needs (baby boomers, generations X, Y and Z) and also different technology needs and competencies. Today’s manager must understand how to inspire, reward, and motivate employees from these different groups as well as strike a balance for the needs of the business. With managers spanning these different generations, there is a need to remain grounded in the “supervisory basics” of giving feedback, setting and communicating goals and objectives, and inspiring ownership and accountability along the way. Developing leaders in very technical ranks is always a challenge. Early assessment and lengthy mentoring of future technical leaders is essential. We feel proactive education and training are essential to meeting these objectives.  

ARTH: Attracting and retaining the best possible associates is the greatest human resource challenge our industry faces. The ability of its associates is one of the means any company can use to differentiate itself from the competition. We attempt to position ourselves as an “employer of choice” by adopting compensation and benefit programs that appeal to the best candidates within our recruiting markets. Also, we have created an award-winning work environment. Retaining associates requires constant attention to providing workplace attributes that drive associate engagement. Providing reward and recognition programs, along with opportunities for development and professional growth, are included in our workplace attributes. We have instituted formal succession planning programs to help identify and develop the necessary competencies of our associates.  

BREMER: The greatest human resource challenge our industry faces is the long-term decline in the industry’s sales force. It is critical that our industry has the distribution capacity which allows for continued sales growth. LIMRA has documented the aging of our distribution outlets and the decline in recruiting. To reverse this trend, the industry must renew its commitment to recruiting new financial professionals, encouraging professional education to meet the needs of the consumer, and building productive practice management models. We continue to focus on recruiting financial representatives that are new to the business and working on increasing their productivity, thereby improving retention. In today’s environment, this is a challenge, but we see this as the best long-term, sustainable approach to distribution. We remain committed to the career distribution channel.  

CHAPPELL: Our company works hard to make Penn Mutual a great place to work. Our focus is on skills development, particularly good skills for our leaders, open and honest communications, and good work/life balance for all associates. I believe that our associates distinguish our company, and that the attention we pay to associates helps the company obtain better results.  

DAHL: The greatest human resource challenge our industry faces is to change the mindset of existing employees to think about and approach challenges in different ways.  

FRIEDMAN: The greatest human resource challenge our industry faces is having sufficient numbers of people at all levels with the right skills. The issues around attracting and retaining the right talent, and developing and maximizing that talent, are incredibly complex, given the competitive industry in which we operate, the differing expectations of different generations in the workforce, the rapid pace of change we face, and the educational system that exists to provide new talent for the system.

There are no easy answers, but Allstate, like other companies, is addressing the challenge on many fronts. We are partnering with designated institutions of higher learning to influence curriculum so that we have graduates entering the workforce with skills we need. As we build relationships with colleges and universities, we are also building brand recognition that predisposes top students to consider a career with our company.

In addition, we are aggressively working to provide meaningful and challenging developmental opportunities for current employees through professional educational programs, including undergraduate and graduate degree sponsorships and cost sharing, as well as through industry certification programs and rotational assignments. We stay focused on understanding our workforce, both professionally and personally, and offer programs and opportunities that help support the wants, needs and interests of our employees.

Like other companies, we are continuously engaged in the “routine” aspects of our business, such as ensuring that our pay and benefits are competitive. And we work diligently to create and maintain an inclusive, diverse workforce, as well as a positive work environment that facilitates achievement of our short- and long-term corporate goals. Even with all this focus and effort, we know talent issues will continue to be at the top of our priority list for years to come.  

GILBERT: I think the biggest human resource challenge facing the industry continues to be helping employees deal with the kind of change that is buffeting our industry. The need for employees to continue their personal and professional growth has never been greater. More than 50 percent of LOMA exams have been taken outside of North America since 2002. The educated and driven employees beyond our borders will pose a formidable competitive force over the long term. Employees and companies in North America ignore this force at their own peril. Employees in North American companies must be equally committed to their own growth and development.  

LOWER: I believe that recruiting and retaining personnel for key positions in the company are the biggest challenges we face in this arena. Key positions include actuaries, internal auditors (especially for 404(c) compliance), high-tech IT personnel, and client service representatives. Specific areas of concern include having enough qualified individuals for a pool of viable candidates from which to select; having a sufficient level of diversity among candidates; finding candidates with experience in multiple skill sets, such as presentation/speaking skills, job knowledge, P&L and teamwork; finding individuals who have all the job requirements; and having a sufficient number of qualified candidates who are willing to relocate and/or deal with conflicting family’s needs.

The actions we’re taking to address these challenges include conducting more focused, intensified recruiting efforts; shoring up and further developing recruiting and support staff; increasing our reliance on placement firms for strong candidates with hard-to-find skill sets; renewing and enhancing our relationships with universities and college placement personnel; increasing our participation in college and career fairs; developing more creative and targeted advertising to attract specific candidates; and increasing our use of hiring bonuses as an incentive.  

McFARLANE: I believe the biggest HR challenge is the development and retention of quality staff at all levels in an organization. In today’s work environment, where voluntary staff turnover is the norm and employees with transferable skills are just as likely to seek employment outside the industry as within, it is critical for a company’s success to keep its best people. To do this, a company needs to establish HR plans which identify key staff and develop flexible development programs, together with employee retention strategies.  

MacLEAY: The greatest human resource challenge our industry faces is attracting and retaining skilled and motivated people, both in the home office and in the field.  

ROYSTER: One of the greatest human resource challenges our industry faces is labor cost and productivity. Our company plans to utilize technology to a greater extent.  

SCHOECK: One of the greatest human resource challenges our industry faces is attracting and retaining quality agents. We are a career organization and are working to grow the number of agents. We have redone the new agent financing program and are placing more emphasis on recruiting. Management incentives require our manager to hire people.  

WARING: Two of the greatest human resource challenges our industry faces are developing our next generation of leaders and mentoring.  

ZILINSKI: I’d like to answer this question within the context of both the field and the home office. The biggest human resource challenge for the field, I think—within the industry and for our company as a part of that—is building distribution. Over the last decade, we have watched a fairly substantial contraction in the number of organizations that are doing career-building, and that’s a very serious concern, in terms of where the future salespeople in the organization will come from. So it’s not a crisis, but it’s a trend that’s problematic. Fewer companies are making the investments in recruiting, training and retaining people, and that’s an issue. As a company, The Guardian has spent a great deal of time focusing on this with the general agencies, and we’ve been encouraging them as well as providing them support tools, incentives, and other mechanisms to help drive the building of the distribution system. So that would be one half of it. The other half, which would be true for both the home office and the field, is just managing change—getting people to be change-ready and change-adopters, as opposed to change-resisters. We’re in an industry that, in the last 10 years, changed probably three times as much as it changed in the prior decade, and in the next decade, we’ll probably have to change three times as much as we changed in this one, which means everything is speeding up; everything is moving more quickly and is driven by a wide range of forces. And we’ll either be good as an industry—or an individual company within the industry—at adapting to change, or we’ll fail as a result of it.

HOLLAND : Asset-liability management techniques beyond basic cash flow testing continue to be refined and implemented in more companies. This includes more sophisticated hedging strategies for variable annuities with guarantees and interest rate management.

Many companies writing term business are starting to embrace the concept of term insurance as a commodity rather than a specialty product. With commodities, the key is volume of business and expense controls. Companies with multiple back office approaches, including multiple legacy systems, are consolidating these efforts with newer IT solutions to achieve efficiencies. Long-term care pricing should trend toward a more conservative path due to the recent long-term care pricing model regulation requiring actuaries to opine that non-guaranteed rates have an extremely low probability of increasing over time.

The current lag of life insurance returns behind those of other financial services providers will increase pressures on life company profit objectives. Similarly, capital management constraints surrounding level term business are applying pressure to improve financial terms for this business.  

ARTH: Our industry can increase the level of profitability by discovering new ways to improve productivity at both the field and home office levels. The life insurance industry is becoming fiercely competitive from a pricing perspective as more and more comparative information becomes widely available, which puts tremendous competitive pressures on industry margins.  

BREMER: We focus on managing the fundamentals and creating long-term value. It’s important that we as an industry not sacrifice our future for top-line revenue growth today (S&P, December 2003). Rational product pricing and appropriate risk management are critically important (Moody’s, March 2004). As we look to enhance long-term profitability, we at Northwestern Mutual are focused on three priorities: growing insurance revenue through promotion of our existing products and development of appropriately priced new products; strengthening our distribution system through investments in technology, emphasis on recruiting and retention, and continued development of the financial representative’s business model; and focusing on operating efficiencies through the utilization of technology and a culture focused on constant improvement in work process.  

CHAPPELL: Our industry can increase its profitability by growing and by being smart about how we spend our resources. It’s easy to put resources into projects or businesses that have lots of “sizzle” but produce no benefits. Determining if “value” is obtained from your expenses and tracking to make sure the value is delivered will be key to our industry’s future profitability.  

DAHL: We must reduce the paper flow. We can do this through further automation of many processes, including policy servicing and risk selection. We’ve got a long way to go in this area.  

FRIEDMAN: Our industry needs to continue to improve its cost structure in order to improve profitability in the long term. We need to continue to reduce costs by increasing scale and eliminating unnecessary costs. Examples include eliminating legacy systems, eliminating manual processes, and simplifying back-office operations.

The industry also has to utilize technology to become more efficient. We need to have a cost structure that can compete not only with other insurance companies, but also with other companies like Fidelity and Schwab. The winners will be those that can reduce costs faster than the competition.

In addition, while expense reduction is key to improving profitability, you can only cut expenses so much. At some point, you have to grow. New product development (or the ability to be a fast follower) and more wholesaling muscle will be the keys to growth. Lastly, our industry needs to use capital more effectively and efficiently to improve returns. This can be done in a number of ways, including more effective risk management to reduce the amount of economic capital needed to support and run our businesses.

The Six Sigma methodology is a very effective tool to help maximize the likelihood of success in pursuing the above challenges. When properly implemented, Six Sigma can reduce operational risk, improve the customer experience and increase shareholder value.

Allstate is in the process of doing all these things. From application rationalization to the elimination of manual processes, Allstate Financial is reducing its cost structure. We are also trying to streamline the product development process.  

GILBERT: There are no easy answers or panaceas to this question. At Thrivent Financial, we have been on a three-year journey to reduce home office expenses by 20 percent, to effect top-line growth of 7 percent, and to ensure the profitability of our products. All three efforts are necessary to improve our overall profitability. Moving any one of those three levers requires incredible focus and discipline. We’ve learned that it isn’t “rocket science,” but that it does mean understanding the facts about the businesses’ current profitability and the commitment to make the necessary changes. We are guided by a tough adherence to ensuring that the current year’s book of business is adding positive value. That’s a tougher measure than statutory or GAAP earnings measures because it forces us to look at the value added of the new business we’re writing.  

LOWER: Today, winning companies trim costs because they realize they can achieve long-term profitability through sustainable efficiencies. At the same time, long-term profitability growth is sustained by top-line growth. So our approach is to first control expense in a thoughtful way that pays off long-term. Then we seek growth opportunities by focusing on our niche market and by focusing on annuities. Annuities, with their favorable demographic trends, are one of the best growth opportunities in the life insurance industry. Additionally, by increasing the training and support we give our agents in the area of needs-based selling, we plan to grow, even in less robust product lines such as life insurance.

On the sales side of the equation, annuity business is a key driver of life insurance profits. Although consumer preferences shift between fixed and variable, the overall annuity business consistently accounts for a substantial portion of total earnings. However, in the current interest rate environment, it remains difficult to achieve adequate spread in the fixed annuity business. If interest rates remain at a low level, the ability to subsidize new business by increasing margins on the in-force book is not readily available today. In fact, spread compression has impacted new business. An upward shift in the yield curve would be beneficial for both new business and in-force profitability. As for the entire industry, the willingness to establish appropriate crediting rates in the current interest rate environment, which could result in lost sales, will be a good measuring stick if the industry is committed to improving returns on capital.  

McFARLANE: From the Canadian industry perspective, with a mature, relatively small domestic market, the long-term profit opportunities are going to be in international expansion. We’ve seen this already over the past few years, with the international expansion of the large Canadian companies into the U.S. and Asia . In the Canadian market, whether an insurer is targeting broad or niche markets, the key to maximizing long-term profitability is to have well-thought-out, in-depth marketing strategies linked with business operational plans which capitalize on a particular company’s strengths and positively differentiate them vis-à-vis the competition.

I also think it’s important to focus on the delivery of quality service in meeting the needs of customer/distributors on a consistent basis. This requires an understanding of these needs, the establishment of standards, ongoing measurements, action plans, and follow-up to eliminate any service gaps.  

MacLEAY: We have to be much more efficient in delivering products that provide value to customers. Most significantly, I believe, is the high cost of distribution. I’m not optimistic about this changing in the near future, but in the long term, I think we need to do much better if we’re going to attract customers to our products, especially in the middle- and lower-income markets. Also, product mix is important to long-term profitability. We have diversified both product and distribution to try to address these issues.  

ROYSTER: In order to increase profitability over the long term, our industry will need to increase sales and productivity, control expenses, and use technology more effectively. Our company is trying to do all these things.  

SCHOECK: Our industry can increase its profitability over the long term through technology, outsourcing and eliminating the duplication of tasks. We are moving to electronic workflow to speed our processing and reduce employees.  

WARING: Our industry can increase its profitability over the long term by growing sales to bring down unit costs and aggressively managing expenses.  

ZILINSKI: The first thing that the industry can do to increase its profitability is to be rational in its pricing. And we have a history, product line by product line, of potentially doing irrational things that eventually come back to bite us. In the late ’80s and early ’90s, the industry did all sorts of crazy things in the disability business that ultimately had 85 companies shrink down to 15 or so today. Today, the margins are back in the business, and people are much more focused on making smart underwriting decisions, not providing discounts where discounts don’t make any sense, and just paying very close attention to running the business very effectively. That’s what has to happen. The single-minded race for top-line growth in our business is very damaging. I won’t say we’re in a crisis, but we’re in a very severe situation, in terms of rational pricing when it comes to term life insurance. Most domestic carriers today have reinsured most of their mortality risk to the reinsurance companies; that ought to tell you something. We’re probably 40 cents on the dollar of where we were 25 years ago, in terms of what we price term insurance to the consumer. Now, I guarantee you that no matter how good mortality has become, it hasn’t eked out 60 cents on the dollar over the last 25 years. Now, I’m not sure how much efficiency bought us; I think what’s happened is that we’ve reduced the margins down to where it’s about as thin as you can possibly get it, which is why I think you’re seeing reinsurers consolidating, and I think you’re seeing them start to come back and escalate prices. Long-term care insurance has gone through a cycle, and we’re now seeing escalations in its pricing. So irrational pricing is the thing that we need to be most mindful of as an industry. We need to ask, “Are we really looking at the fundamentals of pricing and adhering to them, or are we playing a pricing game to drive revenue?” If we’re doing the latter, it ultimately comes back and causes the cycle that the health insurance business goes through every eight or nine years. So at some point, people have just got to decide to drop back and not play the morbidity or mortality game at the wrong end by chasing expenses.

Throughout Berkshire Life, we are very focused on the term “profitable growth,” with great emphasis on the word “profitable.” It’s very important that we recognize we’re not writing loss leaders for the sake of some other rationale for being in the business. And we’re putting a great deal of emphasis on managing risk and making sure we’re doing all the things we can to really take into account every process in the risk management equation. In disability income, for example, that would be underwriting claims and how we price the product and the information that we have to manage the data to show us where we’re seeing claims emerge by occupation, by geography, and by producer. That’s called hunkering down on the risk management process and just managing every process in as excellent and as tight a fashion as we can. The Guardian and Berkshire are very focused on managing expenses. We’ve gone through a fairly substantive expense reduction cycle to make sure that we don’t see cost escalation going on where it doesn’t make sense; it needs to be an investment. And then, of course, top-line growth is important, and growing the business and having a good value proposition makes sense. But I literally put them in the order that I put them in to try and emphasize that the main event is profitable growth, and seeking executional excellence in how we manage the business. 

Regulatory Issues of 2005

Q: What legal or regulatory or legislative issues do you expect to be of the biggest concern in 2005:

HOLLAND : The political environment can be expected to provide challenges for the life insurance industry. Retirement savings and Social Security reforms are expected to be priority issues. Some ideas, such as lifetime savings accounts and retirement savings accounts, may provide competition for traditional annuities. Permanent repeal of the estate tax will likely come up again, and corporate-owned life insurance and bank-owned life insurance are perennial issues. A topic of significant interest to group insurance writers is the inclusion of group insurance as extension of the Terrorism Risk Insurance Act is debated.

A major issue facing the industry is state vs. federal regulation. A number of members of the American Council of Life Insurers have pushed for an optional federal charter. The states have resisted this approach and have been working on improved regulation, including interstate compacts, to address some of the industry’s concerns. The State Modernization and Regulatory Transparency Act was drafted by the staff of the House Financial Services Committee and, until recently, appeared to be a likely compromise. However, recent developments following probes by Eliot Spitzer, New York ’s attorney general, have raised the stakes in the question of state vs. federal regulation.  

ARTH: The optional federal charter and state regulation will continue to be a major issue for our industry in 2005, although at the present time it appears that much of the focus will be on improved regulatory oversight by the states. An emerging issue is the increased level of scrutiny by regulators over certain industry practices by both the state and federal regulators.  

BREMER: Fallout surrounding the Eliot Spitzer/broker compensation issues could have significant impact on internal systems and product marketing.Another regulatory issue that could be of great concern to our industry in 2005 is regulatory efficiency and modernization, particularly continued consideration of an optional federal charter. Such a change has the potential to improve the industry’s ability to bring products to market in a timely fashion, as well as reducing our regulatory compliance costs.

Another big issue is the ramifications of potential federal tax changes. These could be positive if greater tax incentives are provided for individuals planning for their retirement or other life contingencies (e.g., the LTC tax deduction legislation), or negative, if the growing federal budget deficit results in our companies and/or products being used as a vehicle for additional tax revenue. Similarly, continued efforts to repeal or drastically reform the estate tax could have a significant impact on the life insurance industry, as could the administration’s interest in providing tax incentives for additional forms of savings.  

CHAPPELL: Regulation by the various regulatory bodies is in the midst of change, and that will have a big impact on us. I believe the impact will be both structural and behavioral.  We must do our best to get ahead of the “change curve” by continuing to improve our processes and people, and not be satisfied with where we are today. Battles in Washington over tax policy, retirement savings and regulation will continue to occupy our time and affect our business.  

DAHL: The regulatory and legislative issues that will be of the biggest concern to our industry in 2005 will be tax changes, concerns regarding the right to underwrite, and privacy legislation.  

GILBERT: The Bush administration’s efforts to enhance the level of individual savings through lifetime savings accounts could have a deleterious impact on the products our industry sells and the longer-term savings that is the essence of those products.

The regulatory environment in which we operate is going to continue to be more demanding.  More and more resources, both human and financial, will be necessary in order to comply with new regulations. There are benefits to the consumer, but there is also a very real cost. The industry is likely to again find itself in an uncomfortable position as proposals to permanently eliminate the estate tax will again be raised in a Republican-controlled Congress.  

LOWER: This is an important area, and worth spending some time on. There will be five issues that we will be focused on.

The first issue is Sarbanes-Oxley compliance. I believe the most significant concern to the industry as it relates to the regulatory environment in 2005 and into 2006 will be the impact of compliance with a “Sarbanes-Oxley Section 404 type” requirement. This is my most significant concern because of the effort that it has taken public companies to comply with the law in 2004. Further, if the standard that will be audited to is the same as the public company standard, the effort for most non-public insurance companies will be greater, as they historically will have prepared less documentation surrounding their processes and may not have had as rigorous an audit in the past. Finally, I believe that insurance department personnel will require extensive training to be able to understand the attestation reports and appropriately respond to their findings.

The second issue we’ll be focused on is the regulation of variable insurance contracts. There are a number of recent regulatory actions or proposals that impact insurers issuing variable insurance products and insurers with affiliated broker-dealers to distribute the insurer’s variable products. These actions/proposals include: (1) SEC Rule 38a-1, effective October 2004, which requires that insurance companies separate accounts (under which variable insurance contracts are issued), have written policies and procedures reasonably designed to prevent violation of the federal securities laws, and that they designate a chief compliance officer responsible for administering those policies and procedures; (2) the new NASD Rule 3013, which was approved by the SEC in September 2004 and requires broker-dealers to designate a chief compliance officer and that the chief executive officer of the broker-dealer make certain annual certifications and reports; (3) new and revised NASD rules approved by the SEC in June 2004 regarding broker-dealers’ required supervisory procedures; (4) a proposed new NASD rule that would impose specific sales practice standards and supervisory requirements on broker-dealers for transactions in variable annuities; and (5) measures proposed by the SEC to address marketing timing issues and abuses.

In addition to the above actions, the NASD and SEC are focusing on variable insurance products in their examinations, and they issued in June 2004 a joint report on examination findings regarding broker-dealer sales of those products.

The third issue we’ll be focused on is fallout from New York Attorney General Eliot Spitzer’s complaint and investigation. Spitzer has filed a complaint against various insurers and insurance brokers, alleging that they rigged bids for insurance contracts to receive additional contingent commissions and that they failed to disclose the contingent commission arrangements. Spitzer has also claimed that these contingent commissions resulted in the brokers violating their fiduciary duty to clients by channeling business to insurers who would pay the most.

While the Spitzer complaint and investigation involve only commercial property/casualty business, they have already impacted the insurance industry as a whole, with respect to their reputations and stock prices. The ACLI has formed a task force on sales practices and compensation to examine the issues that emanate from the Spitzer complaint and related state investigations that may impact life insurers. As an example of such an impact, the Wall Street Journal reported that an Intel Corp. employee has filed a lawsuit alleging that individuals purchasing insurance through their employer’s employee benefits program pay inflated premiums for supplemental life and accidental death insurance.

The insurance industry is currently subject to the laws of all of the states in which they operate. Various proposals have been made for an optional federal charter, under which insurers could opt to be regulated by the federal government or the various states. In addition, some legislators and regulators feel that the current state regulatory system is ineffective. The Spitzer investigation may lead to renewed efforts to modify the existing regulatory system for insurers.

The fourth issue we’ll be focused on is global outsourcing. Legislation has been introduced in a number of states to restrict the outsourcing of jobs or business functions to other countries by U.S. insurers. Depending on the number of states adopting such legislation and the restrictions or burdens imposed by such laws, there could be a significant impact on insurers engaged in such outsourcing.

The fifth issue we’ll be focused on is class action reform. Insurers are increasingly subject to class action litigation that in some cases is not justified by the circumstances but requires extensive time and resources to defend. While the other areas discussed in this response involve legislative or regulatory actions that would have an adverse impact on insurers, class action reform legislation that would address some current abuses of the judicial system could have a significant positive impact on insurers.  

McFARLANE: As I mentioned in my answer to the question about mergers and consolidations, I expect to see revised regulations affecting the banking community, which will also impact our industry. I also suspect that shortly, we’re going to see some new regulations on distribution compensation practices in Canada as a result of the Spitzer investigation in the U.S. Although the first area to be targeted will be P&C companies, I also expect some impact on life insurers, which, at a minimum, will lead to improved compensation disclosure.  

MacLEAY: In 2005, we’ll still be arguing about the interstate compact and the optional federal charter. On the regulatory front, I suspect sales practices will re-emerge as an issue after the focus shifts from mutual funds and registered products to non-registered products. NASD and SEC-style requirements will likely be imposed on non-registered product sales. In addition, there could be significant pressure for full disclosure of compensation arising as fallout from the Spitzer investigations of commercial insurance brokerage.  

ROYSTER: The biggest concern to our industry in 2005 will be taxation of life insurance. Also, another issue will be state versus federal regulations.  

SCHOECK: One issue that will be of great concern to our industry is tort reform, which may finally get passed as a result of the recent elections. One of President Bush’s agendas is the tax code, which could affect the tax favored status of our products. Estate taxes and how the government approaches Social Security could be positive or negative for our industry. I think the desire to encourage more savings for retirement could be a real positive for us. We are the on