From Resource, January  2007
Copyright by LOMA

Forecast for 2007: Changes, Challenges Lie Ahead  

Members of LOMA’s Board of Directors share their thoughts on up-and-coming products, regulatory and legislative issues, M&A activity, technology’s role in the industry’s evolution, and other key issues. 

By Stephen Hall  

With 2006 now officially a memory and 2007 a mystery waiting to be unraveled, the next 12 months are full of uncertainty, in terms of what lies ahead for the industry.  

However, what is likely to occur with regard to key industry issues and concerns is something that members of LOMA’s Board of Directors have definite opinions about. Resource recently surveyed members of the board to solicit their views on where they see the industry headed for 2007. Among the major points of agreement were the following:

Sales and profits will likely remain flat or rise somewhat. Sales of universal, variable universal and term life products are expected to be strong performers in 2007, and possibly annuities as well. Sales of critical-illness insurance products will probably continue to trend downward.

The most critical regulatory and legislative issues in the new year will be the optional federal charter, the reform or repeal of the estate tax, principle-based reserve requirements, overseas travel underwriting, and annuity disclosures.

Merger and acquisition activity will probably continue, though not at the same rate that has transpired over the last few years.

Participating board members also had much to say about the imminent retirement of many members of the Baby Boomer generation and the many opportunities this phenomenon presents for the industry (Scroll down to see “Opportunities in the Boomer Retirement Market”.).  
Board members who participated in the 2007 forecast are:  

Lawrence J. Arth, CFA, chairman and CEO of the UNIFI Companies in Lincoln , Neb. , and LOMA chairman;  

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

Steve Briggs, CLU, ChFC, executive vice president of the Protective Life Insurance Co. in Birmingham , Ala. ;  

Donald W. Britton, FSA, MAA, president of the life business group for ING U.S. Financial Services in Atlanta , Ga. ;  

David M. Holland, FSA, MAAA, president and CEO of Munich American Reassurance Co. (MARC) in Atlanta, Ga.;  

Mark E. Konen, FSA, president of individual markets for Lincoln Financial Group in Greensboro , N.C. ;  

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

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

Al Meyer, CLU, ChFC, executive vice president of American Family Insurance in Madison , Wis. ;  

George S. Mohacsi, FLMI, president and CEO of Foresters in Toronto , Ontario ;  

Thomas E. Rattmann, CFA, chairman of the board, president and CEO of Columbian Mutual Life Insurance Co. in Binghampton, N.Y.;  

John W. Wells, FLMI, CPA, CLU, ACS, senior vice president of operations at Bankers Life & Casualty in Chicago, Ill.;  

Susan D. Waring, CLU, ChFC, executive vice president and CAO for State Farm Life Insurance Co. in Bloomington, Ill., vice president for State Farm Health, and LOMA vice chairman;  

Lizabeth H. Zlatkus, president of international wealth management and group benefits for Hartford Life, Inc. in Hartford , Conn.

The questions and answers follow:

1) SALES. What is your overall prediction for sales, premiums and profits for our industry as a whole in 2007? What products look particularly strong or weak?  

ART: For the life insurance industry, my outlook is for modest growth in both new sales and total premium, with good levels of profitability for the overall industry. Products that should show good growth include both life and annuity products that offer secondary guarantees at the expense of those products that don’t have secondary guarantee features.  

BREMER: We expect the industry’s 2007 new life premium growth to be relatively flat, with a number of companies showing negative growth as they begin—or continue—to reduce sales of investor-owned life insurance (IOLI). Due to significant IOLI sales in the first half of 2006, some companies will be faced with difficult year-over-year sales comparisons in 2007. Sales growth of universal life with secondary guarantees (ULSG) is expected to continue to slow as more companies reprice their products and restrict issuance ages.

Uncertainty in the corporate owned life insurance (COLI) market was dissipated by the Pension Protection Act of 2006. Though a temporary pause may occur initially as companies adapt to the new administrative requirements, we expect that the COLI Best Practices provisions within the Act will actually help the industry longer-term, due to the certainty of the tax-free death benefit status.

Overall, we expect modest growth in the annuity business. If the equity markets remain favorable, we would expect to see additional growth in VUL and VA sales. Fixed annuities have had to compete within a rising interest rate environment, which can help sales, but we are also competing with other fixed instruments and a relatively healthy equity market, which have made sales growth difficult. We would also like to note that many articles in the popular press are beginning to tout the merits of using immediate annuities as part of a person’s retirement income strategy, and we expect that this product will enter a sustainable growth cycle in the not-too-distant future.

Disability income insurance sales have been growing moderately—3 to 4 percent—and we expect that trend to continue. Long-term care industry sales have been difficult to forecast and have been rather soft for some time as consumers wrestle with their understanding of and need for the product. Though we do not anticipate any significant industry growth in 2007, we believe that at some point, aging baby boomers will want to more actively pursue this type of risk management insurance.

Profits for the life industry in 2006 have been rather strong due to higher-than-expected sales growth, favorable financial markets, and a focus on cost controls. We expect profits to remain dependent on those three variables, but a moderation of the 2006 growth rate experienced is expected.  

BRIGGS: We will see strong sales in UL and solid increases in VUL as companies add guarantees and other benefits to that line. Equity-indexed universal life
(EIUL) will continue to make advances above the average. Term will hold steady. Accumulation annuities will have a strong year, and income-based products will continue to get strong attention. Profitability will be mixed, with gains coming from expense management more than core products results, since most lines are highly competitive and margins continue to decline on new business while higher-margin products roll off the books.  

BRITTON: The industry will still have limited sales growth. The number of new policies sold will continue to decline.  Earnings will not have robust growth, and guaranteed premium universal life will still be the big seller.  

HOLLAND : For the life insurance market, I expect recent trends to continue. Premium growth is being led by UL and variable UL products. Face amount is growing modestly, and the number of policies issued continues to decline. In 2005, the top 25 issuers wrote approximately 75 percent of the volume for the entire industry, and as a group, they experienced a decline in face amount for new issues of 1 percent for term and 3 percent for permanent. Although term insurance may grow overall, there will be substantial volatility amongst individual companies. Term products may experience a resurgence, should principle-based reserving and the interim reserving solutions result in more attractive pricing for the consumers.

With the Baby Boom generation nearing retirement age, there will continue to be a strong push for asset accumulation products, especially variable annuities and indexed annuities. The non-cancelable disability income market is relatively flat by premium, with most of the observed growth in the guaranteed renewable and multi-life product designs. As non-can dominates the established DI market with white-collar professions, some companies have shifted their focus to the underserved blue-collar market via guaranteed renewable designs. Although demographics demand that there will be a growth in the long-term care market, it may still be some time in the future before this occurs.  

KONEN: Well, I think that from Lincoln ’s perspective, we see strong sales growth potential in both our life insurance and our annuity lines, particularly in the variable part of those products. And from a profit standpoint, I think we see stability and growth in the profits as well. I don’t think we see any products that are particularly weak in this environment.  

MacLEAY Sales expectations for 2007 are mixed by product line, with overall life insurance sales growth expected to be in the low single digits, most likely led by universal life and perhaps a resurgence of variable universal life if equity markets remain healthy. Fixed annuity sales depend very much on the interest rate environment, especially the shape of the yield curve. If the curve returns to a positive slope in 2007, expect a resurgence in fixed annuity sales. If the curve remains flat to inverted, which is the more probable scenario, then fixed annuity sales will continue to struggle. Variable annuities with living benefit guarantees will most likely continue to be strong sellers as more companies compete on the basis of these specific features.

In terms of profits, life companies will continue to be stressed by the low spreads available due to the expected continuing low interest-rate environment. Nonetheless, profit growth should continue to be healthy as many strong companies deliver new products to the market and contain expenses while benefiting from good mortality  and  positive investment results. This positive profit outlook could be compromised if there is a significant recession, especially if it is accompanied by a deterioration in credit quality and an upsurge in defaults. Also, companies with substantial exposure to products with embedded options, such as the VAs with guaranteed living benefits, could face earnings pressure if equity market volatility and the cost of hedging increases significantly.  

McFARLANE: In Canada , I expect individual life sales to be relatively flat compared with 2006. Renewable term and universal life will be popular products, while term to 100 sales will continue to decrease as a result of companies either withdrawing the product or alternatively implementing rate increases, which has decreased the product’s attractiveness. Sales of critical illness insurance will continue to be weak, compared to the strong growth the market had seen up until 2006. This is due to the significant rate increases companies implemented in 2005 and the more complex underwriting (compared to life insurance), both of which have dampened broker enthusiasm for the product, despite an aging population and increasing needs.

Profitability should remain strong for the Canadian industry, especially for the large insurers who will continue to benefit from scale economies, their dominant Canadian market share, and their international business expansion. Smaller companies, especially those in the very competitive individual life market, will continue to see pressure on profitability as they manage the balance between market growth and the bottom line.  

MEYER: In the multi-line industry, we expect the auto line to continue to be somewhat soft in both sales and premium growth. The fire line is in a similar position, but not quite like auto. Profits will be strong, but somewhat lower than 2006 due to rate flattening.  

MOHACSI: I believe the industry will have a good year in 2007, with sales and profitability consistent with 2005 and 2006, although margins in new sales will still be very slim. Universal life and term sales are showing some growth, which should continue. Critical-illness sales are declining as pricing hardens in the market but are showing some signs of stabilizing. Sales of segregated funds, or segfunds, will continue to grow, as demographics would dictate, but will be volatile as equity markets rise and fall. Specialty riders added to life insurance products seem to be coming into favor.  

RATTMANN: I expect that overall sales will rise modestly, in the low single digits. In-force premiums will rise while cost per $1,000 will continue to decline modestly. Industry profits should grow modestly due to higher sales and financial market returns.  

WARING: I see overall life insurance and annuity sales being slightly up to relatively flat. Term insurance will show some growth in 2007 as the rollout of new 2001 CSO term products gain momentum, but permanent sales will be relatively flat.

We currently have a flat yield curve where the extra yield on a 10-year bond over a five-year bond is negligible. This flat yield curve hurts the competitiveness of fixed annuities vs. bank CDs.  I cannot see a pickup in fixed annuities until we have a more traditional sloped yield curve.

The stock market has been up for the first 10 months of 2006. We need continued stock market increases to fuel further increases in variable sales. The task of evaluating risk in the sales of living benefits and secondary guarantees continues to be challenging and is a potential threat to industry profitability. With rising interest rates, portfolio interest rates should stop declining and fixed annuity margins could return to acceptable levels if the yield curve would steepen.  

WELLS: Overall modest growth for these areas would be my view. In terms of sales, as baby boomers start to retire, fixed annuities seem to be an attractive product. On the strength of the stock market, sales of variable annuities will pick up, with life insurance sales relatively flat.

 ZLATKUS: In the U.S. , the individual life insurance business is expected to finish with a mid-single-digit growth rate in 2006. In 2007, we anticipate industry sales will be relatively flat, with marginal growth at best. We expect universal and term life sales to lead the way, while whole life and variable universal will struggle to grow sales.

With respect to employee group benefits, we also anticipate mid-single-digit growth in the life and disability businesses.  In 2007, we expect these growth trends to continue as employer spending on medical benefits continues to place pressure on ancillary products, such as group life and group disability insurance.

On the individual annuity side, we see the potential for continued future market growth as the Baby Boom generation rapidly approaches retirement here in the U.S.   With 3 million Baby Boomers set to reach age 60 in the coming year alone, we anticipate growth in the VA industry to continue, as the demand for living benefit guarantees will remain strong. We do not anticipate growth in the fixed annuity industry; however, sales in this market will be largely dependent on the level of interest rates in 2007.

Internationally, we anticipate that the Japanese VA industry will continue its strong growth as the market continues to mature and the aging Japanese
population continues to shift its assets from cash to retirement investments. Additionally, 2007 will see further bank deregulation that will pave the way for
new life product offerings, as well as the very early initial stage of the privatization of Japan Post and its $3 trillion in assets.

 2) REGULATION
What regulatory or legislative issues will be of the biggest concern to our industry in 2007, and why?  

ART: The optional federal charter legislation at the federal level, along with principle-based reserving at the regulatory level, will be the bigger issues the industry will face in 2007. Additionally, federal and estate tax legislation proposals will likely surface. At the state level, we will likely see new regulations on required annuity disclosures and perhaps life insurance disclosures.  

BREMER: Increasing regulatory pressure will continue with regard to the secondary life insurance markets as hedge funds and other investor groups pursue arbitrage opportunities. Some companies have stepped forward in an attempt to turn this growing tide within their own distribution channels. Sales in this market may moderate as regulatory discussions increase. We observed a similar cooling-off of sales when equity index annuities were subjected to more regulatory scrutiny. Actuaries and insurance regulators have devoted a lot of effort in 2006 to studying the appropriate level of reserves and new reserving mechanisms for life insurance products; that work is expected to continue into 2007. Finally, although results are unknown at the time of these comments, the November 2006 mid-term election results may affect our industry. Legislation regarding the tax treatment of capital gains, dividends and estates could all change dramatically. Any such reforms will significantly impact our industry. As firms begin to work through the changes presented by the Pension Protection Act, opportunities will arise. Looking beyond 2007, the Pension Protection Act will be the catalyst for the development of the next generation of products.  

BRIGGS: The optional federal charter should continue to make solid progress next year. Principle-based reserves will make modest progress; annuity disclosure rules should come into focus next year as well.  

BRITTON: The regulatory and legislative issues that will be of the biggest concern to our industry in 2007 will be reserves for guaranteed products. A move to principle-based reserves is very important to the industry.  

HOLLAND : From a long-term perspective, there will be continued efforts to improve state insurance regulation while at the same time developing alternatives such as an optional federal charter. Due to broad recognition by the industry and regulators that the current formulaic reserving approaches inadequately capture all the material risks inherent in certain products, resulting in inappropriate reserves, significant support for principle-based reserving has been building. States are working to implement the interim reserving solution, and both the industry and regulators are diligently moving toward development of a comprehensive proposal that can be adopted by the NAIC and implemented by the states. The NAIC Reinsurance Task Force plans to review issues raised in connection with U.S. requirements regarding reinsurance collateral. Depending on the support for such a proposal, changes to the current collateralization requirements could be a significant topic of discussion in 2007.

Another issue is regulatory efforts to limit insurers’ ability to underwrite travel. The NAIC recently held a public hearing to discuss travel underwriting practices and is working on an amendment to the Unfair Trade Practices Model Act that would provide additional guidance regarding permissible underwriting of travel.  

KONEN: I can think of a few major areas. The first area is the optional federal charter, and the continuing debate and possible resolution on that. It’s extremely important to our industry, in terms of making it easy for customers to do business with us and establishing a level playing field with other financial services industries. The second area is the possible repeal or reform of the estate tax, assuming anything happens with that. I would say the estate tax debate is a life insurance issue, and depending on which way that goes, it could have an impact, given the way life insurance is currently being marketed in many areas. It will create a need for our industry to refocus its attentions to other capabilities of life insurance, because life insurance can do a lot of things besides just estate tax planning.  

MacLEAY At the national level, assuming there is no broad-based tax reform initiative, the two significant issues will be the estate tax and the optional federal charter. A compromise on the estate tax seems more likely as the complexion of Congress changes, while the optional federal charter is likely to move forward but not achieve closure in 2007. At the state level, continued progress on the interstate compact is likely as state regulators persist in their efforts to improve the state regulatory environment in hopes of defeating or reducing the need for a federal charter alternative. Also, expect movement at the state level toward a comprehensive regulatory approach to the burgeoning life settlements market, and more progress on annuity disclosure and principle-based reserving.  

McFARLANE: In Canada , probably the most important issue next year is the revision to the Federal Bank Act, which is expected to be enacted in 2007. However, as to the impact on the insurance business, I don’t expect we’re going to see any major changes. Although the banks have been lobbying aggressively to have the government ease the present restrictions on bancassurance, it’s unlikely to happen with a minority federal government and the political risks due to negative reaction from consumers and brokers to any meaningful changes.  

MEYER: The possibility of greater federal regulation will have a major impact on the P&C industry. If there is movement toward a national disaster plan, it will impact the fire line availability in disaster-prone areas. Also, any adverse ruling on the use of credit in the rating of policies will impact pricing.  

MOHACSI: With a minority government in Canada , it is unlikely that there will be any major changes in financial services legislation. In particular, the prohibition on banks selling insurance in their bank branches will continue. Areas on which companies will need to focus include compliance with anti-money-laundering rules, privacy regulations, and general market conduct regulations.  

RATTMANN: I believe the two largest insurance-specific issues will be principle-based reserving and the optional federal charter versus the current state-based regulation.  

WARING: The impact of pension reform could help drive a continued move toward defined contribution plans.  Restrictions on the underwriting of foreign travel may need to be accounted for in the pricing of new products.  The likely requirement of the Commissioners Annuity Reserve Valuation Method for variable annuity reserves (VACARvm) and the move toward principle-based reserves in statutory accounting (although not an immediate concern for 2007) will require changes to actuarial computing capacity and the pricing process. Also, the continued movement toward compliance with the 2001 CSO mortality table requirements will continue and drive product development activity.  

WELLS: The spate of accounting scandals will continue to lead to stricter enforcement by the regulators. The implementation of additional controls by companies will lead to increased costs of compliance, impacting profitability. Organizations that are proactive in implementing an effective enterprise approach in monitoring compliance at the highest levels of the company should have an advantage in working with the regulators.

Compliance issues relating to the sale of annuities to seniors will continue to emerge as an issue. Several states have adopted suitability requirements to ensure that sales of these products are appropriate. This trend is expected to continue. Some companies selling annuity products are being proactive on this issue and are making suitability an important component of the overall sales process.  

ZLATKUS: In the U.S. , regulatory and legislative issues of concern to the industry include appropriate regulations on suitability in the sales process, questions of disclosure on compensation, and ever-changing proposals for the tax code. The industry has also been concerned about a potential lack of uniformity if various states impose new suitability rules on the life insurance or annuity sales process. The continued debate on potential changes to, or repeal of, the estate tax will also remain of considerable importance to life insurers.

Internationally, we expect current regulatory trends to continue as products become more complex and the marketplace evolves in terms of sophistication and customer needs. In the countries in which The Hartford operates, we see a continued emphasis on the structure of insurers, wherein regulators seek for insurers to maintain appropriate internal structures to ensure compliance, assess risk—including underwriting, financial and operating risk—and provide appropriate products for the marketplace. Regulators continue to look to the experiences of their colleagues in other countries and to share best practices among themselves. As a result, we will continue to see a measure of regulatory convergence among countries.

3) RESTRUCTURING
Do you believe industry restructuring through mergers, consolidations and alliances will continue? How is the industry likely to look 10 years from now?  

ART: Mergers, consolidation, and strategic alliance activities will continue for the foreseeable future. For many companies, achieving scale is a significant challenge, and growth through internal activities will not be sufficient to reach scale. In 10 years, there will be fewer but larger companies in the life insurance industry.  

BREMER: We continue to believe that the industry will be marked by mergers and acquisitions to some degree, though we did not witness any blockbuster activity in 2006. The industry is becoming more global as companies combine or form alliances across borders in pursuit of growth. We expect companies will continue to try to build scale in the business lines that they want to pursue while exiting others that no longer align with their company’s current focus. Looking out 10 years, we would expect to see a number of large global players along with some dominant niche players. Although fewer in number, we expect many small insurance companies to survive into the future.  

BRIGGS: I certainly hope so—it is core to our strategy and skill set. Ten years from now, there will be somewhat fewer large companies (focused on scale improvement through a merger).  

BRITTON: We still have a lot of supply. While there is a large population of people without life insurance, we are focused on the affluent market and neglecting the middle market. Alternative distribution models may be the answer to serving this market.  

HOLLAND : The direct insurance market has already undergone considerable consolidation, and I expect it to continue over the next decade. Today, the top 100 companies control 97 percent of industry assets. Major companies will seek even larger scale, consolidators will continue to profit from putting together smaller companies which lack critical mass for today’s products, and international companies who want to be truly global will seek opportunities to expand in the U.S. market. There could also be interest from outside entities who want to move into the asset accumulation market associated with longevity-based products. However, the combination of high capital costs and low return on capital has made the industry fundamentally unattractive for outsiders.  

KONEN: I do believe industry restructuring through mergers, consolidations and alliances will continue. There are still a lot of strong competitors in the insurance space, and I believe that this plethora of competitors will cause increased consolidation over the next decade. Ten years from now, there are going to be fewer of us, and the industry will be more concentrated.  

MacLEAY Industry consolidation will certainly continue, but at a somewhat slower pace. Looking out 10 years, it is highly likely that there will be fewer independent companies and that the industry will have further bifurcated into a relatively small number of extremely large “scale players” and a group of smaller, niche-focused, high-quality organizations.  

McFARLANE: In Canada , the life insurance industry has been through significant consolidation over the last 10 years.  While there may be acquisitions in the coming years, it’s certainly not going to be at the pace we’ve seen in the past. I believe the next area of significant consolidation is going to be in mergers between insurance companies and banks. As for the timing, this is largely contingent on a change in the political environment to accommodate the required regulatory changes. With a minority federal government, I don’t see this happening in the short-term, but I would certainly expect it to occur in the next five to 10 years.    

MEYER: Merger and acquisition activity will continue as companies look for greater scale to gain a competitive advantage. The challenge going forward will be companies’ ability to differentiate themselves in an industry that appears headed toward commoditization. Branding will be key in the next few years.  

MOHACSI: In Canada , much of the major M&A activity is complete. The top five companies in the market have more than 80 percent of industry assets. While there are a number of mid-sized companies, they will need to focus on defined markets or product areas and be a major player in their chosen segment to be successful in the longer term. Otherwise, some of the mid-sized players will be purchased by the larger players.  

RATTMANN: Yes, I believe industry restructuring will continue. I expect the number of companies to decline 30 to 50 percent over the next decade. Alliances will continue to grow. Both trends will be driven by the ongoing cost pressures of the industry, thin margins, and a declining agency force.  

WARING: Few of the top 30 companies in our industry are obvious acquisition targets. Most activity could be by larger groups acquiring many small companies. To acquire economics of scale, many
medium- and smaller-sized companies will enter into alliances or merge to obtain critical mass. What’s less predictable is whether we will see mergers of the mega-companies. The latter is what has happened in the Canadian life insurance industry and the U.S. banking industry. Specialization will drive sales and acquisitions of specific blocks of business.  

WELLS: Mergers and acquisitions will most likely continue in the years ahead. Sales of closed blocks of business will also continue as companies focus on their core product lines and markets. While it is likely that there will be fewer carriers in the years ahead, companies will continue to need to attract and retain talent. Our industry has a more difficult time than other financial services companies in this area, and this situation will continue to deteriorate as Baby Boomers retire. Companies will need to create unique ways for retirees to continue to contribute, as well as develop strategies to attract top new talent into the industry. For example, allowing employees to telecommute is growing in popularity, and some companies are seeing a noticeable increase in productivity as a result.  

ZLATKUS: There will continue to be mergers, consolidations, and sales of blocks of business in our industry as the pursuit of growth in a mature industry such as ours requires scale and capital to satisfy regulatory and rating agency requirements, maintain and enhance internal risk management programs, invest in distribution, technology and service, and pursue global markets.  

4) TECHNOLOGY
What new technologies have the greatest potential to help our industry, and how can they help?  

ART: Web enablement of our producers and customers continues to offer significant opportunities to improve service levels at reduced costs. Wireless technology will expand access to producers and customers. Identity management will continue to present challenges.

 BREMER: The explosion of educational material and planning tools available on the Internet has raised consumer awareness of various products, risks and costs. This proliferation of information provides yet another reason for companies to invest in the training of their financial representatives while providing them with the best tools available.

Looking forward, the convergence of account access, financial market data, and customer communication is happening here and now. Some of these technologies will impact and possibly enhance the sales process. As firms continue to develop straight-though processing, the efficiencies gained should empower representatives to grow their businesses.

Though perhaps not new, the mobile professional office is becoming a reality for many in the industry. Finding ways to support this new business model will certainly lead to additional technological investments.  

BRIGGS: We see continued expansion of existing technologies, such as imaging and workflow, and we are developing voice signatures and electronic signatures as well as electronic policy delivery. We await breakthroughs in access to medical and other databases that will streamline the underwriting process but that will also result in reasonable mortality results.  

BRITTON: The technologies that I believe have the greatest potential to help our industry are new front-end tools for underwriting and the application process, voice and e-signature, and drug database information.  

HOLLAND : One of the significant trends in the industry has been a focus on information security and information controls related to security. The increasing frequency of reports of missing data due to lost or stolen laptops has made this issue prominent.  The need to monitor data being copied from production data sources onto devices such as USB drives becomes more pressing, as  these devices can store more and more information in a portable fashion.  Today, an innocent-appearing digital camera or iPod can be a vehicle to copy and transport data from an office network.  New systems that reside on company networks will need to track and monitor the movement of company data to ensure that it’s not being copied to an unauthorized location. These systems can restrict USB connections to only allow approved devices to connect to desktops and laptops.  Some systems also incorporate human behavior analytical capabilities that seek unusual activities or behavior patterns on the corporate network that may indicate improper use or transport of data.

In contrast to limiting data for security reasons, companies need to make information readily available to clients, trading partners and employees. New business continuity challenges such as pandemics require that information be accessible remotely, but in a highly secure and controllable manner. Systems that provide disk drive encryption on laptops and workstations that can be centrally managed by IT staff are becoming increasingly popular. This technology encrypts local disk drives from a centrally controlled management system. Such technology enables companies to effectively deploy and enforce encryption without visiting every workstation.  

KONEN: I think that in general, the new technologies that have the greatest potential to help our industry are what I call various business-to-business technologies—things that make it easier for our customers to do business with us. For a company like Lincoln , our customers are really financial intermediaries, whether they’re financial planners, people in a wirehouse or life insurance agents. And so the kinds of tools that can make it easier for those intermediaries to do business with us are the kinds of technologies that have the greatest potential to help us at Lincoln Financial, and I think the same thing is true of a lot of our competitors as well.  

MacLEAY: Use of the Internet continues to evolve, and it still represents the single most significant technology breakthrough for the industry. Advanced communications technologies are especially important for the emerging younger affluent market, for penetrating the underserved middle market, and potentially for serving the in-retirement market.  

McFARLANE: I believe what has the greatest potential to help our industry are continued expansion of current technologies to improve efficiencies and lower costs in customer and distribution Web services, wireless technology, electronic forms, and automated underwriting. At Wawanesa Life, we’re implementing Web capabilities for our group customers and brokers, as well as expanding wireless technology to enable staff to work from home in the event of a pandemic or some other major business disruption.  

MEYER: The Web continues to impact business models. The insurance industry is playing catch-up to other industries. This gap will close in the next few years.  

MOHACSI: Many areas come to mind. First, there are now more ways than ever to communicate with customers, advisors and employees. Obviously e-mail and Web sites are common. Message centers should become more common as companies address information security and privacy concerns. Companies are starting to experiment with such things as blogs and podcasts to get attention and target their message.

Second, there is still so much that technology can bring to improving critical business processes, particularly the new business process, which in many companies is still a paper-intensive, high-cost transaction. We should see automated underwriting scoring and electronic submission of business and delivery of policies in more companies. The industry and its business partners need to adopt the Accord standards more universally to communicate information efficiently through this and other processes.  

RATTMANN: The Internet and wireless technology will continue to play a growing role in both the sale and servicing of policies. The continued growth of each will reduce the use of paper in both the sales and servicing activities. However, the requisite system investments will continue to strain companies financially and will further contribute to the consolidation trend.  

WARING: The internet and wireless technology continue to hold great potential for our industry. Providing access to information and customer self-service through the Web gives our industry the opportunity to reach and respond to the customer in the time and manner most convenient for them. Further, the expanded use of electronic signatures and use of biometrics for customer authentication will simplify the sales and servicing processes and help to ensure customer privacy.

Underwriting technologies that eliminate the need for invasive procedures or streamline the process for obtaining pertinent information will speed up the underwriting process. Computer programming practices that employ the use of business models to capture business rules ensure consistent use across technical applications. This helps our industry by ensuring higher adherence to compliance and regulatory guidelines while simplifying the process for the end-user. Any solutions to relieve the burden of legacy systems will help the industry move forward.  

WELLS: Technology-enabled solutions that provide the continued development of straight-through processing will add significant value. This is particularly true in the sales and new business areas. Processes like the electronic submission of applications and the ordering and follow-up of underwriting requirements will lead to more efficient processes and improved placement rates.

Replacement of expensive legacy systems continues to be a challenge for many companies, particularly those that have grown through acquisition. Finding cost-effective ways to convert these systems to new platforms, developing a surround system, or business process outsourcing are all options.

Technology that helps improve auto adjudication of health claims will continue to be popular. Also for health carriers, systems that support the use of claims data to help support financial modeling will be needed.

Finally, workflow systems and enhanced optical character recognition (OCR) technology will continue to help companies operate more efficiently in the back office. These tools also provide companies flexibility in moving work to and from multiple locations.  

ZLATKUS: Several technology trends are helping the industry to lower costs and improve efficiency. These include Web-based customer service, streamlined electronic data interchange with distribution partners, wireless technologies for field support, electronic forms and signatures, imaging technology, automated workflow management, enhanced data mining (audio and video), and tool enhancements for security and compliance management. Grid computing and other technologies are becoming increasingly important for the hedging and risk management programs which support the product guarantees underlying many of the products being offered in the marketplace.  

5) PROFITABILITY
How can our industry increase its profitability?  

ART: The industry can improve its profitability by increasing the productivity of both field and home office associates. Also, it needs to find ways to increase top-line revenues at a rate greater than the increase in expenses.  

BREMER: Simply put, the industry should focus on long-term profitability. There really is no substitute for rational product pricing and prudent risk management. Our organization expects to achieve long-term profitability by focusing on three priorities: growing our insurance revenue, strengthening our distribution system, and focusing on operating efficiencies. Overall, our goal remains the same: to create sustainable, organic, bottom-line growth.  

BRIGGS: Expense management will be the primary tool in the coming year with some creative capital management opportunities (reserve securitizations, for example) for companies of enough size to execute, which will improve returns on capital.  

BRITTON: We need to increase our productivity, but more importantly, we have to find a way to get real growth back into the industry. We need to find new ways to serve the underserved market that allows companies to build more scale in business, and we need better reserving methods that do not require big redundant reserves.  

HOLLAND : Profitability can be increased by reducing structural costs that are specific to the insurance arena, such as the 50 sets of state regulatory laws. Critical rationalizing of risk capital is also of paramount importance to improving profitability. The struggle has begun with the introduction of the concept of principle-based reserving (PBR). If we cannot reduce the capital required by statutory reserving and risk-based capital (RBC) rules, redundant reserves will continue to drive down the returns of our products. 

The industry has made the transition from mortality risk life products to asset accumulation products. This hasn’t been without pain, but it has been more or less successful and in line with demographic developments. Now the industry, along with other asset accumulators, must transition to longevity/income risk products. The transition is already under way. Unlike other asset accumulators, our industry has the knowledge and expertise to address longevity risk in tandem with investment risk. This is the next huge opportunity to reap the profits of managing risk for our customers.

For life insurance, all the demographics suggest that consumers age 65 and over make up a robust market, especially those who have money to spend. The key will be developing proper risk selection procedures, tests and protocols, along with the necessary risk management. The demand for LTC coverage has to increase as the Baby Boomer generation ages; there needs to be emphasis on product design and risk management techniques to make this a profitable product.

There are profits and sales to be had in the middle market in the U.S. It continues to be neglected by the vast majority of carriers. As time goes on, I expect this part of the market to become oriented more toward ethnic groups, particularly groups of recent immigrants. Finding economical ways to serve that segment of the market will be profitable.  

KONEN: Our industry can increase its profitability through understanding and managing prudently these risks we take. When I think about what we in the insurance industry have to offer that no one else does, I think about the “franchise rights” of being able to offer this security and these various types of guarantees. A robust understanding of exactly what benefits we are offering, and making sure those are appropriately priced and managed is the key to our industry’s profitability. This is an aspect that this industry can and must improve upon.  

MacLEAY The key to increased profitability in any business is to offer soundly priced products that represent attractive value to consumers while continuously improving productivity and customer service. In the life insurance business, where products can be on the books for decades, it is very important to improve unit costs not just on new products, but on in-force business as well. Hence, continuous improvement in operations, adding scale to spread costs over a bigger base, and the effective leveraging of technology are all critical factors in improving profitability.  

McFARLANE: Within the Canadian industry, one of the keys to improving profitability is cost containment and, where possible, expense reductions. Certainly the large Canadian companies have gained a significant cost advantage from their acquisitions and resulting scale economies when it comes to expenses.

For a small company like ours, increased profitability will come from growth, both organically and through acquisitions, as well as prudent expense management. Where we can, we will utilize technology not only to improve customer service, but also to improve cost efficiencies. In 2006, we installed a new administration system for our group division, which we expect will be a significant contributor to our growth and future profitability.  

MEYER: The companies in our industry must maintain discipline in pricing.  

MOHACSI: Two ways to increase profitability are to reduce expenses by making our business processes more efficient, and finding market niches that are underserved and where some reasonable margins can be priced. As stated above, the new business process is one that can be made much more efficient. As for underserved markets, the industry has acknowledged for many years that the middle market is underserved. Innovative low-cost, high-volume distribution channels need to be developed to get to this market more effectively.  

RATTMANN: Our industry can increase its profitability through consolidation, a tight focus on the market or markets a company serves, and a relentless focus on reducing overall expenses.  

WARING: We need to increase revenue while decreasing expenses. Ways that the industry is trying to increase revenue include increased penetration of the under- served markets and increasing sales to existing clients. Expenses can be lowered by aggressive expense control, outsourcing and managing risk. Alliances can provide access to products that are not able to be manufactured on a cost-efficient basis.

Disciplined pricing for an acceptable return on equity is crucial to increasing profitability. Effective risk management programs should be in place to ensure pricing expectations are realized.  

WELLS: Continuing to manage margins through careful risk selection, managing expenses, and controlling claims costs will require more diligence than ever in order to compete effectively.

A key driver of improved profitability will be product innovation and speed of delivery to the distribution channel.  Companies that are able to deliver these products to the market rapidly through streamlined product development and improved technology will be in the best position to capitalize on increased sales and profits.

One method by which many companies can improve profits is focusing on their own policyholders. Strategies that consider building relationships with existing customers through improved service and better communications will provide opportunities to cross-sell other products into the household. An effective conservation program should also be part of this strategy.

A relentless focus on expense reduction will also help. The industry should continue to consider outsourcing functions or tasks that are not considered core competencies, that are transactional in nature, and that are conducive to reducing expenses. These include data entry activities, certain high-volume back-office transactions, and mailroom activities.  

ZLATKUS: To increase profitability, our industry should focus on developing rational product features that serve the current and future needs of our customers. When combined with strong underwriting, pricing to an appropriate return on capital, and excellent risk management, our industry will not only provide great value to our customers, but will also grow profitably.

In addition, effectiveness and efficiency in distribution and service, as well as careful staging of technology investments, are critical to sustaining a competitive advantage.    

Opportunities in the Boomer Retirement Market  
In the questionnaire that was sent out to LOMA’s board members for this article, one question asked participants to reflect on the fact that many Baby Boomers are rapidly approaching retirement age, and to share their thoughts on the opportunities this offers. The responses to this follow.

Q: As the huge Baby Boomer generation approaches retirement, what opportunities do they present to the industry?

ARTH: The Baby Boomer generation presents a tremendous opportunity for the life insurance industry to provide for secure retirements to that generation. The life insurance industry is uniquely positioned to provide “guaranteed” levels of retirement income to Baby Boomers through the development and marketing of products that feature distribution guarantees.  

BREMER: Research has indicated that Boomers have concerns about the many risks they face in retirement—including health care expenses, long-term care, longevity, inflation and investments—and are interested in advice on how they can manage these risks. Risk management is a core competency of our industry. As such, we are well-positioned to help clients manage the many retirement risks they face through both existing products, such as annuities and long-term care, and new and innovative products, such as longevity insurance and combination products. Risk management education and advice is also a core competency of the industry’s distribution partners.  

BRIGGS: We obviously can offer products that cannot be outlived, and our industry’s life and annuity products continue to exhibit creative income streaming benefits. We are working on consumer-friendly income benefits in the life and annuity lines and are developing packaged sales concepts focused on asset transfer and legacy planning.  

BRITTON: Only our industry can provide guaranteed life incomes, and the SPIA (single-premium immediate annuity) market should grow. I am in the life segment of ING, and we are using life insurance as a tool to protect, accumulate and distribute wealth.  

HOLLAND : Previous generations have been able to put a large reliance on company defined-benefit pension plans on top of a layer of Social Security pension. However, many of those in the Baby Boomer generation either do not have corporate pensions or have pensions that are not as rich as in the past. Thus, there is an increasing need to fill this void. For years, the financial industry has been predicting a large increase in immediate annuity sales. Although there has been significant focus regarding the advantages and challenges associated with financial guarantees on this business, there is also the challenge of the uncertainty regarding managing the longevity risk. In addition to annuities, products such as critical illness and long-term care can be of help to meet the needs of the Boomers. At MARC, we expect to draw upon our expertise as a global reinsurer to build best practices to turn risk into value.  

KONEN: I think this is the greatest opportunity for the insurance industry, both in terms of life insurance and annuities products, that we’ve had in probably 30 years. First and foremost, Boomers are looking for security, and we are the only industry that has what I call the “franchise rights” to protect that security. A bank can’t protect someone financially from either dying too soon or living too long; neither can the securities industry. Only the insurance industry has the ability to do that. So we need to capitalize on that unique capability to help Boomers as they prepare for and move into retirement—not just the aspect of providing retirement income, but rather guaranteeing the security around that.  

MacLEAY: The Baby Boomer generation has always presented huge opportunities for our business, and that opportunity is growing dramatically as the Boomers approach retirement. People in this generation are currently in their peak earning years, which makes them excellent prospects for our traditional suite of products and services.  And the life insurance industry is in a very strong position to meet their evolving needs as they approach and then enter their retirement years. Not only are we the only industry that can offer guaranteed products as a foundation for a sound in-retirement financial strategy, but we also have the network of professional financial advisors needed to help people devise and execute a sound financial approach to their retirement years. This capability, plus the ability to provide effective estate planning products and services, puts the life insurance industry in a very favorable position to serve Baby Boomers’ needs.

The National Life Group is targeting Boomers as a critical part of its overall strategy of providing a diversified set of high-value products and service solutions appropriate for varying economic conditions and customer preferences. But we don’t believe that the nearly 80 million Americans born between 1946 and 1964 represent a monolithic and homogenous group. They vary significantly in age and across ethnic and economic lines, and their needs for the products we offer vary significantly as well. The diversity of Boomers represents the diversity of our entire society. However, we believe our companies are well-positioned to meet many of the financial and protection needs of many individuals in this extended generation, particularly as they move toward retirement.  

McFARLANE: I see a couple of opportunities with the aging Baby Boomers. One is in the wealth management business, both in the demand for accumulation investment products as well as increasing interest in income payout vehicles as Boomers move from the wealth accumulation highway onto the exit ramp. One insurance company in Canada recently introduced the first guaranteed minimum withdrawal benefit in a segregated fund structure. I expect to see other companies follow their lead with these types of plans. 

Another area where I see increasing opportunity for the retiree market is with Individual Supplementary Health plans. In the past, retirees could expect to get continued health insurance coverage through their company’s benefit plans. This is not as true today, however, as many companies have reduced or eliminated this type of coverage for retirees in an effort to control costs. Individuals leaving the workforce will need to purchase replacement coverage as an alternative to self-insurance. The individual health insurance market is a business our company is very interested in pursuing.

I also think that within 10 years, you will see a market developing in Canada for long-term care coverage. Although consumer demand for this type of insurance has yet to materialize, I feel that the Baby Boomers’ experience with aging parents in finding and funding appropriate care is going to accelerate demand for a product to insure their own future needs.  

MEYER: We are seeing some of the impact as the Boomers enter their “safe driving” years. Both frequency and severity are trending downward for this group. We are targeting this group through greater cross-selling activity and product offerings.  

MOHACSI: Boomers have tremendous financial resources and present many opportunities for our industry. The most obvious is their need for retirement savings and estate planning. However, as they age, Boomers will begin to recognize the need for LTC insurance, a product which should show some growth over the coming years. Boomers are also refinancing their homes to access the built-up equity. This could lead to mortgage insurance needs. Finally, many Boomers are underinsured, and basic final expense needs will become more apparent.  

RATTMANN: Clearly there will be an ongoing focus on providing retirement income and wealth accumulation products to Boomers. Additionally, there will be a growing focus on estate planning. Our own company is targeting Boomers with our products in the final expense and pre-need areas. The use of these products will continue to grow as the realization of the Boomers’ own mortality risk sinks in, and as they continue to face the challenges of dealing with elderly parents.  

WARING: The Baby Boomer generation presents many opportunities. The primary opportunity encompasses retirement planning—the continued accumulation of wealth and the eventual disbursement phase. The Boomer’s redefinition of retirement will provide opportunities for additional life insurance sales to cover income as many venture into second careers and/or purchase second homes. We have a retirement market segment defined and have established a retirement marketing strategy team to focus on the needs of this market.  

WELLS: The aging of our population, rising medical costs, and the financial challenges with Medicare will require changes to be made in the Medicare system as it exists today in order to avoid further stress on this program. These changes are moving those in favor of managed care to programs like Medicare Advantage and Private Fee for Service programs. These changes will provide carriers, especially those selling Medicare supplement products, a natural opportunity to participate in these reforms over time. There also seems to be a greater demand by an aging population for fixed-income products. For the next 20 years, a record number of Americans will be 65 and over. As life expectancy continues to rise, fewer people will have sufficient investments to protect themselves against longevity risk. A possible solution for homeowners that is emerging involves a reverse mortgage product that allows seniors to access the equity of  their home for a guaranteed monthly income. Finally, although individual long-term care insurance has seen moderate success, the aging of our population and legislative changes relating to the product will create a unique opportunity for carriers that can effectively manage profitability through careful risk selection and claims control.  

ZLATKUS: With 77 million Boomers in the U.S. ready to step into retirement, many of whom do not have a holistic plan for living their senior years, the Baby Boom generation represents a $9 trillion opportunity for our industry—by far the largest business opportunity of the next two decades. In Japan , one-fourth of the population is age 60 and older, and that percentage is only expected to grow moving forward. In addition, 51 percent of the assets held in Japan —approximately $6 trillion—are in cash and deposits, which represents a significant opportunity to our industry.

Further fueling the opportunity, a recent Hartford-sponsored survey showed that people around the globe are anxious about their retirement. 58 percent of those polled in Japan , 28 percent in the U.K. and 31 percent in the U.S. were concerned they would not have enough money to get them through their retirement. Additionally, our survey showed that people no longer believe their governments will be able to sufficiently provide for their retirements. A staggering 89 percent of those polled in Japan and 77 percent of those polled in the U.K. were not at all confident that government-sponsored pension plans would provide them enough income to maintain their current standard of living. In the U.S. , half of all respondents felt similarly.

To target the Boomers in the U.S. , we are reaching out to them in a number of ways. We have appointed a team of retirement experts who provide coaching on financial planning concepts to The Hartford’s client advisors and their customers. The Hartford has always been a product innovator, and this group of retirement solution consultants will showcase our innovative new retirement solutions—such as lifetime income products and benefits like facility care benefits riders—to the market.

Internationally, we have brought our products and experience to markets in Japan , the U.K. and Brazil . As we continue to grow our presence in these markets, we will begin to offer more products to our international customers, as well as look to expand our operations geographically.

Contact Resource at resource@loma.org