Tag Archives: aegon

The Industry Needs an Intervention

Leaders in the insurance industry, like many other industry executives, are seeking routes to profitable growth amid unprecedented economic, financial and regulatory change. No longer can companies pursue top-line growth for its own sake without adverse consequences or rely on cost cuts alone to boost margins. Today, companies must strike a strategic balance that will sustain profit growth and shareholder returns over the long term.

This is no easy trick, as tectonic forces unsettle the insurance industry — which is accustomed to measuring the pace of change in decades, not years or quarters. A business-as-usual approach falters in the face of quickly shifting customer needs, rising capital requirements, new regulatory burdens, low interest rates, disruptive technology, and new competitors.

Many companies aren’t getting the results they need from textbook moves such as fine-tuning marketing programs, updating products, enhancing customer-service systems or beefing up information technology. That’s because traditional operating levers for executing strategy simply weren’t designed for the challenges confronting insurers today. Strategic success now requires something more: a structural response. A company can’t adapt to 21st-century conditions without modernizing its 20th-century structures.

The key is for companies to realize that strategy equals structure. Strategy — the big and important ways that a company chooses to compete — must naturally and intrinsically weave in key operating model dimensions, including legal entity, tax positioning, capital deployment, organization and governance.

Finally, once strategy and structure are wed, companies must recognize the role of culture in making new structures work, and use their cultural strengths to promote the changes and ensure that they have staying power. Here’s how:

Responding to the Pressures

Rapid evolutionary change has rendered time-honored organizational structures ineffectual or obsolete in many cases. Before attempting to execute new strategies, insurance companies need to reevaluate every dimension of their operating model.

Structural inadequacies take many forms. Some companies lack the scale needed to generate profitable growth under new capital requirements. Others with siloed, hierarchical organizations lack the flexibility to respond quickly to market shifts. Poor technological capabilities often hamstring old-line insurers facing new digitally oriented rivals. And tax reform and regulation looms as a potential threat to profitability in certain business lines.

See also: Why Is Insurance Industry So Small?

In our work with insurers, we at Strategy&, PwC’s strategy consulting business, have seen certain common responses to these pressures. Their responses divide these companies into three groups:

  • The first group of companies have anticipated the effects of marketplace trends and made appropriate structural adjustments, clearing the way to profitable growth. For example, life insurer MetLife avoided costly regulatory mandates by selling registered broker distribution to MassMutual and spinning off its Brighthouse retail operations. Others, including Manulife and Sun Life, have made substantial acquisitions to consolidate scale positions.
  • The second group of companies have recognized the need for structural change, but have yet to carry it out. With plans made, or under discussion, these companies are waiting opportunistically for the right deal to come along.
  • A third group of companies, however, have hunkered down behind existing structures, making only minor tweaks and hoping to emerge from the storm without too much damage. For some, this is a rational choice because of constraints that leave them with little or no maneuvering room. In other cases, action is impeded by a company culture that reflexively rejects certain options.

Companies in the first two groups are giving themselves a chance to win. But the response of companies in the third group smacks of self-delusion in an age when strategy equals structure.

Time for Real Change

Without a doubt, many insurers work diligently and continually to improve their businesses across dimensions. They gather insights into consumer needs and behaviors, nurture unique capabilities to differentiate themselves from competitors, modernize products, update distribution strategies and embrace digitization in all its forms. These are all sound approaches, but they’re inadequate in addressing the unknown facing insurers today. Their belief that they will persist assumes a certain stability in underlying economic and market conditions that hasn’t been seen since the financial collapse nearly a decade ago.

Forces unleashed by that crash and its aftermath undermined the pillars of many insurance business models. We’ve seen years of only modest growth, with property/casualty insurers expanding at a 3% pace, and life insurers barely exceeding 1%.

The long stretch of sluggish global growth has put pressure on revenues and forced insurers to compete harder on price. Near-0% interest rates that have prevailed since the Great Recession are squeezing profit margins, especially in life insurance. On the regulatory front, tougher accounting rules are driving up costs while heavier capital requirements weigh down balance sheets and dilute returns.

Compounding these challenges are the potentially destabilizing effects of tax reform on earnings and growth. Taxes may actually rise for some insurers, an outcome that could force them to raise prices or find other ways to protect shareholder returns. In many cases, the benefits of falling tax rates may be diminished by the loss of deductions for affiliate premiums, limits on deductibility of life reserves, accelerated earnings recognition and a slowdown of deferred acquisition cost deductions.

Competitive dynamics are shifting, too, as expanding “pure play” asset managers such as Vanguard and Fidelity block growth avenues for insurers. Established companies and some new entrants are innovating and experimenting with disruptive distribution models. Others, including private equity firms, are looking to bend the cost curve through aggressive acquisition and sourcing strategies.

To be sure, some long-term trends could benefit certain insurers, or at least improve their risk profile. Longer life spans and the shift of responsibility for retirement funding to individuals may drive demand for annuities and other retirement products.

However, many companies are as unprepared to capitalize on these opportunities as they are to meet long-term challenges. Often the problem comes down to scale. Some insurers lack the resources to build new distribution platforms and customer service capabilities in growing markets such as asset management, group insurance, ancillary benefits and retirement plans. Although offering an individual product may be relatively easy for new market entrants, the difficulty and cost of establishing such platforms creates a desire for scale and increases pressure on smaller competitors.

Sometimes, the issue isn’t scale but a failure to respond quickly enough as conditions change. Buying habits are changing as consumers — particularly the younger cohorts — make more purchases online. Yet our research indicates that people still want some personal assistance with larger and more-complex transactions.

It takes investment and experimentation to find and refine the right business model for new marketplace realities. But some companies haven’t built the necessary assets and capabilities or adjusted to evolving distribution patterns and consumer behaviors.

The proper response to each challenge and opportunity will be different for every company, depending on its unique characteristics and circumstances. In virtually every case, the right solution will involve structural change.

Joining Strategy and Structure

As companies recognize that traditional approaches to annual planning, project funding and technology architecture may be hindering innovation and real-time responses to changing market conditions, many are rethinking and redesigning their core processes to facilitate change. Recent transactions in the sector show the range of structural options for companies that want to advance strategic goals in a changing marketplace. Below are some examples.

Exiting businesses. Sometimes, the best choice is to move out of harm’s way; companies can preserve margins by exiting businesses targeted for higher capital requirements or costly new accounting standards. MetLife’s Brighthouse spin-off bolstered its case for relief from designation as a “systemically important financial institution,” and the associated capital requirements. Exiting U.S. retail life insurance markets also enabled MetLife to focus on faster-growing businesses that are less vulnerable to rock-bottom interest rates. The Hartford recently announced the sale of Talcott Resolution to a group of investors, completing its exit from the life and annuity business.

Partnerships and acquisitions. When scale is an issue, the solution may lie outside the company or in new structural approaches. Some insurers form partnerships to expand distribution, diversify product portfolios or bolster capabilities. Companies also adjust their scale and capital structures through mergers, acquisitions and divestitures. Sun Life paid $975 million in 2016 for Assurant’s employee benefits business, filling gaps in its product portfolio and gaining scale to compete with larger rivals. MassMutual’s purchase of MetLife’s broker-dealer network in 2016 enlarged the MassMutual brokerage force by 70% and freed MetLife to pursue new distribution channels.

Expanding into new lines and geographies. New product lines offer another path to faster growth or fatter profit margins. Several insurers have moved into expanding markets with lower capital requirements, such as asset management. Voya, Sun Life and MassMutual have acquired or established third-party asset management units to capitalize on investment expertise they developed managing internal portfolios. The Hartford recently agreed to acquire Aetna’s U.S. group life and disability business, deepening and enhancing its group benefits distribution capabilities and accelerating digital technology plans. We also see companies establishing technology-focused subsidiaries such as Reinsurance Group of America’s (RGA’s) RGAx and AIG’s Blackboard.

Cutting costs. Some companies have moved aggressively to improve their cost structure. Insurers seeking greater financial flexibility have divested assets that require significant capital reserves. Aegon unleashed $700 million in capital by selling blocks of run-off annuity business to Wilton Re in 2017. An insurer that offloads its defined-benefit plan to another via pension-risk transfer frees up capital and eliminates continuing pension funding requirements. Other cost-saving moves focus on workforce expenses. In addition to rightsizing staff, such measures include relocating workers to low-cost areas or jurisdictions offering significant tax incentives. Prudential and Manulife slashed expenses by establishing overseas operating centers that take advantage of labor cost arbitrage, create global economies of scale and reduce taxes.

See also: Key Findings on the Insurance Industry

Transformation and Culture

Once companies have launched ambitious structural initiatives, they don’t always recognize the role of culture in making the new structures work. But this is a mistake.

Culture is a pattern of behaviors, norms and mind-sets that have grown up around existing organizational structures; the two (culture and structure) are tightly linked, and you can’t change one without affecting the other. No culture is all good or all bad. But certain cultural traits are more relevant to structural change than others.

Cultural attributes affect a company’s ability to make necessary changes. A company that is consensus-driven and focused on preventing problems before they arise may be indecisive and slow to act. These traits may cause it to wait too long and miss the optimal moment for a structural transformation. Other companies, by contrast, have a tradition of quickly seizing opportunities. When this trait is supported by other important characteristics — more single points of accountability, strong leadership and an aligned senior management team — it can foster the rapid decision making essential to structural change.

Culture also comes into play after executives decide to initiate structural change. Most employees have strong emotional connections to the culture — this source of pride, along with a clear and inspiring vision of the future, can motivate them to line up behind the change and can inspire collaboration across organizational boundaries to drive the transformation. Leaders at all levels can generate momentum by signaling the desired cultural shifts and embodying the new behaviors needed to execute structural change.

A new structure without a corresponding evolution of culture amounts to little more than a redesigned organization chart. Culture makes or breaks the new structure, influencing factors as diverse as resource allocation, governance and the ability to follow through on a vow to “change how work gets done.” It’s not uncommon for a company to expend tremendous effort and resources on a complete structural overhaul, only to see incompatible cultural norms thwart its strategic execution. For example, a new, streamlined operating model intended to accelerate decision making and foster cross-functional collaboration won’t take root in a culture that exalts hierarchy and encourages employees to focus on narrow functional priorities.

Culture also influences a company’s willingness to make the deep structural changes in time to avert a crisis. Those who wait until market conditions have undermined their operating model put themselves at a disadvantage. Nevertheless, few companies attempt structural change in “peacetime.”

Absent a crisis, cultural expectations often limit directors to a narrow role monitoring indicators such as growth and profitability, while management concentrates on achieving specific strategic objectives. Under this traditional allocation of responsibilities, emerging structural issues may not get enough attention. Successful companies, by contrast, continually reassess their structure in light of evolving market conditions. They understand that organizational structures aren’t permanent fixtures, but strategic choices to be reconsidered as circumstances and objectives change.

Capitalizing on Changes

Amid the confusion of today’s insurance industry, one thing is clear: Business as usual won’t deliver sustained, profitable growth. As powerful forces reshape markets, conventional tools for executing strategy are losing their effectiveness. Today’s challenges are not operational, but structural. Many insurers lack the scale, capabilities or efficiency to compete effectively as competition intensifies, regulatory burdens increase and financial pressures rise.

Winning companies are meeting structural challenges with structural solutions. Approaches vary from company to company. Some add scale or enhance capabilities, whereas others streamline cost structures or exit lagging business lines. With the right cultural support, these structural responses position a company to capitalize on industry changes that are confounding competitors.

You can find the article originally published on Strategy & Business.

This article was written by Bruce Brodie, Rutger von Post and Michael Mariani.

‘It’s Life, Jim, but Not As We Know It’ (Part 2)

The article below has been based on a keynote presentation delivered at the Euro Events Life Insurance and Pensions Conference in Amsterdam on Nov. 16 2017. This is part 2. Part 1 can be found here.

Summary of Part 1

Most customers do not buy insurance because they like it. They buy it because they have to. This makes it difficult for providers to develop engaged and happy clients. The question is: Can you make the process of buying insurance something that customers actively engage in? Can investing in a pension become an urgent, relevant, integral part of our daily life? Can long-term financial planning become as quick and easy as shopping online?

The answer is yes, but…. there are some important changes for insurers to make.

Insurers need to offer a broader, more relevant solution–with insurance as a component. Examples included integrated solutions for risk management and safety, health, housing, mobility or personal financial planning. In this scenario, insurers can become participants in an extended customer and supplier ecosystem and offer integrated solutions with higher customer engagement.

Part 2: Reconnecting with your customers

In this second part, we focus on the challenge of how to reconnect with your customers – a key to transforming insurance into an urgent, relevant and sexy product.

After the 2015 pension liberation in the U.K., some retirees could not handle their new financial freedom. There are even some reports that retirees were taking their newly available pension savings straight to the casino! Obviously, this was not the intended consequence of giving people more freedom in spending their pension money.

See also: This Is Not Your Father’s Life Insurance  

So how can you avoid these kinds of unwanted scenarios? How can you help your customers with highly complex financial products that may be not immediately relevant and often are without a direct benefit? It is not about giving freedom; it is about helping your customers make smart choices. Unfortunately, that is not as easy as it sounds. There is still a big engagement gap between insurers and their clients.

What are the key challenges we have to overcome to close this gap and reconnect with our customers? We are going to take a psychological view on this and touch on a number of key concepts.

The Theory of Planned Behavior

Helping customers make smart decisions is not an easy job. How do we know if our campaigns and communications work? How do we respond to our customers’ needs? The theory of planned behavior can help answer these questions by predicting and understanding how customers act.

According to the theory, a person’s behavior is predicted by his or her intention, which is in turn predicted by the attitude toward that behavior. This theory can be used to evaluate customers’ general attitudes, their feelings about social norm pressure and their difficulty in achieving the desired behaviors.

This theory is used in a wide variety of areas and can be particularly useful when the desired behavior doesn’t result in immediate benefits. One such example is the Dutch government’s campaign to stimulate better health behaviors of young adults toward smoking. By using the slogan “Maar ik rook niet!” (at least I don’t smoke!) the government hoped to change general attitudes and social norms to drive more healthy behaviors.

There may be similar benefits for financial planning. This task can often lack urgency, resulting in customers procrastinating over their decisions. However, providers can respond by creating better customer awareness and positive attitudes toward their financial planning products.

Although this theory is already used in numerous fields, it surprised us that we couldn’t find clear-cut examples of its application in financial or pension planning. We are interested in exploring this is more detail and welcome you to share examples with us.

The Dynamics of Inertia

In psychology and economics, inertia refers to the tendency to remain passive, even in the presence of good reasons to become active. Several companies are well aware of this tendency: That is why we get the first two months for free at our internet provider and we pay 50 euros a month for a gym we never go to. These providers are very well aware that our inertia will prevent us from canceling the subscription.

When you translate this thinking to retirement savings, there has been extensive research on the mechanisms underlying inertia/underlying mechanisms of inertia. Life and pensions insurance requires you to make long-term decisions under changing and uncertain conditions that do not result in an immediate state of happiness or fulfillment. This causes people to avoid or postpone retirement preparations for as long as possible. So even if you do understand and appreciate the long-term benefits of taking action, it is much easier to remain passive. So how do you beat it, this inertia?

Aegon started in 2016 with its Future Fit Strategy. The purpose is to become the “customer-based company of the future” by enabling people to make self-conscious decisions on their financial future. For the organization, this means doing the right things in the best possible way for their customers.

Alternatively, you can try to provide immediate incentives by addressing the individual. For instance, Nationale-Nederlanden challenges you to create an image of the future you and explains that to achieve the goals you’ve set for later you have to get moving now. The company effectively asks you to think about how you WANT your future life to look like, and what can you do about it NOW to reach those life goals.

Financial anxiety

The top source of anxiety, according to the Stress in America Survey, is money, followed closely by work and the economy. These three factors clearly are causes of financial anxiety. People who experience financial anxiety have a bias in processing information and are more likely to use avoidance mechanisms.

See also: Thought Experiment on Life Insurance  

One way to cope with financial anxiety is gamification. Gamification moves away from conventional enterprise communications toward personalized, easy and playful interactions. As an example, Mint.com is a tool that aims to demystify financials and future planning by incorporating simple and more entertaining elements to decision making. These include goal trackers, visual breakdowns on spending habits and budget allocation and simple charts displaying the same data as spreadsheets but in a much more appealing and easily accessible manner. This makes it simpler to understand exactly where your money is going every month.

Another way to address financial anxiety has been created by U.K. pension communications agency Pension Geeks. The company started with an annual Pension Awareness Day, including a bus being driven across the country to inform and support the public with their financial planning. The company is using several techniques to make it fun and understandable with video’s animation, games and apps to make pensions accessible for all.

Conclusion

The second approach to turn insurance into a product customers actually want to buy is to reconnect with your customers. There’s still a big engagement gap between insurers and their clients. When trying to change people’s behavior, the most important thing is to understand people’s needs, to listen to what they want and to respond to their current behavior. Then, you have a chance to  overcome the dynamics of inertia and financial anxiety.

The third part of this series to change insurance into a product customers actually want to buy will bring the insights of Part 1 and Part 2 together.

An Interview With Nick Gerhart (Part 1)

I recently sat with Nick Gerhart to discuss the regulatory environment for U.S. insurance carriers. Nick offers a broad perspective on regulation based on his experience: After roles at two different carriers, Nick served as Iowa insurance commissioner, and he currently is chief administrative officer at Farm Bureau Financial Services.

Nick is recognized as a thought leader for innovation and is regularly called on to speak and moderate at insurtech conferences and events. During our discussion, Nick described the foundation for the state-based regulatory environment, the advantages and challenges of decentralized oversight and how the system is adapting in light of innovation.

This is the first of a three-part series and focuses on the regulatory framework insurers face. In the second part, Nick will provide the regulator’s perspective, with a focus on the goals and tactics of the commissioner’s office. Finally, in the third installment, we will cover the best practices of the insurers in compliance reporting.

Part I: The Regulatory Framework

You served as the chief regulator in Iowa: How do regulatory practices in Iowa compare with other states?

Every state essentially has the same mission. Iowa has one of the largest domestic industries, so we have to focus a lot on the issues that go along with having a lot of domiciled companies. We have over 220 companies domiciled in Iowa. I believe that is the eighth most in the country; therefore, we are a top-10 state in the number of domiciled carriers. So, how we focus may be a bit different than if we only had a handful of domestic carriers. Due to the number of companies domiciled in Iowa, we must have a technical skill set and ability to completely understand the all facets of the industry.

Level-setting: What are the goals of the office of the insurance commissioner?

First and foremost, the goal is to protect the consumer. You do that through monitoring a company’s solvency and financial status. You also make sure that companies are following rules and regulations and all the laws on the books.

A lot of folks don’t recognize how complex that regulatory framework is, so you really spend your time not only on financial solvency but also on the market side, making sure that rules are followed.

See also: Time to Revisit State-Based Regulation?  

Even if a state has fewer companies domiciled, is it still interested in solvency? Or is this outsourced to the state of domicile?

That’s a good question. There are two sides – the financial side and the market side. On the financial side, there’s great deference to the lead state. For instance, if you are the lead state regulator of a group that is doing business in multiple states, there will be great deference to that regulator and his or her team that is reviewing those financials and that file. Any regulator can check and have their own views, obviously. But, there’s going to be great deference to that lead state.

Is this the same for market conduct?

On the market side, there’s not nearly as much deference. In fact, while I was commissioner, the NAIC was undertaking an accreditation standard for the market side. On the financial side, every state is accredited by the NAIC. And through this process, there’s much more cohesiveness and deference to that lead state. That doesn’t exist as much on the market side.

So, backing up a second, I’d like to touch on the topic of state-based regulation vs. federal regulation. Is this the right way to regulate this market?

I think it’s a good thing, because it’s local. A lot of insurance is local.

The feds have done a lot of work – whether it’s CMS, the Department of Labor or Treasury – that encroaches on state insurance regulators. I submit that this encroachment creates confusion and is counterproductive. I personally do not believe a federal regulator is going to do a better job and, in fact, believe it would lead to poorer results and hurt consumers. In my opinion, the federal government did not do exemplary work during the financial crisis, and I believe insurance regulators actually performed and executed quite well during that financially stressful time. In looking at that crisis, I have concluded that I do not want federal regulators or prescriptive banking standards forced upon the insurance industry.

State insurance commissioners are either elected by the people they serve or are appointed by a governor or other official or agency head. Those are held accountable at that local level and are part of the communities they serve. On countless occasions, I was stopped by people and asked about insurance issues. It would be very difficult to get that accountability or access if insurance were regulated at a federal level.

Are there areas where the states could improve?

There are some areas: They can do a better job of working together on the market side. But that’s why the National Association of Insurance Commisioners, the NAIC, exists – to create model laws that will create more uniformity across all states. And again, the states have done a tremendous job on the financial side.

The market side has more room to improve –  at least as far as coordination. Regulators have made tremendous progress in recent years, though. In the last six years, by collaborating and coordinating through the NAIC, monumental modernization has occurred. As an example, annuity suitability, ORSA, principal-based reserving, corporate governance, credit for reinsurance and now cyber model laws have all been created and passed in numerous states. Passing a model law out of the NAIC is important because it provides a state a solid model to guide through the legislative process.

What is the downside of state regulation?

There are certainly challenges with the state-based system. One is, at the state level, having resources to do the job. The state of Iowa is really an international regulator as we’re the lead state for Transamerica/Aegon and group-wide supervisor for Principal Financial. We have firms in Iowa with significant international footprints, so Iowa regulates alongside international peers from all over the world. I believe it is critical that Iowa resource the insurance division appropriately, as limiting resources too much ultimately hurts the ability to regulate effectively.

After resources, I think the biggest challenge for states is uniformity issues. An emerging challenge is keeping up with all the technological advances and innovation emerging from the insurtech and fintech area.

Is regulation keeping up with innovation?

Whether or not the old regulatory framework is still relevant today – I believe we will soon have a debate around that and how to modernize. The use of data is going to be a challenge for regulators, whether it’s genetic testing in life insurance or some other topic. There are a lot of issues in the innovation space that regulators are going to have to step up and meet because, if consumers demand change, the answer shouldn’t necessarily be, “We can’t do that.” Maybe we need to look at the rules and the laws and make a concerted effort to modernize.

Over the years, a number of people have come into my office frustrated at the limitations of the current rules and said, “That law’s stupid.” I have to inform them that just because it is illogical doesn’t mean that you can get rid of it. That’s not the commissioner’s job. The legislature passes the laws. The commissioner interprets and enforces the laws. Commissioners do not pass the law, so, when individuals are frustrated, often that frustration is misplaced.

See also: The Coming Changes in Regulation  

All in all, you would say that state-based regulation is the better answer?

I would put the state system up against a federally based system any day.

At the same time, we are the only country, to my knowledge, that has 56 different jurisdictions regulating insurers. Every other nation has a federal one. This poses challenges for international groups; certainly, some reinsurers are facing these issues. It is for that reason that we must coordinate better and speak with a unified voice.

As I have said, I do think the state system is remarkably better for consumers. When I was commissioner, the phone number on my business card went right to my office. I talked to consumers every day who called me directly. I would answer my phone, and they would be shocked that I would answer. There is genuine appeal in that.

When something goes wrong, insurance quickly becomes very personal. Sometimes, it’s bad things happening intentionally or willfully, while other times it’s just misunderstandings. Insurance is incredibly complex. I’d much rather have a system where there is accountability at the state level. You have people working for their citizens whom they go to church with and see around the state.

That’s a much better system than a federal bureaucracy that might have 10 regional offices where it’s impersonal and you have no idea who in the heck you’re talking to.

Continued….