Tag Archives: life annuity

M&A: the Outlook for Insurers

Mergers and acquisitions in the insurance sector continued to be very active in 2016 on the heels of record activity in 2015. There were 482 announced transactions in the sector for a total disclosed deal value of $25.5 billion. Deal activity was driven by Asian buyers eager to diversify and enter the U.S. market, by divestitures and by insurance companies looking to expand into technology, asset management and ancillary businesses.

We expect the strong M&A interest to continue, driven primarily by inbound investment.

With the election of a new president and the transition of power in January 2017 comes tax and regulatory uncertainty, which may temporarily decelerate the pace of deal activity. President Trump is expected to prioritize the repeal and replacement of Obamacare, tax reform and changes to U.S. trade policy, all of which have unique and potentially significant impact on the insurance sector. Further, the latest Chinese inbound deals have drawn regulatory scrutiny, with skepticism from the stock market regarding their ability to obtain regulatory approval.

Bond yields have spiked over the last few months and are widely expected to continue to increase. The increase in yields should improve insurance company earnings, which is likely to encourage sales of legacy and closed blocks.

Highlights of 2016 deal activity

Insurance activity remains high

Insurance deal activity has steadily increased since the financial crisis, reaching records in 2015 both in terms of deal volume and announced deal value. While M&A declined in 2016, activity remained high, with announced deals and deal values exceeding the levels seen in 2014. In 2015, deal value was driven by the Ace-Chubb merger, valued at $29.4 billion, which accounted for 41% of deal value.

See also: A Closer Look at the Future of Insurance  

Significant transactions

Key themes in 2016 include:

  • Continued consolidation of Bermuda insurers, with the acquisitions of Allied World, Endurance and Ironshore. Drivers of consolidation include the difficult growth and premium environment.
  • Interest by Asian insurers in continuing to expand their U.S. footprint — accounting for two of the top-10 transactions.
  • Expansion in specialty lines of business as core businesses have become more competitive. This is evidenced by (i) Arch’s acquisition of mortgage insurer United Guaranty as a third major business after P&C reinsurance and P&C insurance; (ii) Allstate’s acquisition of consumer electronics and appliance protection plan provider SquareTrade to build out its consumer-focused strategy; and (iii) the agreement by National Indemnity (subsidiary of Berkshire Hathaway) to acquire the largest New York medical professional liability provider, Medical Liability Mutual Insurance, a deal expected to close in 2017.
  • More activity in insurance brokerage, which accounts for two of the top-10 deals.
  • Focus on scaling up to generate synergies, as evidenced by the acquisitions done by Assured Guaranty and National General Holdings.
  • Continued growth in asset management capabilities, as exemplified by New York Life Investment Management’s expanding its alternative offerings by announcing a majority stake in Credit Value Partners LP in January 2017 and MassMutual’s acquiring ACRE Capital Holdings, a specialty finance company engaged in mortgage banking.

Key trends and insights

Sub-sectors highlights

Life & Annuity – The sector has been affected by factors such as Asian buyers diversifying their revenue base, regulations such as the fiduciary rule by the Department of Labor and the SIFI designation, divestitures and disposing of underperforming legacy blocks, specifically variable annuity and long term care businesses.

P&C – The sector has been experiencing a challenging pricing cycle, which has driven insurers to 1) focus on specialty lines and specialized niche areas for growth and 2) consolidate. We have seen large insurance carriers enter the specialty space. Furthermore, with an abundance of capacity and capital, the dynamics of the reinsurance market have changed. Reinsurers are trying to adjust to the new reality by turning to M&A and innovation in products and markets.

Insurance Brokers – The insurance brokerage space has seen a wave of consolidation given the current low-interest-rate environment, which translates into cheap debt. The next consolidation wave is likely in managing general agents, as they are built on flexible and innovative foundations that set them apart from traditional underwriting businesses.

See also: Key Findings on the Insurance Industry  

Insurtech has grown exponentially since 2011. According to PwC’s 2016 Global FinTech Survey, 21% of insurance business is at risk of being lost to standalone fintech companies within five years. As such, insurers have set up their own venture capital arms, typically investing at the seed stage, in efforts to keep up with the pace of technology and innovation and find ways to enhance their core business. Investments by insurers and their corporate venture arms are on pace to rise nearly 20x from 2013 to 2016 at the current run rate.

Conclusion and outlook

The insurance industry will be affected by the proposed policies of the Trump administration, especially on tax and regulatory issues. Increasing bond yields and the Fed’s latest signal about a quick pace of rate increases in 2017 are expected to improve portfolio income for insurers.

  • Macroeconomic environment: U.S. equity markets have been rallying since the election, with optimism supported by President Trump’s policies to boost growth and relieve regulatory pressures. However, the rally may be short-lived if policies fail to meet investor expectations. While the Fed is widely expected to raise rates in 2017, other central banks around the world are easing, and uncertainty in Europe has spread, with the possibility that countries will leave the euro zone or the currency union will break apart.
  • Regulatory environment: The direction of regulatory and tax policy is likely to change materially, as the president has campaigned for deregulation and reducing taxes. Uncertainty around the DOL fiduciary rule has been mounting even though President Trump has not spoken out on the rule; some of his advisers have said they intend to roll it back. His proposed changes to Obamacare will affect life insurers, but at this juncture it is hard to estimate the extent of the impact given the lack of specifics shared by the new administration.
  • Sale of legacy blocks: Continued focus on exiting legacy risks such as A&E, long-term care and VA by way of sale or reinsurance. In 2017, already, there have been two significant announced transactions, AIG paying $10 billion to Berkshire for long-tail liability exposure and Hartford paying National Indemnity $650 million for adverse development cover for A&E losses.
  • Expansion of products: Insurers will focus on expanding into niche areas such as cyber insurance (expected to be the fastest-growing insurance product fueled by a slate of recent corporate and government hacking). Further, life insurers are focusing on direct-issue term products.
  • Technology: Emerging technologies including automation, robo-advisers, data analysis and blockchain are expected to transform the insurance industry. Incumbents have been responding by direct investment in startups or forming joint ventures to stay competitive and will continue to do so.
  • Foreign entrants: Chinese and Japanese insurers have keen interest in expanding due to weak domestic economies, intent to diversify products and risk and hope to expand capabilities.
  • Private equity/hedge funds/family offices: Non-traditional firms have a strong interest in expanding beyond the brokers and annuities business to include other sectors within insurance, such as MGAs.

EY’s Outlook for L&A, P&C in 2017

The coming year promises to be a year of continued disruption on several fronts for the insurance industry, including consumer demands, digital technology, cybersecurity and the shifting political landscape. The slow growth of the U.S. economy, coupled with market shifts, will also be prominent factors in 2017.

Insurers are looking at machine learning to make underwriting decisions. They are looking at all kinds of data, from medical to behavioral. They know they cannot take months to underwrite a policy. They need to do it in days – and, soon, even quicker.

This is an ideal time to make plans that take into account the future of the nature of work. Insurers now have the opportunity to introduce new technology, such as robotics, and more effective workforce management activities. By taking out repetitive tasks, they can produce an even more industrious and stimulating work environment for people.

See also: One Foot In Healthcare: Property And Casualty Payer Integration  

Below are the top strategic priorities from the 2017 EY U.S. life-annuity and property-casualty insurance outlooks.

Life-annuity strategic priorities

  1. Prepare for regulatory change. From rules on consumer protection and transparency, to financial solvency and cybersecurity – and now a potential shift in overall policy direction – the regulatory landscape for life insurers has never been more complex. Insurers should develop a strategy to comply with the new Department of Labor fiduciary rule, and be prepared to course-correct; as well as confirm that internal systems can keep up with regulatory change overall.
  2. Stay centered on the customer. The customer can be a valuable compass to companies mapping a strategy in changing times. Insurers should use this resource by applying analytics to gain deeper customer insights, creating a strong cross-channel customer experience and rethinking go-to-market approaches to meet changing investor needs.
  3. Re-evaluate strategies for a changing marketplace. With the industry in transition, and a new administration taking office, this is an ideal time for management teams to carefully asses their current market position and plan for where they would like to be, long-term. In addition to reassessing strategic positioning for the years ahead, insurers should also consider using M&A to improve competitive positioning and should also look to find the right insurtech strategy for the firm.
  4. Take digital transformation to the next level. 2017 will be a year of continued experimentation, and the focus of innovation will start to shift from reducing costs to reinventing products and business models. To do this, insurers should be prepared to enter the next phase of digital innovation by getting control of data across the enterprise and by using technology to improve current business approaches.
  5. Make cybersecurity a top strategic priority. Given the vast amount of personal and health data that resides in insurance firms, and their complex vendor relationships, building a robust data security system is both crucial and challenging. To do this, insurers should look to make cybersecurity a continuous business activity by drawing on technology and people to secure data.
  6. Close the talent gap. 2017 is the year to determine the critical workforce skills that insurers will need to drive the business forward. Insurers can build new talent management strategies by assessing whether the firm has the needed talent for the future and by creating clear pathways to transfer knowledge.

See also: 4 Mandates for Agents in Sharing Economy  

Property-casualty strategic priorities

  1. Focus on customer-driven innovation. To adapt to a fast-moving marketplace and differentiate themselves from competitors, insurers must stay laser-focused on the customer and adapt their go-to-market strategies. To do this, they can nurture a culture of innovation, which will help accelerate the development of new products and business models.
  2. Use technology to drive top- and bottom-line performance. In the face of shrinking returns, insurers will need to apply advanced analytics systematically across the value chain, as well as drive costs savings by drawing on robotics to automate insurance processes and build smart technology into future plans to remain competitive.
  3. Put cybersecurity high on the corporate agenda. As with life-annuity insurers, cybersecurity is also a key topic for property-casualty insurers. In 2017, cyber risks will increase exponentially as digital technology becomes more pervasive, and cyber-attackers more sophisticated. Insurers should prepare for the next stage of cyber-risk and implement an active defensive system to protect against attack.
  4. Rethink strategies to attract, develop and retain talent. With a large percentage of the workforce retiring in the years ahead, and digital transformation accelerating, 2017 will be a good time to take a hard look at future work needs. Insurers can start by understanding the millennial mindset and identifying the digital expertise they will need in the future.

Here are the complete reports:

2017 EY U.S. life-annuity insurance outlook

2017 EY U.S. property-casualty insurance outlook

BPO for Life & Annuity Market

Life and annuity insurers are focusing on three areas to drive growth: distribution, product and brand. Growth is hard enough in today’s market, but it’s even harder when your back office holds you back, both in terms of fixed costs and limited capabilities. Accordingly, achieving operational efficiency is table stakes for life and annuity insurers competing in an extended soft market.

Fortunately, given recent advances in technology and expansion of provider capabilities, business process outsourcing (BPO) has become a feasible way to reduce costs and increase efficiencies. Based on what we’ve seen in the market, we think BPO providers are ready to move from their traditional role as vendors to true business partners. With scale, advanced technology and money to invest, the best of them offer great opportunity for insurers to significantly lower costs and benefit from complementary services over the long term.

Why BPO and why now?

For years, insurers have tried numerous methods to achieve greater operational efficiency, including process reengineering, Six Sigma, and LEAN. Many companies also have pursued sourcing (primarily in IT) to stem the tide of rising fixed costs. While these initiatives have reduced costs and complexity to a certain extent, they have not lowered costs and operational complexity enough to enable the business to focus first and foremost on growth.

Fortunately, times have changed. Some BPO providers have recently offered savings on a per-policy basis (inclusive of both operational and IT costs) of anywhere from 20% to 40%. (Benefits depend on how much savings a company has already realized and how much additional opportunity for savings remains.)

BPO now offers the potential for greater long-term cost reductions and efficiencies than the methods insurers have used in the past.

In Europe, BPO and ITO (information technology outsourcing) has already played a major role in closed block businesses. Life, annuity and pensions BPO has a global market of more than $2.6 billion, nearly half of it in the U.K. In this case, the main point of BPO has been legacy policy cost reduction, but it also offers carriers an alternative operational platform for achieving faster speed to market for new products and for tapping into advanced customer service capabilities.

Legacy modernization is another important reason for considering BPO. As key staff retire, there is a real threat of knowledge loss, not least because legacy systems are concurrently moving toward the end of their effective working lives. Many BPO providers feature up-to-date and evolving technology platforms that are an attractive alternative to incurring continuing fixed costs in-house.

The key for carriers is to select a BPO provider that will keep its platform current rather than simply provide a “your mess for less” service (i.e., administration of your aging platforms). Without the right scope, BPO can backfire and actually result in a more complex operating model, with resulting stranded costs and a suboptimal customer experience.

What is large-scale BPO?

To understand what BPO entails, it is helpful to compare the different kinds of shared services that are available:

  • Captive shared services are when a carrier creates a wholly owned subsidiary to deliver services at a reduced cost. They can be established domestically, near-shore or off-shore.
  • Out-tasked shared services occur when a carrier hands over administration of its systems to a third party that offers wage arbitrage, but the carrier maintains ownership of the process and underlying systems.
  • In contrast, in a BPO transaction, the insurer hands over administration to a partner, who runs the former’s technology platform. In other words, the partner owns the process. Implementation may occur through a lift and shift approach (i.e., the partner takes over the carrier’s legacy platforms), through conversion (data is converted from the carrier’s legacy to the partner’s modern platform) or through a phased combination of both. To smooth the transition, ameliorate community and reputational concerns and improve change management, there is typically a significant amount of rebadging of employees from the carrier to the BPO partner.

Ideally, after BPO, the insurer is a service level agreement (SLA) manager, and the BPO partner controls the process. (N.B.: Contracts should be in place that stipulate performance requirements.) The insurer’s focus on the sourced business should be on performance and analytics, made possible through regular data feeds from the BPO partner.

  • In brokered BPO, the insurer contracts with a third party that isn’t itself offering BPO services but instead will manage the transition to a BPO provider. Ideally, the third party manager will have successful past experience with the BPO provider and managing the complex details of conversion from legacy platforms to new ones.

BPO is not one-size-fits-all. There are different varieties that insurers can match to their individual goals and circumstances.

Managing retained alongside sourced business

While moving the entirety of operations and IT to a BPO provider may seem appealing, insurers realistically will continue to be involved in many operational and IT activities. They often will retain key components of their operations and IT that they deem to be market differentiators. These most often relate to the customer experience (both with the agent and insured) and include call centers, portals and analytics. To remain effective, the operational platform that support retained components will continue to require maintenance, upgrades and BPO integration. Extensive up-front effort will be necessary to promote seamless integration of retained and outsourced components.

In addition, despite inclusion of a broad scope of operations and IT components, certain operational functions will remain with the insurer, namely HR, legal and compliance. Given significant sourcing, the question is if the insurer’s reliance on these functions will decrease and, if so, how to shrink them without increasing operational risks like:

  • Interruption of customer channels and operations: Businesses have been caught by surprise when service grinds to a halt at a provider.
  • Brand-damaging criticism: Businesses that fail to meet customer expectations – even if the cause is outside their walls – may see an increase in complaints, some going viral on social media.
  • Regulatory violation: A data error or breach at your service provider can put you in violation of regulations and jeopardize your customers’ trust.
  • System vulnerabilities: In a complex infrastructure that has dependencies you don’t even realize, a service interruption might trigger a series of problems that can affect your business.
  • Inaccurate reporting: Service provider processing errors can cause a misstatement of compliance, performance, operational or financial information.
  • Risk management lapse: Not knowing the controls around service contract terms can lead to unreported breakdowns in areas hitherto considered secure.

A good way to reduce the chance of BPO-related risks is to insist on a provider that comports with advanced service organization control (SOC) reporting. SOC 2 provides assurance that the provider has controls around the sourced technology and systems supporting the sourced business processes, but only to a pre-defined audience. SOC 3 provides the same assurance but more broadly to anyone interested in the provider’s control and allows the posting of a public seal on the provider’s website.

Embarking on BPO: An end-to-end approach

Given the significant potential for disruption to distribution partners, policy/annuity holders, employees and the community at large, BPO requires a more iterative approach to execution than many other forms of operating model transformation.

When evaluating BPO partners that best match criteria for in-scope functions and blocks of business, some carriers find that a single BPO partner may not meet all needs. Accordingly, it is imperative to determine the best BPO fit for each block of business.

Implications: Insights from BPO initiatives

  1. Plan big. Scope thoroughly enough to actually simplify management instead of just adding another layer of complexity to what you already have.
  2. Choose a partner, not a vendor. Approach the BPO as a relationship that will grow over time. Vet your prospective partner’s record of investment in other relationships and appropriately provide incentives to each other with thoughtful contracts that promote accountability.
  3. When vetting BPO providers, consider the amount of investment they’ll make to upgrade their platforms over time to continue delivering effective service.
  4. Don’t underestimate the amount of time that staff need to prepare for BPO. Identify all necessary business rules and ensure that key individuals and cryptic systems are aware of and understand them. You do not want any service interruptions.
  5. Map all dependencies on the policy administration platforms you’re seeking to move, inclusive of all ancillary applications.
  6. Realize that each part of the operating model you retain will add another layer of integration complexity to BPO.
  7. The prevalence of shared services and the opacity of many service-based cost-pools mean that many companies struggle to understand their IT spending. Therefore, it is vital to have an agreed-upon allocation method that won’t leave significant stranded IT costs post-BPO.
  8. Considering there will be more lines of accountability for running the business during and after the BPO, unless you use a brokered approach, you’ll have to create or augment an existing service provider management team.
  9. You may need multiple BPO partnerships. For example, the BPO partner that best meets your life book needs may not be the best choice to meet your annuity book needs.
  10. Ensure contracts account for all reasonable contingencies (e.g., growth, M&A, divestitures and spin-offs).

Life-Annuity Insurers: Outlook for 2016

U.S. life-annuity insurers will enter 2016 in relatively good financial condition but facing exponential changes from rapid advances in technology, rising customer expectations and growing competition. These market shifts will require insurers to reinvent their strategies, services and processes, while coping with nagging financial, economic and regulatory uncertainty. Fortunately, after years of bolstering their balance sheets, life-annuity firms are in a strong position to invest in the innovations and technologies needed to fuel future growth.

Growing customer expectations

Digital technology will continue to transform the life-annuity industry in the coming year. From anytime, any-device digital delivery to customized services, today’s diverse insurance customers will demand flexible solutions that go beyond one-size-fits-all product offerings. To take advantage of these trends, insurers will need to adopt a customer-centric approach that relies on deeper relationships, more personalized advice and more rigorous information. At the same time, life-annuity insurers must integrate emerging distribution technologies to reach customers through multiple channels, all without disrupting traditional distribution.

Millennials and mass-affluent consumers, in particular, are seeking the latest digital tools, such as on-demand insurance apps and robo-advisers for automated, algorithm-based financial advice. Meanwhile, insurers are establishing omni-channel platforms to reach and service customers more effectively and exploring the use of wearables and health monitors for usage-based life insurance. Advanced analytics, such as predictive models, combined with cloud and on-demand technologies, will provide insurers with the instruments to re-engineer front and back offices.

To fast-track digital transformation, insurers are turning to partnerships and acquisitions. For example, in 2015, Northwestern Mutual purchased online planner LearnVest to provide more customized support to customers. Other insurance firms, such as Transamerica and Mass Mutual, have set up venture capital firms to invest in digital service providers.

But digital innovation also carries greater risks. Digital technologies make insurers more vulnerable to financial fraud, data theft and political activism. Privacy breaches are becoming a bigger concern as insurers gain wider access to sensitive financial and health data. Even the use of social media is exposing firms to risks from reputational damage.

Competitive pressures are building

As digital technology becomes more pervasive, insurers will face greater competition from new digital start-ups. Although much of the recent innovation in financial services has occurred in the banking and payments sector, insurance is now squarely in the cross-hairs of new digital providers. One example is PolicyGenius, which is offering digital platforms to help consumers shop for insurance. With the recent launch of Google Compare, the rise of InsuranceTech will gain momentum in 2016.

But competition will also come from existing insurers leveraging new digital solutions and business models. For example, John Hancock recently launched Protection UL with Vitality, which rewards life-insurance policyholders for health-related activities monitored through personalized devices. In 2016, more insurance stalwarts will jump on the digital bandwagon through new product development, acquisitions and alliances. At the same time, changing insurance attitudes and practices among Millennials will spread to other age groups. Insurance firms reluctant to embrace innovations for fear of cannibalizing their own market space may be overtaken by more nimble firms able to capitalize on a shifting insurance landscape.

Uncertain economic and regulatory conditions

Life-annuity insurers are operating in a tenuous economic and financial environment with sizable downside risk. In 2016, global economic weakness will continue to be a worry, particularly as emerging market growth decelerates, financial volatility escalates and the U.S. economy muddles through a presidential election year. Regulatory and monetary tinkering will further complicate macro conditions.

The political landscape is likely to remain gridlocked at the federal and state levels as the election cycle concludes. Tax policies are unlikely to change in 2016, but insurers should prepare for new post-election regulatory headwinds in 2017. Insurers should also stay on top of the Department of Labor’s evaluation of fiduciary responsibility rules, which will remain a disruptive force in 2016.

Regulations originally designed for other industries and jurisdictions are being extended into the U.S. insurance market. International regulators are moving ahead with further development of Solvency II and IFRS. The NAIC and state insurance departments are adjusting risk-based capital charges and will react to the first year of ORSA implementation.

Mixed impact on life-annuity insurers

Premiums will grow moderately in 2016. Individual life premium growth will be particularly sluggish, as consumers remain focused on retirement savings. Faced with equity market volatility, consumers will continue to invest in fixed and indexed annuities and avoid variable annuities.

To cope with torpid market conditions, insurers will focus on growing premium and investment income, managing risks and controlling costs. Companies will continue to identify opportunities to improve return on equity through active balance sheet and back-book management. Among the strategies are investments in organic and inorganic growth, seeking reinsurance and capital market capacity and returning excess capital to shareholders. M&A activity will likely accelerate in 2016 as Asian insurers and private equity firms continue their interest in U.S. insurance companies.

Margin compression will dictate sustained emphasis on cost management through centralized control, technology upgrades and better integration of business units. With mission-critical information becoming more accessible, data-driven business decisions are moving to the C-suite. At the same time, regulatory demands and business imperatives are elevating risk management responsibility to the C-suite and board.

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STAYING IN FRONT OF CHANGE: PRIORITIES FOR 2016

In 2016, life-annuity insurers will need to take decisive measures to cope with market upheavals – or risk the consequences. By staying in front of change, insurers can strengthen customer relationships, build market share and gain competitive advantage. Tapping their strong capital positions, insurers will invest in new technologies, systems and people that will allow them to capture their future.

Specifically, leading insurers will focus on the following pathway to change:

1. Pick up the pace of business transformation and innovation

Time to reboot

The life and annuity industry has never been considered highly innovative or nimble. But the convergence of technological, regulatory and customer trends is creating a perfect storm, with the power to upend the industry. EY’s 2015 Retail Life and Annuity Survey of senior executives identified the need to embrace new market realities in 2016, highlighting innovation as a top strategic priority. To cope, industry leaders must act now to rethink their business approach:

Priorities for 2016

Create a company-wide culture of innovation. To foster transformation, insurers will need to break away from their conservative leanings, and create a culture that encourages new thinking. Such a culture should allow for greater experimentation, and even short-term failures, to achieve long-term success. Senior leaders through to middle-managers should champion change and avoid the danger of the status quo.

Drive innovation through cross-functional teams. In 2016, life and annuity insurers will need to cut across organizational silos to drive innovation. Establishing cross-functional teams of sales, underwriting and policy administration can lead to new ideas
that enrich the customer and distributor experience. Similarly, a cross-functional team of actuarial, finance and risk management can help build consensus around new analytical and risk approaches.

Share information openly. Overcoming departmental silos will not be easy. Executives should ensure that information-sharing occurs at the right time and that teams are working from the same set of high-quality data. To avoid time-consuming reconciliations, managers will want to address data discrepancies across business units. Using skilled program managers to track progress against timelines and budgets can help.

2. Reinvent products and services for the new digital consumer

Addressing ever-rising customer expectations

In 2016, life insurance and annuity products will need to come to grips with tectonic shifts in consumer expectations and behaviors. Driven by their experiences in other industries, customers will demand greater digital access, better information and quicker service. Failure to respond will make it difficult for insurers to acquire and retain customers. Fast-moving insurers are redefining their customer relationships and products and services to cope with these new market dynamics.

Priorities for 2016

Offer anytime, anywhere, any-device access. Banks now provide customers with unprecedented 24/7 access and self-service on multiple devices, from PCs to smartphones. In 2016, life insurance customers will expect a similar anytime, any-device experience from insurers from point of sale and throughout the relationship.

Provide greater transparency to customers. In today’s digital world, customers expect clearer product information and pricing transparency. To respond, insurers should reduce the complexity and definitional rigidity of current life insurance products, while providing a more streamlined and transparent issuance process.

Deliver more flexible solutions. Insurers will need to emphasize product flexibility to cost-conscious customers and offer hybrid products that combine income protection, such as long-term care and disability insurance, with life and retirement coverage. For high-net-worth customers, insurers should stress the tax advantages of life insurance and annuities and develop features to compete with alternative investment products.

Build continuing engagement with customers. The life and annuity industry has long suffered from “low engagement” with customers following the initial sale. More customer engagement will minimize the risk of customer indifference and potential disintermediation. Developing an integrated, personalized digital experience that leverages the latest mobile and video technology will be a key to success.

Move toward a service orientation. To differentiate themselves, insurers will want to shift from a product placement to a trusted adviser approach. With established personal relationships in place, and access to more flexible products and services, new sales will occur more naturally in response to customer needs.

3. Adjust distribution strategies for technological and regulatory shifts

The rise of omni-channel distribution

Technological and regulatory changes are prompting life and annuity insurers to think beyond traditional distributors. For example, robo-advisers, growing in popularity in the wealth industry, could offer insurers a way to reach the underserved mass-affluent market. Yet, unlike property and casualty carriers, life and annuity insurers have made little progress in selling through digital channels. Looking ahead to 2016, life and annuity insurers may find themselves losing market share if they fail to adapt to an omni-channel world.

Priorities for 2016

Prepare for new fiduciary standards. In 2016, the Department of Labor’s proposed fiduciary rule could upend existing distribution models. The rule strengthens consumer protection, constrains distributors and alters compensation for advisers providing retirement advice. Similar changes in the UK widened the gap in personal financial guidance between wealthy and mid-market customers – a potential impact in the U.S. The ability to recommend specific products may become more difficult, creating a ripple effect on retirement sales and advice.

Adapt services for new distribution models. Insurance firms, particularly those focusing on retirement services, will find themselves under pressure to transform their distribution platforms. In 2016, insurers should consider developing products for an “adviser-less” distribution model that delivers financial and product information directly to consumers through digital platforms. Insurers will need to adjust compensation systems to meet new fiduciary requirements, while maintaining existing distributor relationships.

Explore the use of robo-advisers. Robo-advisers represent a new self-service channel aimed particularly at younger, tech- focused consumers. In 2016, insurers will need to consider the best way to incorporate robo-advisers into their current distribution platforms-through internal development, partnership or acquisition. To help make that decision, insurers should ask themselves: Would the robo-adviser be a new distribution channel, a supporting tool for current distributors or some combination of the two approaches? Insurers will need to evaluate the costs and potential impact of integrating systems to improve sales and service. And with regulations in flux, firms will want to give compliance and suitability careful attention.

4. Reengineer processes to drive efficiency and market growth

Building operational agility

Changing customer expectations are opening up new opportunities for life-annuity insurers to grow their business through innovative products, solutions and go-to-market strategies that focus on the customer experience. However, existing process silos and legacy systems can restrict operational flexibility, so insurers may need to focus on reengineering processes and systems in the year ahead.

Priorities for 2016

Determine if your systems are ready for rapid market change. Today’s assembly line approach to policy quoting, issuance and administration can slow application turnaround and detract from the customer and distributor experience. Once a policy is issued, legacy administrative systems can limit the ability of customers and distributors to access current account information, especially policy values, and to self-service their accounts. This problem can be exacerbated as customers purchase additional products from the insurer, particularly if those purchases are on different platforms.

Ensure that your systems can stand up to new regulatory rigors. Policy issuance and administration are not the only areas affected by process silos and legacy systems. Regulatory changes and risk management imperatives are putting pressure on finance to improve the quality and speed of reporting, as well as the use of advanced analytics for predicting and stress testing trends. As companies expand into new geographic markets and lines of business, the complexity of reporting and analyzing data is multiplied. A review of your systems through a regulatory lens could be helpful.

Invest in next-generation processes and analytics. Recognizing the importance of operational excellence to future strategies, insurers will continue to invest in straight-through-processing in 2016 to speed application turnaround times. They will also use more advanced analytics to enable underwriters to minimize the amount of required medical data, slash decision- making time and improve accuracy. Data consolidation projects will remain a high priority for many IT departments.

Revamp IT systems built for simpler times. During 2016, insurers will need to improve and replace IT systems that have reached the end of their useful life and are no longer fit for purpose. Unlike past investment cycles in IT systems, when one generation of hardware replaced another, the emergence of cloud technologies and on-demand solutions create new flexible options that can be implemented more quickly.

Consider partnerships that will facilitate transformation. To support critical business data processes, life-annuity insurers should explore creating strategic alliances with outside specialists. Insurers have already worked on consolidating legacy information systems and integrating data from around the firm, which will facilitate their transition to cloud and on-demand platforms. However, management must clearly understand the auditing, control and business risks of taking that leap.

5. Bring in the right talent to lead innovation

A growing talent gap

Life and annuity insurers are finding that driving innovation will take fresh ideas and new talent. As they age, distribution teams are falling out of sync with emerging consumer demographics.

The result: Life insurance and annuity sales to younger generations are declining, a trend that will only build momentum over time. In 2016, insurers will want to meet this challenge head-on by developing initiatives to attract young, diverse workers.

Priorities for 2016

Take concrete actions to compete for talent. The talent shortage affects every layer of the organization, from gaps in senior executive roles to deficiencies in technical skills. At the same time, the industry’s image as staid and risk-averse often does not appeal to the brightest and most promising young people, who view fast-growing technology companies as their employers of choice. Insurers will need to compete fiercely for the talent required to build the next-generation insurance company.

Go beyond image-building to attract fresh blood. Executives recognize that simply burnishing the industry’s image will not be enough to draw in new talent, such as data scientists and digital experience designers. In 2016, insurers need to offer greater flexibility in work locations, find creative ways to motivate and reward employees and fine-tune talent management programs.

Make diversity a strategic imperative. Workforce diversity is more than a compliance exercise; it offers a powerful way to achieve key strategic objectives. An employee base that reflects the customer universe is better-equipped to respond to changing customer needs. Diverse teams make better decisions by avoiding groupthink. In 2016, life and annuity insurers will broaden their efforts to attract a workforce representing a mix of cultural, demographic and psychographic backgrounds.

6. Put cybersecurity high on the corporate agenda

Escalating cyber risks

Leveraging social media, the cloud and other digital technologies will expose life and annuity insurers to greater cyber risks in 2016. These risks can run the gamut from financial fraud and corporate terrorism to privacy breaches and reputational damage. To protect their businesses and their clients, insurers will need to take strong measures to keep their technical platforms air-tight.

Priorities for 2016

Make cybersecurity a priority. Inadequate cybersecurity can cause a serious financial, legal and reputational fallout. In today’s digital age, hacking often involves organized crime looking to steal data and trade secrets for financial gain. Cyber attacks can also be politically motivated to disrupt organizations. Whatever the motive, insurers will want to ensure that growing digital connections between their systems and outside parties are well-protected.

Take a broad view of the potential risks. Cybersecurity is not the only data-related risk for insurers to consider. Privacy issues surrounding consumer and distributor information are a mounting area of concern, especially as insurers use that data in product pricing, underwriting and target marketing. In addition, social media can make insurers vulnerable to reputational risks – in real time.

Safeguard customer data from misuse. Although consumers have grown accustomed to providing personal information to third parties, there is still uneasiness over usage, especially when it involves sensitive consumer medical and financial information. Insurance firms, particularly those with a global client base, need to stay abreast of emerging privacy regulations that could affect the use of digital technology and analytics. Crucially, insurers must invest in internal firewalls that protect personal data from misuse.

Assess your exposure to data sovereignty risks. As insurers move toward cloud computing and on-demand solutions, issues surrounding data sovereignty are becoming more complex. In a hyperconnected world – where a U.S. insurer might partner with a Dutch firm using a data service in India – the concept of data residing in one jurisdiction is difficult to apply. To cope, insurers will want to set up processes to monitor changing data regulations around the world and their impact on their businesses.

This piece was written by Doug French and Mike Hughes. For the full white paper, click here.