Innovate and
experiment to
fail and win:
a new formula
for survival
and success
During a challenging time,
the industry is poised to do
well by doing good
2015 Retail Life Insurance and Annuity
Executive Survey
01 |
2015 Retail Life Insurance and Annuity Executive Survey
Executive summary
In many areas,
the need for action
is clear
The insurance industry continues to face
an unprecedented range of strategic and
operational challenges. The results from
EY’s 2015 Retail Life Insurance and Annuity
Executive Survey show many forces of
change — some long-standing and some
emerging — that are shaping the strategic
agenda for senior leaders and, at some
carriers, causing something of an existential
crisis. In many areas, the need for action is
clear; there is widespread consensus among
survey respondents regarding the need for
more innovation, better technology, greater
focus on the customer and attracting new
talent. In fact, the key findings and selected
respondent comments included on the
following pages show that the industry’s
leaders are fully engaged with the challenges
and are looking forward in driving the
industry to do well by doing good.
At EY, we are committed to building a better
working world — one with increased trust and
confidence in business, sustainable growth,
development of talent in all its forms and
greater collaboration, and we’re excited to
see so many executives in the life and annuity
industry sharing our commitment.
But just because the needs are well defined
does not mean they will be easy to overcome.
With a sluggish global economy as the
backdrop, the industry faces many hard
choices regarding the products it sells, how
it sells them and to whom it sells them.
As such, the industry’s leaders called for
a repositioning of insurers’ basic value
proposition to make it more meaningful for
customers throughout their lives. They also
pointed out the industry has significant work
to do in connecting with and attracting a new
generation of workers.
The increasing focus of executives on
innovation and transformation underscores
both the imperative for fundamental change
and the need for strategic evolution. While
the headlines may seem mostly negative
and recent performance has not been
encouraging, the industry’s top leaders are
clearly driving forward and promoting change
on multiple dimensions.
2015 Retail Life Insurance and Annuity Executive Survey
| 02
Key findings
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Ongoing
macroeconomic
sluggishness
The innovation
imperative in the era
of permanent disruption
The flexing of distribution
models and return of
information asymmetry
Despite upticks in the US and
the UK, the global economy
remains in the doldrums, with
many nations still struggling
with the fallout from the financial
crisis. Low interest rates,
demographic changes, rising
health care costs and the risk of
future bubbles are limiting wealth
creation opportunities for many
industries and depressing growth
prospects for most carriers.
Naturally, these are top concerns
for senior leaders who want
to drive a mature industry into
a new era of expansion.
The industry has never been
considered highly innovative,
but competitive pressures and
increasing client expectations
have made innovation an imperative.
In today’s context, innovation no
longer means launching new
and different products; it means
fostering and delivering innovation
in sales, service and operations.
While a few skeptics remain, the
industry as a whole has never
seemed more ready to challenge
traditional thinking and adopt new
ways of completing sales, engaging
customers and managing the
business.
The impact of market, technology,
demographic and regulatory
forces on distribution models will
be profound. New channels will
not necessarily replace but will
complement the traditional inperson model. And there is little
debate whether advisors’ roles and
compensation models will change,
but there is some uncertainty as to
how fast the transition will occur
and where the ultimate endpoint
falls. More and better data, plus
advanced analytics, may ultimately
give insurers an informational
advantage over consumers in terms
of visibility into behavioral biases
and incentivized behaviors, which
could be used to increase levels of
purchases and renewals.
2 31424
53 4 4
5
Finding, attracting
and retaining
sufficient talent
Once upon a time, claiming that
chief HR officers held the most
important job in the industry might
have seemed laughable. No longer.
Talent management and human
capital issues are approaching
near-crisis urgency at some carriers,
with severe shortages of qualified
workers at every level of the
organization. The bottom line is that
executives believe that the industry’s
workforce must look like more like
its future customer base — more
diverse in age, outlook, ethnicity and
religion.
The rapid evolution
(and rising uncertainty)
of consumer protection
regulation
The regulatory field is fast-changing
and executives have grave concerns
about the potentially game-changing
nature of the Department of Labor’s
proposed conflict of interest rules
that expand the industry’s fiduciary
duty to consumers. Everyone wants
common-sense protections against
abuse and fraudulent behavior, but
those threats must be balanced
against the pressing need to provide
the middle market, in particular,
with advice regarding retirement
products and services. Data security
and privacy are important as well,
but most executives are focused on
the potentially massive impact and
final details of the changing fiduciary
rules.
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2015 Retail Life Insurance and Annuity Executive Survey
About the survey
During the summer of 2015, EY interviewed executives
at approximately 20 leading US insurance manufacturers,
distributors and reinsurers as part of an ongoing effort to
understand how the life insurance and annuity industry can
surmount current challenges and move forward. The objective
was to understand the views and concerns in the eyes of
industry executives and stakeholders — and to outline the
industry opportunities and challenges from the perspectives
of customers, distributors and manufacturers. The interviews
focused on the global economy, innovation, distribution,
talent issues and consumer protection.
2015 Retail Life Insurance and Annuity Executive Survey
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5
1234 4
Ongoing
macroeconomic
sluggishness
In the aftermath of the global
financial crisis, insurance executives
are justifiably worried about
macroeconomic trends and the
prospect of slow growth. As a whole,
the global economy is still struggling
to gain momentum. Global growth in
2014 was lower than initially expected,
according to the World Bank. Overall,
it is expected to rise moderately to
2.8% in 2015, and average about 3.2%
through 2017.*
Although the United States and
the United Kingdom are showing
improvement, the global outlook
remains questionable. Negative interest
rates and devalued currencies trouble
some major economies. Financial
malaise lingers in Europe and Japan.
China is undertaking a cautiously
managed slowdown. Equity markets
are highly volatile, and there is a
widespread fear of “the next bubble,”
such as an emerging debt crisis in
the US. Few respondents believe
that an uptick in the US economy will
restore growth for the life insurance
and annuity industry or lead to broad
improvements globally.
It is not surprising that retail life and
annuity executives express concern
about the full range of macroeconomic
indicators, given the industry’s unique
sensitivity to many of these forces.
Consider demographic trends. Japan
is facing a 40% population decline
in the next 40 years, with huge
impacts on a wide range of industries,
including insurance. In the US, we
have a growing population, but the
inability of the insurance industry to
penetrate this growing market remains
evident. Stagnant wage growth, rising
health care costs and increased health
insurance premiums could crowd
out potential share-of-wallet gains
for insurers, as consumers feel they
have less money for life insurance
and retirement savings. These effects
could hit the middle-market segment
particularly hard. This group is currently
underserved by the industry, according
to nearly all respondents. At the same
time, millennials are marrying later
and thus postponing the purchase of
life insurance, which means income
protection and retirement planning
products will likely need to play a larger
role within insurers’ portfolios.
Low interest rates negatively impact
earnings and reserves, and some
respondents felt that drove companies
to look for alternative asset classes for
yield. Others identified a heightened
awareness for the detrimental
impacts of rising interest rates. As one
respondent pointed out, “We have
managers that have never experienced
rising rates before, and consumers
that have never had to deal with it.”
For instance, a potentially huge debt
refinancing crisis looms if interest rates
rise; as loans are refinanced, consumers
will have even less money to save for
retirement or to purchase life insurance
products.
Stagnant wage growth, rising health
care costs and increased health
insurance premiums could crowd out
share-of-wallet gains for insurers. In
the face of these economic challenges,
the industry must develop offerings
that reflect the real-world needs of
consumers, from affordable annuities
for the middle market to more
sophisticated life and health policies
that leverage the Internet of Things.
The bottom line is the global economy
will be an obstacle to growth for
insurers, until the return of broad-based
prosperity and wealth creation.
In looking forward, the respondents
stressed the long-term view. Such a
perspective recognizes that the current
environment reinforces the need for
strategic risk-taking and continuing
analysis of business models. Thus,
many carriers are likely to experiment in
* “Global Economic Prospects: The Global Economy in Transition,” World Bank Group, June 2015.
different markets. Survey respondents
also recognize that the maturity of the
industry makes it particularly sensitive
to macroeconomic challenges. The
bottom line is that a sluggish global
economy will remain an obstacle to
growth for life insurers and give C-suite
leaders even less financial margin for
error in the future.
What survey respondents say:
• “The US economy as a whole may
perform well, but that doesn’t
necessarily extend to the insurance
industry.”
• “Several players will continue to focus
on penetrating the middle market
(or experimenting with it), but we
don’t see a super expansion due to
[Americans’] nervousness around
share of wallet and wage growth. “
• “It’s not going to get easier. Margins
will get tougher. More consolidation.”
• “We’ve been lucky in the sense that
we haven’t had any shocks to [the
economy], because I think it could
unravel pretty easily.”
• “We rely on the global economy to do
well.”
• “The penetration of life insurance
in the US has decreased and our
population has doubled.”
• “The ability to change quickly is key in
this environment.”
• “The biggest risk is geopolitical risk
across countries. [There’s] nothing we
can do about that.”
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2015 Retail Life Insurance and Annuity Executive Survey
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The innovation
imperative in the
era of permanent
disruption
As we continue to do business in an era
marked by a continuous disruption and
new competitive threats, the insurance
industry, which has never been
considered leading edge or particularly
nimble, must work to increase the pace
and scope of innovation. “Innovate or
die” was the succinct description of one
survey participant.
The impact of shifts in product focus
and different customers on distribution
cannot be overlooked. That’s why
some carriers are providing advisors
with new, proprietary tools, as well as
systems for underwriting, for digital
applications and for managing customer
relationships. Carriers are also
evaluating their distribution models as
a whole, including their compensation
models.
It’s clear that technology will be the
driver of innovation. Carriers can
leverage considerable advancements in
digital technology to make step gains
in their ability to engage customers
consistently, across more channels, with
richer experiences. But it is important
to recognize that innovation is the job
of every function of the enterprise,
not just product development. One
respondent put it this way:
“As an industry, we confuse innovation
with product development …
if we don’t learn the difference … and
don’t learn how to become far more
innovative much more quickly, we run the
risk of being disintermediated by those
that can run faster.”
True, some executives believe their
organizations have already done much
in the way of innovation, and more than
a few consider the focus on innovation
to be something of a fad. But, overall,
survey respondents emphasized their
readiness to embrace the new market
realities and resulting innovation
imperative. To an unprecedented
extent, the industry accepts that it must
re-think everything about the way it
operates or face dire competitive — even
existential — consequences.
In terms of recent progress, early
adopters of technology have been
making significant investments in
research and development. For
instance, some insurers now offer
discounts to policyholders willing
to utilize sensors that track their
movements and health. The success of
such high-profile programs has made
it clear that telematics in the insurance
industry is no longer a futuristic
scenario, but rather a here-and-now
opportunity. Thus, the fast followers are
doing just that, and hastily re-allocating
resources toward R&D.
New competitive threats are driving
insurers forward on the innovation
front. Any company, from any sector
that possesses large amounts of data
about people and their relationships,
could become a player in the financial
services arena. As such, the industry
faces a diverse and daunting range
of potential competitors from banks
and credit card companies, to makers
of wearable technology and personal
devices, to search engines and big
online retailers. That is why forwardlooking insurers are considering
partnerships with such companies, as
well as entirely new business models
and dramatically re-engineered
customer relationships. It is important
to note that respondents did not
unanimously accept that view. Some
pointed out that data aggregators did
not necessarily “have the expertise to
tie data to mortality and morbidity.”
Rising consumer expectations are
another driver. Today’s buyers look to
interact with companies through new
devices (such as smartphones and
tablets) and new channels (like video
chatting and text). One respondent
commented on customer expectation
for “a seamless high tech experience.”
Self-service tools that are optimized for
mobile devices are being developed at
many carriers, with some executives
predicting that the IT function will
become one of the largest and most
important functions at insurance
companies.
It’s no surprise that improving the
customer experience is high on the
strategic agenda, according to survey
results. Specifically, several respondents
spoke of working to improve the
experience through which consumers
access advice. The good news is that
providing guidance through new
channels (such as video chatting) would
be less expensive than a traditional
over-the-table and in-person sale.
So where should innovation come from
and which form should it take? Survey
respondents cited a few main areas.
Sales and service: The focus will be
on driving customer engagement
with well-integrated, personalized and
meaningful digital experiences and
a streamlined application process.
Here again, insurers are focused on
empowering agents with better tools,
including mobile, tablet and video
platforms to connect with consumers as
they build out more robust channels for
research and self-service.
Product and market: The industry
must develop offerings that reflect the
real-world needs for consumers, from
affordable annuities for the middle
market to more sophisticated health
policies that leverage the Internet of
Things. As providers of historically “low
engagement” products, insurers are
challenged to build and maintain strong
and flexible client relationships. As one
respondent stated, the industry “must
learn to engage with consumers on
the basis they determine … and figure
out how to lock-in and re-engage with
customers” at different points of their
lives. Failing to do so does a “disservice”
to both customers and shareholders.
2015 Retail Life Insurance and Annuity Executive Survey
Operations: The industry is finally
updating or retiring old legacy
systems (especially those for policy
administration) that can be 20 to 30
years old. It’s the end of the capital
cycle for big systems that were put
in place in the 1980s or 1990s.
Accelerated or automated underwriting,
the use of electronic forms and straightthrough processing are new ways
insurers are seeking to modernize and
enhance operations. For underwriting,
the goal is to make underwriting
decisions in seconds, not hours or days.
Even as these cycles shorten, new data
sources — very much including big
data — will be brought to bear to
enhance the accuracy of decisions. Data
aggregators are playing a role at some
carriers already. Last, the development
of straight-through processing,
especially in the transfer business, is
seen as a potentially large source of
cost savings as it would help simplify
the process of IRA rollovers and 1035
exchanges.
Technology: Better mobile apps, more
advanced analytical capabilities and
better data integration are pointing
the way forward. Advanced carriers
are using data mining and predictive
analytics to help determine when
policies will lapse and how products
are being used. Others are partnering
with makers of wearable technology to
track consumers’ health behaviors — a
potentially revolutionary development
for insurers. One respondent pointed
out that “EKG data from smartphones is
as good as a medical office EKG.”
Many respondents reported significant
progress on several of these fronts;
however, the industry must also
recognize that customer expectations
move in only one direction — upward.
For example, high-net-worth consumers
want their data quickly and in a usable
form; they want to view information
on their annuities just as they see data
on their stock portfolio. For insurers,
this means innovation and customer
experience enhancements are a
| 06
continuously moving target. Now that
early adopters have demonstrated
success with a few high-profile
programs, more insurers identify
themselves as fast followers than in
prior years. Investments in innovative
capabilities are likely to be significant,
but insurers can build substantive
business cases based on badly needed
performance improvements. Improved
understanding with better harvesting
of lifetime customer value is one way to
achieve such ROI.
What survey respondents say:
It is likely that cross-functional teams
will be established with the sole
purpose of driving innovation. Cultures
that accept experimentation and
failure as necessary components of
innovation will be more likely to remain
relevant and, ultimately, succeed in
the next innovation-driven era. As one
respondent described the way to drive
innovation, “We must fail fast and fail
forward.”
• “If someone finds a real simple,
painless, almost fun way to buy life
insurance, that would change the
world of the insurance industry.”
• “In today’s world, everything has
to be mobile first. Not desktop, not
email, but mobile first.”
• “You just have to suck it up and pay
for [innovation] as an additional cost.”
• “You have to make it so that
[innovation] is a team of people’s
primary responsibility, rather than
just a good afterthought to their
other responsibilities.”
• “Those that can use and make
the most sense of data will have
a competitive advantage going
forward.”
• “Everyone’s saying ‘customer-centric,’
but it’s one thing to say it and another
thing to do it.”
• “We put in accelerated underwriting
tools you couldn’t have done 10 years
ago because the processing speed
and algorithms hadn’t been built.”
• “Automated underwriting offers
a better process, lower cost and
increased traction, but we need to be
sure that our [insurance] clients are
comfortable with the risk.”
• “Predictive analytics will be an
effective tool in the middle market
because of the number of risk classes
and low concentration of risk.”
• “I don’t know that technology is
the limiting factor or all alone the
enabling factor … I think the missing
ingredient is getting people to view
life and disability insurance as critical
as auto and home insurance.”
• “ [Technology] is fundamentally
upending, and allowing
new competitors to come into and
interrupt traditional business
models … [None of us] are safe.”
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2015 Retail Life Insurance and Annuity Executive Survey
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5
The flexing of
distribution
models and return
of information
asymmetry
Survey respondents are clear-eyed
about the shifts away from traditional
distribution models, as well as
rising consumer empowerment and
the breakdown of the information
advantage insurers have traditionally
enjoyed. Historically, the industry has
operated with a high degree of opacity,
due to the low-engagement nature of
the insurance business, where products
are “purchased and then put in a
drawer,” as one survey respondent put
it. Overall product complexity means
consumers lack visibility into the costs
and inner workings of complicated
products. In this context, the traditional
distribution model made sense, with
predominantly face-to-face distribution
with commission-based agent
compensation and a general focus on
affluent markets.
But today the playing field has changed.
Customers have unprecedented access
to product and pricing information,
thanks to the internet. Their preferred
shopping methods have changed
globally, with a pronounced preference
for mobile shopping and
self-service channels that are available
24/7. Today’s consumers are more
comfortable with self-service and have
educated themselves to a greater extent
than in the past. Further, technology is
challenging the traditional advice model
and facilitating the emergence of
new, low-cost, online-based advisor
models. These so-called
robo-advisors have had a major impact,
according to survey respondents.
Consumers seem especially attracted
to the objectivity of the advice and the
continuous updating of guidance.
It is important to note a few contrarian
views among survey respondents.
Some expressed little faith in internet
sales, questioning whether average
consumers understand their own
insurance needs. Similarly, roboadvisors may only be appropriate for
select people who are comfortable
with the significant information input
required to make such models work.
Still, the overall impact is clear: the
insurance advice model is changing.
Customers who still engage advisors
may only seek to confirm purchase
decisions, rather than guidance on the
purchase decisions themselves. Further,
customers now expect a high-quality,
customer-centric experience and
seamless, high-tech digital experiences.
Survey respondents recognize that the
industry has struggled to deliver these
in the past.
One distinct trend is the shift toward
omni-channel distribution. With an
omni-channel approach, insurers offer
a range of channels to suit the diverse
purchasing preferences of consumers.
For example, a consumer may come to
the company digitally and then switch
to an advisor for a more personalized
service experience. Additionally, the
mix of channels will vary by product.
Improving the efficiency of traditional
advisors is another priority. The need
to digitize steps in the sales process
is driving the significant investment
around client relationship management
(CRM) and electronic applications
for agents, as well as an improved
underwriting process.
The key is to change the role of the
agent at the point of sale to unlock
customer lifetime potential, not just
take an order or close a sale. Such a
transition would require a new focus on
providing holistic advice for customers
based on a deeper knowledge of their
needs and finding the right offering
for those needs. “Life-cycle selling,”
or a program to re-engage throughout
a customer’s life after the initial sale,
may open up significant cross-selling
opportunities, such as integrating
401(k) plans with options for life, health
and disability.
If this strategic evolution were to
succeed, insurers would not only have
to develop new products, but also shape
an entirely new value proposition for
consumers. One respondent exhorted
the industry to become more “involved
in protecting, monitoring and advising
on health rather than just being
involved at death.”
Looking forward, “more digital” does
not equate to “no face to face.” In
fact, even as new distribution models
grow, in-person contact will remain
predominant, according to survey
results. According to one executive, “I
can’t believe that a meaningful amount
of life insurance can be distributed
without human contact.” Another
disagreed, stating that “a significant
portion (not majority) of sales will be
agentless.”
Whatever the exact percentage of
sales that move to direct channels, it is
clear that digital platforms are here to
stay. Thus, the carriers with the most
advanced capabilities — especially in
terms of mobile — are most likely to
win. Further, customers will have more
freedom and authority in choosing how
they want to engage with the company;
carriers and their distributors will not
set the terms of engagement, as in the
past. One respondent highlighted the
need for “peaceful coexistence between
channels.”
Beyond channel orientation, the more
significant step may be adapting to
consumer expectation and perception
about the value of life insurance
products. Providing a good customer
experience, both at the point of sale and
throughout the customer’s lifetime, will
be the key. One respondent mentioned
the need to “actually own customer
relationships,” rather than “producer
relationships.”
2015 Retail Life Insurance and Annuity Executive Survey
In any case, significant re-calibration
of compensation models, a highly
sensitive issue in the past, appears
likely. It seems clear that simpler, feebased compensation with fewer bells
and whistles is a possibility. Looking
ahead, one respondent described the
future vision this way:
“An agency model where we provide
technology, a product set and
regulatory compliance/oversight
tools [to attract producers], and if the
compensation that’s been built into
those products is sufficient, [agents
will] be the judge of whether they
want to sell the product or not.”
This model applies to both life and
annuity sales. Robo-advisors will
continue to gain traction, potentially
diminishing commission on annuities,
but there is a clear and pressing
need to keep such products attractive
to consumers.
While the internet has closed the
product knowledge gap between
insurers and customers, information
asymmetry will re-emerge in the long
term. Yes, the internet has given
customers more access to pricing and
product information, which benefits
consumers, but this is a temporary
phenomenon. Once consumers react,
with the addition of advanced analytics,
insurers will once again have more
and better data, which may ultimately
give insurers an informational
advantage over consumers.
What survey respondents say:
• “Buying habits are changing, and
we’re going to have to change with
them.”
• “The fact that the middle market
isn’t as penetrated as it needs to be —
that’s old news — but there are swaths
of current customers on our books
that are underserved.“
• “There are false distinctions between
[agency/brokerage, worksite and
direct] distribution channels. The
reality is if you go omni-channel,
you have to direct people to the
environment where they’re most
comfortable working. It’s the
customer’s call.”
• “We find that a lot of the people
either calling/using the internet do
eventually want an agent — maybe
not on that transaction, but it at least
gives leads to agent to cross-sell.”
• “I can’t believe that a meaningful
amount of insurance can be
distributed without human contact.”
• “I don’t see much pricing power as
an industry … so you have to be able
to differentiate around service and
experience.”
• “We think a lot of our products will
be best presented and reviewed via
the internet, only to have a followup by a call center or an individual.
We see that combination needing to
peacefully coexist for a long time.”
• “At some point you just accept the
consumer has full transparency and
work from there.”
| 08
09 |
2015 Retail Life Insurance and Annuity Executive Survey
There is an opportunity
for the industry to tell
a clearer and more
persuasive story about
its mission and important
societal role in helping
individuals and families
secure financial protection.
The rising generation of
workers is seeking such
purpose as they choose
their career paths.
44
5
Finding, attracting
and retaining
sufficient talent
Talent management and human
capital issues have become so critical
to the industry’s future outlook that
one survey respondent expressed a
belief that the chief human resources
officer had the most difficult and most
important job in the C-suite.
The talent shortage affects every
layer of the organization, with a lack
of sufficient candidates to fill senior
executive roles and significant gaps
in technical skills. In seeking top,
executive-level talent, the industry
seems less lucrative than others, and
doesn’t seem especially cutting-edge.
Then there are the generational issues;
the insurance industry is simply not
attractive to young people, respondents
believe. The industry’s image as staid,
risk-averse and only interested in profits
simply does not appeal to the brightest
and most promising young people,
who likely view technology companies
as their employers of choice. Diversity
— both cultural and geographic — is
another dimension. Several executives
commented that the employee base
must ultimately reflect its future
customer base.
Executives recognize the deep need
to find new talent — like data scientists
and digital experience designers — is not
merely about burnishing the industry’s
image. Rather, the industry will bring
more data scientists and more skilled IT
resources on board — largely because a
larger resource base in these areas will
likely drive market leadership. As one
executive stated, companies “that can
use and make the most sense of data
will have a competitive advantage
going forward.”
2015 Retail Life Insurance and Annuity Executive Survey
| 10
Undoubtedly, there is a clear and
pressing need to replace an aging
workforce, especially in critical areas
like underwriting. Multiple respondents
also highlighted the need for more
“people” people in the industry. In
addition to a variety of quantitative
skills, new insurance talent must still
possess the desire to help people.
We believe the talent questions
are “another face of the relevancy
question,” according to one executive;
insurers must “look relevant as an
employer in the same way can we look
relevant as a product provider.”
Taking a more strategic view, the
talent gap reflects the need to foster
innovation-centric and entrepreneurial
cultures and to develop next-generation
capabilities. There is an opportunity
for the industry to tell a clearer and
more persuasive story about its mission
and important societal role in helping
individuals and families secure financial
protection. The rising generation of
workers is seeking such purpose as they
choose their career paths. We need to
talk about our values and how we have
to be good stewards for the future, as
our people have done in the past. As
one respondent stated, “We have to
walk the walk.” Here again, doing well
and doing good are synonymous.
• “No one wakes up and decides that
they want to go into insurance.”
Talent management programs
will continue to evolve, with more
opportunities for enhanced acceleration
of careers. This is important for
demographic reasons, thanks to “a
generational shift in expectations,”
cited by one respondent, who added
that, “Digital natives have come to
expect more transparency in terms of
their opportunities.” The agent network
could certainly stand to get younger,
if only to smooth the transition of
appropriate business to digital channels.
• “Digital natives have come to expect
more transparency in terms of their
opportunities. There is a generational
shift in expectations.”
These generational shifts in
expectations portend the need for
the HR function to change, as it may
be a microcosm of the overall need
for industry transformation. Many
respondents believe new performance
measurement systems will be
established, with greater flexibility in
work locations and a re-think of both
geographic footprints and real estate
strategies.
What survey respondents say:
• “Financial services companies are
heavily regulated and slow moving
and we are competing against cool
companies for talent.”
• “[We have the] same problem
attracting talent as attracting
customers.”
• “We want our employee base to look
more like our future customer base,
which means more diverse in age,
outlook, ethnicity, religion … There
are geographic implications, too — you
can’t be representative if you’re not
in locations that are representative of
your population profile.”
11 |
5
4
2015 Retail Life Insurance and Annuity Executive Survey
The rapid
evolution (and
rising uncertainty)
of consumer
protection
regulation
Consumer protection considerations
are rapidly evolving. There are many
regulatory initiatives underway that
are aimed at better educating and
protecting insurance customers, though
respondents are naturally concerned
about the impacts. In doing so, one
participant called for the industry to do
a better job in promoting a “commonsense” regulatory regime.
The highest-profile initiative is the
proposed conflict of interest rule
of the U.S. Department of Labor
(DOL), which expands the definition
of investment advice and the scope
of fiduciary services. The proposed
DOL fiduciary rule could change the
way annuity business is written, how
retirement plan participants are advised
and how advisors are compensated.
One respondent likened the proposed
regulation to “an unstoppable train. The
only thing we can do is try and influence
the direction.”
Further, the proposed DOL fiduciary
rule could cause radical changes
in the way companies interact with
their distribution partners, with big
impacts on the advice model, product
disclosure, compensation and CRM.
Many respondents indicated that they
are expecting advisor compensation
to be levelized as a result of the rule,
further accelerating the transition to
fee-based compensation for advisors.
Some respondents believed that the
advisory model would become much
less attractive. One went so far as to
say, “The DOL Fiduciary Rule in its
current form will destroy the annuity
business.” The final wording of the DOL
conflict of interest rule will ultimately
determine its impact, but increased
compliance costs are inevitable. In
general, most executives see large,
“maybe even massive impacts on
operations.”
From the perspective of advisors, their
increased risk may make them hesitant
to provide anything more than generic
advice. Further, enhanced compliance
monitoring and surveillance procedures
will likely increase the time to complete
transactions. Under the proposed rule,
some advisors may prefer to limit their
offering to simpler, low-cost products
such as passively managed ETFs instead
of more complicated products such
as annuities. Advisors may conclude
that it’s not worthwhile to focus on
the middle market. The bottom line is
that increased complexity and higher
regulatory hurdles in the process of
presenting and recommending some
products may lead advisors to sell away
from our industry’s solution set.
Looking ahead, some executives believe
that because of increased litigation
law firms will benefit more from the
proposed DOL fiduciary rule than
consumers, whose lives and financial
security may not be made better
because of the fiduciary requirements
of agents. One respondent expressed
a common sentiment: “Regulation is
making it harder and harder for the
middle class to get advice.” Another
added, “Consumers without advisors
will be hurt and there will be unexpected
consequences.”
Several respondents brought up the
UK market, which has seen significant
regulation aimed at protecting
consumers, as an instructive example.
Some executives have gone as far
as to say that these “best interest”
regulations make it unaffordable to
sell products to consumers. All the
respondents talked about wanting to
prevent abuse, but they indicated that
regulators have so far failed to define
reasonable windows or parameters for
advice to be given. Respondents fear a
similar effect in the US market, where
an unintended consequence of such
regulation might mean the middle class
would not be served by the financial
services industry in the future. One
respondent commented, “It will be
more challenging, and more limiting in
terms of where they would be able to
get financial advice.” This is a critical
concern, since many annuity leaders
eye the large and currently underserved
middle market as a future growth
engine.
More than one respondent believes that
consumers need to be protected from
themselves, while there is uncertainty
about what else they need to be
protected from. Respondents indicated
that in the long term, regardless of
the regulatory rules that get written,
technology, consumer demand and
market forces are going to continue the
push to 100% transparency over time.
As the long-term trend plays out, some
respondents are already considering
the regulatory scrutiny that may occur
as companies adopt advanced data
management and analytics tools.
Companies will soon have better insight
into not only what consumers want, but
what they are willing to buy, given the
right incentive. That concern is over the
horizon for now.
There is also concern around personal
privacy and data security. In particular,
life insurance agents felt this issue was
much more significant, given the data
collected through the underwriting
process. When it comes to the risk
of data breaches, most respondents
are of the belief that “no one is safe.”
That very much includes governments,
which have already been victimized.
The news coverage of security incidents
leads to greater consumer interest
in the measures companies take to
protect their data. That interest varies
by age; many executives feel that
younger people have already ceded
their privacy, while older generations
are more concerned and more reluctant
2015 Retail Life Insurance and Annuity Executive Survey
| 12
to share personal information. Some
executives are wary of a “regulatory
freak-out,” which may occur because a
large cyber incident “is going to happen
eventually and regulators will have to do
something.”
What survey respondents say:
• “Some [regulations] are set up with
good intentions, but in terms of how
it actually impacts the day-to-day sale
— it can make it exceedingly complex.”
• “My impression of what’s happened in
the UK is that people have been left
on their own, and it hasn’t been good
for the lower and middle markets.”
• “Big problem [with consumer
protection] is that [regulators] don’t
really know what consumers need to
be protected from. It could be that
sometimes they need to be protected
from themselves and their behavioral
biases … there is no fundamental,
central principle that you can manage
to … the details are so important that
you still don’t know where you’re
going to end up.”
• “[The proposed DOL fiduciary rule]
will end up re-pricing the entire
industry, getting rid of commissions,
speeding up transition to a fee-based
model and breaking down what you
are charging for into components.”
• “Data breach is not a question of if it
will happen, but when it will happen.”
• “With social media, the next
generation that most of our [life
insurance] sales will come from in
the next five to ten years has already
conceded their privacy.”
Companies will soon have
better insight into not only
what consumers want, but
what they are willing to buy,
given the right incentive.
13 |
2015 Retail Life Insurance and Annuity Executive Survey
Bottom line:
focus on
experimentation,
innovation
and doing well
As difficult as the current market
is, senior industry executives are
driving their organizations forward.
They see particular opportunity in
currently underserved markets,
such as the middle market, with its
urgent need for financial security
and more life insurance in the face
of strenuous economic conditions.
This is not only an opportunity to
grow profits, but also perform an
invaluable societal function and
once again do well by doing good.
But to seize it, carriers will have to
devise and deploy new strategies
and tactics. They must embrace
them in an experimental mode,
measure their performance
carefully and then drive the
successful innovations aggressively
across their operations. Such
experiments will be necessary in
terms of product development,
digital channels, distribution models
and core operations.
For a traditionally risk-averse
sector, transformation is no small
task. In some cases, fundamental
business models will need to
change. Certainly, an infusion of
younger, differently skilled talent
is necessary. But in a time of
widespread change, where there is
broad consensus about the need
for change, substantial competitive
advantage will go to those firms
that move most quickly and boldly
forward. Our respondents summed
it up this way, “When we do right
by the consumer, we do well as an
industry,” and “companies that
think, innovate, experiment, fail
and win will beat the relevance
challenge.” As an organization
focused on building a better
working world, we at EY couldn’t
agree more.
2015 Retail Life Insurance and Annuity Executive Survey
| 14
For additional information,
please contact:
Doug French
Principal
Ernst & Young LLP
[email protected]
+1 212 773 4120
EY | Assurance | Tax | Transactions | Advisory
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