Dickens Was Right: It is the Best and Worst of Times. Here’s Why.

National Harbor, Md.
Challenging times call for a new way of looking at the insurance business, according to Robert Kerzner, president and CEO of LIMRA, LOMA and LL Global, Inc., who opened the organization’s annual meeting here.

During the opening session, Kerzner asked attendees to think of Coke, a company that successfully reinvented itself as being in the fluids business and not just the soda business. He rallied attendees by telling them that when they offer new products and distribution, there companies will see growth.

Recent studies, he stated, show that people want face-to-face interaction but with technology, face-to-face meetings can also take place on a computer, iphone or ipad. Underwriting and issuing a policy can be done in real time, he said.
Distribution is shrinking and new ways are needed to reach people who need life, annuity and savings products.

Increasing product sales is important because insurers “have more things facing us than ever before at one time,” according to Kerzner. The risk-reward balance has been upset, he added. Some products have slipped into single digit return on equity (ROE) rather than double digit, he continued. He cited a number of causes including unpredictable lapses due to investor-originated life insurance, higher operating costs, and riskier products, among other factors.

Indeed an afternoon panel featuring industry CEOs affirmed the challenges the industry faces but also left room for optimism if the insurers rise to the challenge. Edward Rust, Jr., chairman and CEO of State Farm Insurance Co., said that risks that must be addressed now include finance risk, understanding political forces and populism, and how the advent of new ways of reaching people such as social networking will fundamentally change the business.

David O’Malley, chairman, president and CEO with Ohio National Life Insurance Co., says he fears the regulatory environment in the near future, a climate he says goes beyond the National Association of Insurance Commissioners, Kansas City, Mo., and includes the new Federal Insurance Office, a federal office of consumer protection, an accounting industry pushing for mark-to-market standards and new, unfavorable international accounting standards that will disadvantage American insurers. “We are faced with more threats at one time that could have a very, very serious negative effect on our companies. It causes me a great deal of stress to see how this could unfold.”

What it does, according to O’Malley, it to create a level of uncertainty and predictability about how to manage our business. For instance Kerzner and the CEO panel discussed the current low interest rate environment and its impact on business. State Farm’s Rust said that insurers will have to get their minds around what looks like the longer term implications for embedded portfolio yields which have been coming down 100 basis points a year. It will have an impact on pension funding assumptions, discounts and liabilities as well as pricing assumptions, he continued.

Kerzner noted that the recent financial meltdown of 2008 brought a number of insurers to their knees in the downturn throwing risks out of balance with rewards. This lack of balance could make capital reluctant to invest in the market, he added. And with solvency and accounting initiatives in Europe, there could be “a negative disrupter of epic proportion.”

Consequently, small companies may be acquired, mid-sized companies merged, and non-core businesses sold, he said. Fewer companies will exist and the insurance industry will be transformed, he added.

Even with this daunting list of challenges, Gary Bhojwani, president and CEO with Alliance Life Insurance Company of North America, found cause for optimism and “the great opportunity we have” to provide guaranteed income to baby boomers. He cited a recent survey his company completed which found that 80 percent of 3,300 baby boomer participants would rather pick up 4 percent guaranteed income than have the opportunity to earn up to 8 percent.

Kerzner said that there are a “myriad of opportunities” to grow the life insurance business. For instance, LIMRA will offer virtual classes incorporating its research and plans to add more research in the retirement space. “The next decade really could be our best and indeed even our golden age. We are in the eye of storm. Much is behind us but it is not over.”

If the insurance industry wants to reach that Golden Age, then it needs to not only cut costs but empower that consumer, Terry Jones, founder and former CEO of Travelocity.com asserted. Today, “choice happens instantly. Information has found its freedom.” The balance of power is shifting to the consumer and insurers who can provide consumers with information will be the successful ones, he said. Jones noted that 45 percent of US policyholders visited an insurance site last year. The first thing they did after a face-to-face meeting where they received a quote was to go online and look for competing quotes, he added.