200612 nolan life&annuity-surveyfindings

Robert E. Nolan Company
Management Consultants

Strategies for a Changing
Industry

Life & Annuity Industry
Survey Findings

Life & Annuity Industry Survey Findings

Executive Summary
Increased regulation. Aging systems. and the effective use of technology
Changing demographics. Product remains a challenge, even with 85% of
commoditization. Intensified competition. respondents saying their companies have a
Compressed interest rates. Distribution clear vision, goal, and strategy.
consolidations. Life and Annuity insurers are
facing increasingly complex and challenging 3. Leveraging sales and marketing invest-
conditions as demands for returns and ments for optimal returns stands out,
profitability magnify the pressure on growth. particularly with respect to (1) optimizing
In this turbid realm of an industry in the existing distribution channels, (2)
transition, it is not a lack of strategic options enhancing product features to provide
so much as the often conflicting diversity of competitive advantage and meet market
choices available that today’s senior demands, and (3) expanding the tools,
executives are faced with sifting through. techniques, and training of the existing
Where to best apply the limited available field force.
resources of time, money and people is now
more than ever a decision process requiring 4. Utilizing service as a competitive advan-
the greatest of care and focus. tage to offset the convergence of product
features and pricing stands out as one of
The Robert E. Nolan Company's Life & the key differentiators of forward-thinking
Annuity Industry Survey Findings suggest companies, with almost unanimous
that strategic priorities are starting to shift respondent agreement that speed of
from an internal, operational focus to an service will be a strategic imperative.
external, market driven one. With this shift, Timeliness was closely followed by the
executives are challenged with the need to need for access methods from phone, Web,
balance the tradeoffs between service, e-mail, and voice response to traditional
support, product features and returns. Within written requests.
this context, five strategic trends stand out as
differentiators in the years ahead: 5. Intensely focused technology strategies
encompassing key service platforms like:
1. Shifts in demographics paired with chang- (1) e-signatures, (2) document manage-
ing customer expectations demand intensi- ment, (3) Web self-service, (4) multi-
fied attention for growth-oriented compa- product common front-ends, and (5)
nies, with 95% of respondents profiling consolidated commission systems. On the
the aging of America and 88% the expan- other hand, while it remained a limited
sion of ethnic markets as each demanding strategy, only 16% of respondents felt they
attention. were likely to outsource any key functions
within the next three years.
2. Translating strategy into action specifi-
cally in the areas of expense management



Table of Contents
Page

• Breakdown of Survey Respondents ................................................................. 1

• Company Self Assessment ................................................................................ 2

• Industry Trends .................................................................................................... 5

• Competitive Landscapes ................................................................................... 8

• Sales and Marketing ........................................................................................... 10

• Operations ........................................................................................................... 13

• Technology .......................................................................................................... 16

• Outsourcing ........................................................................................................ 20

• Next Steps: Strategies in Transition ............................................................... 22

• Background & Acknowledgements ................................................................ 23

Robert E. Nolan Company, Inc.

17746 Preston Road 90 Hopmeadow Street
Dallas, TX 75252 Simsbury, CT 06070

(877) 736-6526 (877-RENOLAN)
www.renolan.com
info@renolan.com



Breakdown of Survey Respondents
Based on answers to our self-classification A broad diversity of business line blends, with a
questions, we see that respondents repre- solid majority Life and Annuity, followed by
sented a healthy mix across levels, roles, and Single Line companies and then Property
business size. Casualty, is represented.
Responses received represent a broad mix of
Allocation of Responses
all key functional areas... by Business Line
PC Primary,
Allocation of Responses Multi-line
by Department
14% Single
Sales & Operations Line Only
Marketing18% 23% 12% Life/Annuity
Blends
IT 16% C-Level
5%
7% 7% 5% 24% Execs 69%
U/W
Finance Staff

Life/AH
Blends
...with almost all respondents in senior leader-
ship positions (51% at EVP or higher and
almost 80% at the officer level). Stock and mutual companies were equally repre-
sented. Based on annual premium revenue:
Allocation of Responses
by Officer Level • A little over half (54%) of the respondents
were under $500 million a year,
Other
AVP/ C-Level
Director 15% 7% 29% • Just over a quarter (25%) were in excess of
VP 27% EVP/SVP $2.5 billion, and
22%
• Leaving the remaining fifth (20%) between
$500 Million to $2.5 Billion.

Stock and Mutual Companies
Company No. of Home Under $500 $500 Million to Over $2.5 Grand
Type Office Staff Million $2.5 Billion Billion Total
• 500 or fewer 27% 2% 29%
• 501 to 1,000 2% 2% 4%
Mutual • 1,001 to 2,000 2% 2% 4%
• 2,001 or more 2% 12% 14%
Subtotal 29% 8% 14% 51%
• 500 or fewer 17% 3% 20%
• 501 to 1,000 5% 3% 8%
Stock • 1,001 to 2,000 3% 3%
• 2,001 or more 6% 12% 18%
Subtotal 25% 12% 12% 49%

Grand Total 54% 20% 26% 100%

Robert E. Nolan Company 1


1. Company Self-Assessment
When asked about the strategic direction of would not decrease. The eye-opening statistic
their company, respondents gave a reassuring is almost 20% of respondents are not aware if
response. Eighty-five percent (85%) of the their company has a strategy.
respondents said their companies have a clear
vision, goal, and strategy: Insight: The competitiveness of the
marketplace, driven by both consumers
N Has clear vision, goal and strategy for and investors, continues to demand
where it wants to be in three years focused management of expenses. This
3% requires a clear understanding of the
current situation, desired results, and
85% 12% actions to be taken. Absent a connection
between expense ratio, action plan, goal,
Strongly Agree / Agree
and strategy, companies are susceptible to
Strongly Disagree / Disagree higher costs, noncompetitive prices, and,
Don't Know ultimately, a gradual erosion of market
share and/or profitability.
At least for the companies involved in the
survey, the importance of clarity in purpose In the same vein, only slightly more than half
and direction is apparent. However, answers to the respondents (54%) felt that process
the follow-up questions showed that trans- improvements were being used effectively to
lating strategy to action in areas such as generate measurable results. Twenty-seven
expense management and the effective use of percent (27%) said their companies were not
technology remain a challenge: using process improvement effectively to
reduce expense, compared to the almost 20%
N Effectively uses process improvement who had process improvement projects but
to generate measurable results
did not know if they were effective.

54% 27% 19% Insight: The use of continuous
improvement, especially in operationally
intense environments like insurance
N Expense ratios will decrease
measurably over the next 3 years companies, plays a key role in improving
cost-effectiveness. With no continuous
revalidation and redesigning of processes,
50% 31% 19%
the overhead associated with services
provided can grow significantly.
Strongly Disagree / Disagree
Don't Know Given the competitive environment, in three
years would you rather be leading a company
When asked the same question in 2001, 75% that has been consistently reducing expenses
of companies felt that expense ratios would and improving processes or one that hasn’t?
decline significantly for successful companies For the half of the companies without clear
over the next three to five years. In the current expense and service strategies and goals, this
survey, that percentage dropped to 50% while might be the time to reconsider your
more than 30% believed their expense ratios priorities.

2 Robert E. Nolan Company

Life Annuity Industry Survey Findings

Responses to questions about technology while slightly fewer (57%) stated that IT
strategies profiled a similarly interesting generates measurable results. However, 38%
inconsistency: either did not know or felt that their IT
departments were poorly aligned with the
N Uses technology effectively as an business strategies. Equally troubling is that
enabler of competitive advantage
43% either did not know or did not believe IT
45% 24% 31% generated real results. Even more dramatic is
the gap when it comes to technology as an
enabler of competitive advantage, with only
N Effectively uses IT to generate
measurable results
45% agreeing and 55% either not knowing or
not believing that IT is an effective enabler of
57% 23% 20% competitive advantage.

N IT Department is well aligned Insight: Aligning IT with the busi-
with the business ness continues to remain fundamental to
effective realization of marketplace and
61% 12% 27% operational benefits. Strategic alignment
requires significant information sharing,
broad-based involvement, and, above all,
N Plans on making significant tech
investments to remain competitive
common goals and rewards.

65% 21% 14%
!!!
When asked What long standing
practices do you believe are likely to
Don't Know require revision in the next 1 to 3
years?
..............
Almost two-thirds (65%) of the respondents
How we price, underwrite and service our
plan to continue their investment in
products…changes have caused us to re-
technology, offset by a significant percentage think the services we offer.
(35%) who are uncertain or do not plan to VP of Underwriting
continue their technology spending. This is a ..............
surprising finding given the investment and Growing shift to direct / retail for sales
results of the past few years. When we asked a and service, further impacting broker
similar question in 2001, more than 90% compensation practices.
Head of Product Management
predicted that successful life companies ..............
would invest in new technologies to remain Product-focus will begin to change to
competitive. solutions-focus...change may be very rapid
once it takes hold.
A good majority (61%) said that their IT Sr. Manager, Sales/Marketing
departments are aligned with the business !!!



Conclusion: The existence of a clearly communicated
Given the importance of information tech- vision, goals, and strategy helps a company
nology as an enabler of growth, profitability, focus on a collaboratively adopted and cost-
and competitiveness, this disparity of results effective transition to their future business
concerns us—it represents a potential model. Translation of these concepts into
disconnect in a critical business component. actionable plans with measurable results is at
the crux of growth and profitability. Given the
This is especially true considering the opinions
competitive nature of the industry and
expressed in the Technology section of the
tightening profit margins, managing expense
survey. Respondents expressed a strong need ratios must be a key goal of any strategy
for IT to act as the foundation upon which implementation, which means a high-profile
competitive advantage is built going forward. linkage to actions and their impact across the
This need becomes extremely acute as company. Failure to tie, in some way, the
products become more commoditized and impact of strategy execution to expense ratio
profit margins narrow. Companies should could easily constrain paybacks and limit
consider investing in the necessary structure future opportunities. Along these same lines,
and communications to ensure that they are the use of technology and process improve-
clearly identifying, communicating, and ment to enhance service delivery and cost-
supporting the link between IT, results, and effectiveness must play a core role in any
competitive advantage. ongoing strategy.

Life Industry Strategy Map
Customers
Customer Market Market Market Market Market
Focus Segment Segment Segment Segment Segment

Distribution Independent Alternative Global
Strategies Producers Channels Alliances
Integrated Systems

Marketing Niche Relationship Integrated
Strategies Focus Management Financial Services

Better Service through Process Innovation Technology
Service
Strategies Expense Reduction through
Process Improvement Technology

Enterprise Organization Structure Management
Structure That is Accountable, Responsive, Agile



2. Industry Trends
Overwhelmingly, respondents indicated that An almost equally significant trend is the
demographic change was the one trend that growth in diversity of ethnic markets, each
stands above all others. Each demographic bringing language and presentation require-
change shown was rated highly as a significant ments that span distribution, call center,
opportunity for growth: correspondence, and all other major functions
involved in selling to and servicing insurance
N Low- to middle-income markets buyers. Hispanics are the group that
respondents pointed out as the fastest growing
63% 18% 19% underserved population, followed closely by
Asians. With more than one foreign language
N Work site and bank sales will be a involved, the complexity of the situation is
significant opportunity for growth compounded.

68% 10% 22% Insight: The importance of the ethnic
diversity trend is clearly recognized, yet
the industry as a whole has made only
N Ethnic markets
slight progress in improving its ability to
service the various segments. Solutions
88% 7% 5%
range from significant internal IS
investment or outsourcing on the high end
N Aging U.S. population as an industry
2%
to minor translation of marketing
impact driving change materials without supporting multi-lingual
service capacity on the low end. The
95% 4% most successful companies will be the
ones that offer the full spectrum of multi-
Strongly Agree / Agree lingual materials and service capacity.
Don't Know
While lower- and middle-income segments
have been recognized in the past as
Insight: Changes in national demo- underserved markets, more companies are
graphics resulting from the aging U.S. viewing them as a viable source of new
population are bringing significant oppor- customers. This recognition of opportunity,
tunities and challenges to the industry. The though measurably behind that of the aging
payout and maturity stages of products, as and ethnic markets, is significant. For lower-
well as features and benefits tailored for an to middle-income customers, respondents
older population, should be key areas of recognize distribution through work site sales
concern in product design. Furthermore, channels and sponsored groups each represent
with the diminished value of government- a cost-effective opportunity for growth.
sponsored programs like Social Security,
the need for privatized wealth creation, Insight: The margins available in
protection, and management will provide these markets, however, are so low as to
tremendous opportunity. Successful insurers require extremely efficient distribution
will need to have available a diverse suite and service, bringing additional chal-
of products covering the full range of lenges to the table. However, for the most
retirement concerns, such as cash manage- part, the same basic product structure and
ment, lifestyle protection, wealth transfer, features can be leveraged across these
and inflation protection. markets.



The second most significant industry trend Even less known is the potential impact of
identified involves compliance-related items: class-action lawsuits. Litigated contentions
N Class action suits will significantly
have centered on a range of issues, from fee
change how companies market disclosures to agent compensation
agreements. Historically, there has been a
36% 19% 45% sense of comfort in the industry’s ability to
self-regulate, but this has changed with the
N Tax reform (estate or flat) and lifetime frequency and size of penalties in recent
savings accounts major impact class-action lawsuits. In 2001, 70% said that
class-action suits would change the way
44% 21% 34%
companies market and sell products. Today,
while a third of the companies are concerned
N Privacy issues will require increasingly about the risks these lawsuits represent, the
larger investments
largest percentage (45%) are unsure what the
outcome will be.
84% 4%12%
!!!
When asked the most important trend(s)
N Cost of compliance with regulations
will continue to increase facing the industry over the next three
years, there were some varying
88% 5% 7% responses.
..............
How to make life insurance more
affordable and reduce the cost of
Don't Know processing insurance claims, new business
and service.
CIO
Given the formality and structure of the ..............
regulatory environment, it is easier to estimate Affordable and simple to understand Life
the impact of compliance with regulations and Health Insurance Products that meet
such as SOX, the Patriot Act, anti-money the needs of an aging population.
laundering, and privacy laws. The result, it is Medical Director
..............
agreed, will be that compliance will cost more
Will consumer driven healthcare resolve
in systems, staff, and processes. Less clear is inflationary healthcare expenses? will
the impact of possible tax reform, where employers get out of providing healthcare
respondents are spread across “agree,” to employees?
“disagree,” and “do not know.” VP Sales/Marketing
!!!
Insight: The lack of consensus
regarding tax reform may be due to diver-
gent marketing strategies, with some
concentrating on wealth protection, others
on basic income re-placement products,
and so on. In general, tax reform remains
on the radar but appears too unpredictable
to motivate any significant near-term
product design or marketing strategies.



Conclusion: changes in processes and associated increased
The survey identified three significant costs will be incurred as companies move to
demographic opportunities that companies satisfy the new requirements. Less clear are
should act on: potential changes in the estate and income tax
1. The graying of America, arenas, where potential changes are too
2. Growth in ethnic populations, and uncertain to drive product changes at this
3. Lower- and middle-income markets. time.

While not new, the aging of America is a !!!
trend that companies need to address quickly. Across all company respondents, there
Product features as well as distribution and was one very consistent message
service techniques need to match the needs of regarding future marketing and product
the senior market. considerations that had to be taken into
account – the words were written a
Less clear is the impact of ethnicity, clearly a number of different ways, but all
pointed to the same situation:
large and growing market, but one fraught ..............
with high sales and support costs and complex
population aging...growth of life
challenges. A careful demographic evaluation
settlements...aging of the population...
of this market should be part of every
aging of U.S. population...retirement
company’s plan; the evaluation should look
income management as baby boomers
for a match between capacity, distribution,
retire...aging U.S. population and the
service, and segment.
market opportunities it creates...aging
population and wealth transfer...aging
Regarding compliance, careful cost manage-
population...boomers aging and
ment is required to ensure that overhead does
retiring...aging population with longer life
not grow inappropriately as a key element in
spans and better health...
fulfilling regulatory obligations. Growth in
!!!
regulatory based compliance will drive

Common Drivers of Value Improvement

Cutting or containing
Cutting or containing Enhancing channel
Enhancing channel
the tail of the product
the tail of the product profitability and
profitability and
portfolio
portfolio throughput
throughput

Managing expenses
Managing expenses Tapping the hidden
Tapping the hidden
Life and
Life and
through automation
through automation value in current
value in current
Annuity Value
Annuity Value
and process
and process customer // channel
customer channel
Improvement
Improvement
redesign
redesign relationships
relationships

Manage financial
Manage financial
Profitable growth in
Profitable growth in performance on an
performance on an
premium
premium ongoing basis
ongoing basis

Source: Nolan presentation to LIMRA Marketing Forum on Risks and Challenges in our Industry



3. Competitive Landscapes
On the competitive front, most respondents The impact of merger and global expansion
see industrywide refocusing as likely: trends is less clear:
Niche companies will be more Target mergers and acquisitions will
successful than full financial services improve economies of scale

17% 31%
24% 59% 49%
20%

Strongly Agree / Agree Don't Know Strongly Agree / Agree Don't Know
Strongly Disagree / Disagree Strongly Disagree / Disagree

About half (49%) of respondents believe
Divestitures, discontinued products
will grow as companies focus on returns mergers and acquisitions will improve
economies of scale and the other half are
either unsure or believe the opposite—that
29%
66%
bigger is not necessarily better.
5%
Global expansion of U.S. companies
will be a major source of growth

33% 37%
Strongly Agree / Agree Don't Know
30%
The message here is that many companies will
be concentrating their efforts on their best
lines and eliminating marginally profitable
Strongly Agree / Agree Don't Know
ancillary lines. For those companies, a back- Strongly Disagree / Disagree
to-the-basics approach supersedes the goal to
be a financial supermarket. A majority also Another interesting and unclear response is
state that niche companies will be more the almost completely even split on the impact
successful than companies offering full of globalization, despite the continued
financial services. Two factors probably incursion of non-U.S. companies into the U.S.
underlie this response: the company’s current industry. This response seems to be a result of
position in the market (specialized vs. broad) the surveyed company’s strategy, with about a
and its distribution system. third of respondents working on global
expansion (possibly with a partner company),
Insight: Companies with career chan- a third content to remain domestic, and a third
nels (and particularly those covering small still uncertain whether it’s necessary to expand
towns and rural areas) may need a broader into international markets.
product portfolio than those marketing
mostly through brokers, whether they man-
ufacture all lines or private label a few
lower volume lines to enrich their product
sets.



Two long-standing competitive threats now Banks and other non-insurance entities
seem more uncertain than they used to. will become major threats

19%
In 2001, 50% of respondent felt that the 34%
Internet would not destabilize the profitability
47%
of life companies’ traditional distribution
channel. Today, this has dropped to 22%
believing that the Internet will not have a
destabilizing effect. Strongly Agree / Agree Don't Know
Internet sales will destabilize
traditional channel profitability Today, only 19% feel this is a threat and
15% almost half (47%) do not see these businesses
as major threats.
63% 22%
Conclusion:
From a marketing perspective, companies
need to make a strategic decision between
Strongly Agree / Agree Don't Know being either niche-focused or broad market
based, possibly even international.
Respondents are split between the impact of
A majority (63%) remain uncertain of whether
globalization and merger and acquisitions.
traditional channels are threatened by online
That said, the majority of companies will be
distribution, a concern that’s existed since
most successful by focusing on their core
web-based sales first arrived on the scene.
competencies with a clearly defined market
The ultimate impact remains to be seen.
and strategy, eliminating marginally profitable
ancillary lines. A majority also state that
We see a similar shift in attitude regarding the
niche companies will be more successful than
entry of banks and other non-insurance
companies offering full financial services.
companies; compared to the Internet,
Interestingly, there is less concern over the
however, respondents are less concerned with
impact of banks and Internet on distribution.
this development. In 2001, about 50% of
executives believed banks and other non-
traditional competitors would be a major
strategic threat over the next three to five
years.



4. Sales and Marketing Strategies
Answers to questions about product strategy N Build private label products for
offer both consistency and an interesting distribution by other carriers
disparity between market trends and likely
strategies. In interpreting the results, keep in 40% 43% 17%
mind the changes in market demographics
previously discussed. Very Likely / Likely
Not Somewhat Likely
N Increase marketing of variable Don't Know
investment-related products

41% 51% 9%
As a strategy, manufacturing products for
other carriers to distribute had split results in
the survey. The 40% of companies who
N Increase focus on retirement/lifestyle reported being likely to do this was offset by
products (annuities)
the 43% that said they were not likely.
73% 16% 12%
Insight: While the virtual tie is a little
surprising, the overall result indicates that
N Enhance existing products with unique some companies are pursuing product
features and/or reduced charges
manufacturing as a core strength and
others might follow another core strategy,
83% 3% 14%
such as distribution.
Very Likely / Likely
Not Somewhat Likely
Don't Know N Expand into PC or AH lines either
directly or with private labels

Leveraging existing products takes advantage
24% 68% 9%
of market presence, distributor expertise, and
operational infrastructure. Increasing the
emphasis on retirement and lifestyle products, Very Likely / Likely
Not Somewhat Likely
particularly products like annuities which Don't Know
meet the payout needs of seniors, indicates
adaptation to changes in the marketplace. The
interesting disparity involves the caution For those carriers not already in the business,
shown with respect to variable investment expansion into Property and Casualty or
products, a recent core element in the rapid Accident and Health lines was not a supported
growth in annuity product portfolios. strategy, with 68% saying “not or somewhat
Although over 40% indicate a likelihood of likely.” Most of the supporting votes (24%)
increased marketing of variable products, the came from companies already in this business.
“not likely” answers are over 50%.
Insight: Consistent with the overall
Insight: Significant barriers to entry theme of staying focused on core
of variable products, including a higher competencies and leveraging existing
cost of entry, intensified regulatory expertise and infrastructure, expansion
scrutiny with associated distribution risks, into an entirely new line falls low on the
and greater investment management and
list of preferred strategies.
servicing complexity, may keep carriers
out of the market.



N Pursue aggressive investment The three primary distribution strategies
practices - shorter duration and hedging indicated by respondents were:
1. Providing online access to production
24% 55% 19%
(84%),
2. Web conferencing and e-learning (81%),
Not Somewhat Likely and
Don't Know 3. Expanding the existing field force (74%).
Another strategy related to product perform- These strategies build on current resources and
ance, aggressive investment practices, core competencies while leveraging current
received only 24% “likely” votes, with the technologies, infrastructure, and expertise to
majority (55%) saying “not or somewhat drive growth.
likely.” Overall, investment strategy remains
N Increase Internet-based
conservative for the time being. products and sales

A at distribution strategies further sup-
Insight: It is likely that these changes 46% 42% 12%
look
will be gradual, selective, and very closely
ports the leveraging of existing resources as
watched as their impact on product,
the main direction for companies to pursue. N Increase direct marketing efforts
pricing, and profitability is measured over (inbound and outbound phones, mail)
time.
52% 28% 21%
A look at distribution strategies further
supports the leveraging of existing resources Very Likely / Likely
Not Somewhat Likely
as the main direction for companies to pursue. Don't Know

N Expand existing field force When asked in 2001 about Internet sales, only
a quarter of respondents (25%) believed that,
74% 8% 17% as need-based products, Life, Annuity, and
85%
Disability would sell well over the Internet.
N Integrate use of web conferencing and Today, 46% of respondents plan to increase
e-learning into field mgt. practices Internet-based products and sales. That is
almost balanced by the 42% not likely to
81% 10% 9%
follow that strategy. Companies are still almost
as likely to use direct marketing (phones and
N Provide distributors access to web- mail) to reach new customers (52%).
based prod., commission client info.
Insight: Companies show a willing-
84% 7% 9% ness to continue to supplement their sales
12%
efforts via these alternative distribution
Very Likely / Likely sources, although responses indicate a
Not Somewhat Likely stronger preference to support their field
Don't Know
forces.



N Incorporate full commission disclosure companies. Inevitably, these strategies force a
into sales practices choice between being ‘leading edge’ versus
‘fast follower’ in deploying these technologies,
41% 22% 36%
because not providing equal or better
functionality will erode a company’s com-
Not Somewhat Likely petitiveness from a distributor’s perspective.
Don't Know

As a result of the graying of America, there is
More surprising is the response on the need to also a recognized shift to retirement and
incorporate full commission disclosure in sales lifestyle protection product features, although
practices. Despite intensified pressure on sales insurers are approaching growth in variable
practices, suitability, and disclosure, only 41% products with greater caution. Other strategies,
indicated this as a strategy likely to be pursued like Internet and direct mail, continue to play a
over the next three years. role, although at a much lower priority than
existing methods. Lastly, while there is
Insight: This might be an indication of increased attention to the use of more
a general desire to be a reactive follower on
aggressive investment management practices
this topic as opposed to a change leader,
particularly given the potentially and the need for full commission disclosure,
controversial nature of disclosure and the both strategies rank the lowest of all reviewed.
impact it could have on distributors if not
done consistently through the industry. !!!
In response to describing the
greatest challenge(s) facing Sales and
Conclusions: Marketing executives, the responses all
The focus is on (1) optimizing the existing carried a consistent theme:
distribution channels and (2) enhancing ..............
product features to provide competitive Agent recruiting, retention…aging
distribution...cost of distribution...effective
advantage and meet market demands while
distribution…figuring out the appropriate
(3) expanding the tools, techniques, and blend of distribution...allocating
training of the existing field force. Consistent investment and resources over competing
with the strategies depicted in the Operations channels…finding and keeping
and Technology sections of this survey, distribution…dwindling sales force…
growing the investment in the Web combined recruiting and retaining quality
with better use of the Web’s portfolio of tools producers…retaining good reps…sales
productivity...reducing agent turnover.
that enhance distribution channel effectiveness
!!!
is clearly a top priority at the respondents’



5. Operations
Operationally, respondents are working across A. Consolidate similar functions across
the board on service delivery, technology, and channels and products for economy of
structure. Of all the operations strategies, two scale

emerged as clear winners. Almost unani- B. Adjust consumer service standards to
mously, speed of service is seen as a strategic reflect customer tiers based on profit

imperative (97%). Speed is closely followed C. Adjust producer service standards to
by providing more service access methods reflect contribution to profits (tiered
service)
such as phone, Web, e-mail, VRU, and so
forth (93%).
10% 15%
A. Accelerate service delivery (time 15%
needed to complete a transaction
including NB)
65% 60% 55%
B. Provide more service access methods
(phone, Web, e-mail, voice response)

2%
7% A B C
Very Likely / Likely Add In Somewhat Likely

95% 86%
Insight: Like the credit card industry’s
much-touted tiers (e.g., silver, gold,
platinum), service tiers allow a company to
pursue two separate approaches according
A B to unique cost structures. One strategy
would be to reduce the services provided
to less profitable consumers or producers,
using the current level as the “top tier” and
creating a lower-tier service. This would
Insight: A move towards self-service allow a company faced with expense
is evident in this response and supported constraints to preserve its service-based
by recent industry trends. The Web and competitive advantage for the top tier
Internet act as enabling technologies, with while generating savings in the broader,
the expanded access provided driving the less profitable groups. The second
approach, complicated by the cost factor,
industry toward faster delivery of service. would be to create a new, higher tier with
added services above the current level. For
The second most popular strategies looked example, a “concierge” service line for
personalized support, direct access,
first at the cost-effectiveness of service expanded hours, and higher service levels
delivery by combining functions to gain (such as faster answer time) might be
economies of scale (75%), tied with service created. One drawback to this approach is
tiers based on profit (consumers) (75%) and that, unlike the first approach where
service is reduced for all but the top
followed closely by contribution to profits agents, creating a new, higher service tier
(producers) (70%). would add to costs.



The other strategies rated by the survey Some form of consolidating telephone service
participants were spread rather evenly, operations will be undertaken by a majority of
reflecting a diversity of planned approaches: respondents (58%). Still, companies remain
A. Align operations with customer split on the tradeoffs in combining distributor
markets (employer, individual, and consumer telephone service operations,
wirehouse) with the typical determinant being whether
B. Increase hours and days of service most of the calls are sales support and new
availability (move towards 24/7)
C. Consolidate distributor and consumer
business (keep them split) or service-related
telephone service operations (combine them). Organizational questions of
D. Align operations with channels of this nature remain unique to each company’s
distribution (e.g., career, bank, etc.) distribution systems and contact center
(computer-telephony) integration capabilities.

One action to be taken is consolidating physi-
14% 14% cal locations and relocating to a lower-cost
17% 14% area. Fifty-one percent (51%) of respondents
51% either were not likely to pursue this strategy or
50% 41% 40%
did not know. If you added “somewhat likely”
to the total, the total goes to 68%. Only 10%
A B C D indicated this as a very likely strategy.

!!!
Technology and effectiveness
The relatively close ranking of two distinct remain a consistent source of
organizational strategies—by channel (54%) competitive advantage, as indicated
and by market (65%)—indicates that these by the consistency of responses to the
solutions are custom to the company and question regarding the top priority for
based on other existing product, channel, or gaining competitive advantage
service strategies. The interesting finding is through service.
that collectively, most companies are .........
reorganizing in some fashion to improve costs, Straight through processing….
service, or both. technology that meets targeted consumer
needs at cost effective price… use of
Over half (64%) of the companies surveyed technology… technical automation and
are moving towards expanded service hours. process improvement… use of
This works in conjunction with expanding technology... economies of scale and use
access through Web, e-mail, and interactive of technology.
voice response previously mentioned (93%).
Reduced cycle time… reduced costs…
Insight: : Giving broader hours a lower better service… faster time service….
priority than broader access is based on the delivery efficiency… speed to market...
fact that easy self-service options reduce superior service.
the need for expanded direct service. !!!



Conclusion: service tiers which provide a sense of privilege
Service as a competitive advantage is coming to top producers and high-value consumers is
of age as product features and pricing dif- becoming more prevalent, although secondary
ferences converge. Speed and simplicity are to the price/service tradeoff.
two key measures of effective delivery on this
strategy. We know that some companies have The top priorities for gaining
yet to venture into the self-service arena of the competitive advantage through
service will be:
Web, and many have not expanded their call
centers into contact centers that handle calls, 1. Training for consistent delivery
e–mail and even instant messaging. The lack of service,
of strategies and actions in these venues are
risky and could cause these companies to fall 2. Having adequate technologies
behind as they fail to meet producer and to effect good service, and
consumer expectations, compromising growth
3. Monitoring to make sure good
and market share potential. Similarly, the con- service is delivered.”
solidation of functions that bring economies of
scale to the company and one-stop shopping to – Insurance Company President
the consumer remains a solid strategy. Finally,

Service / Cost Levers

Supply-side
Supply-side Demand-driven
Demand-driven New Service Delivery
New Service Delivery
Improvements
Improvements Improvements
Improvements Models
Models

CONTINOUSLY TUNE
portfolio WORK ACROSS FIND “New Ways”
THE FACTORY THE BUSINESS OF DOING
BUSINESS

• Continuous efforts to lower • End-to-end understanding of • Leverage new service
costs, improve quality, develop cost and value models, e.g., self-service
people • Reinforce affordability mindset via web, STP
– Capture scale • Work w/products to make • Rethink underlying
– Streamline processes better, more informed choices business model
– Automation around design • IT innovations (e-signature)
– Best Practice Adoption • Increase advance planning of • Creative sourcing and JVs
– Raise average productivity new product rollouts
– Eliminate layers / increase • Revisit services and service
spans of control levels delivered
– Sourcing to improve unit cost • Charge for services

Cost / Service Cost Cost / Service
Primary Impact

Source: Nolan presentation to IASA on May 2006, Session 106 Tackling the Ongoing Expense Challenge



6. Technology
Continuing the direction of the past several Trailing close behind these three technologies
years, technology remained the most were two almost just as highly ranked that
consistently supported strategy surveyed. That attempt to simplify the core processes
said, it is important to recognize that
involved in issuing insurance and paying
companies often express desires to implement
new technologies prior to the reality of agents:
discussing organizational priorities and A. Common consolidated front-ends
resource constraints. It is easy to see favorite (simple multi-product entry)
solutions without the constraints of a clear
timeline for implementation or resource costs B. Consolidated commission systems
with accelerated electronic payment
to add perspective. Adding these realities
more often than not significantly reduced the 16% 17%
number of solutions that were actually
implemented.

Respondents ranked three technology 83%
80%
strategies significantly above the rest:
A. e-Signatures and online applications

B. Document management, work flow and
imaging A B
Very Likely/Likely Don't Know/Somewhat Likely
C. Web self-service for distributors and/or
customers (portals)
5% 11% 15% 1. Common consolidated front-ends to
address the problems of multiple legacy
systems associated with aging product
88%
portfolios (83%), and
95% 85%
2. Consolidated commission systems tied to
accelerated electronic payments (80%).

The next three technology strategies were still
A B C highly ranked, with over 70% of respondents
Very Likely/Likely Don't Know/Somewhat Likely indicating they were Likely to Very Likely to
implement, although the percentages are
1. E-signatures supporting the operations starting to soften with a higher percentage of
strategy to provide fast service with “Do Not Know” responses:
broader access to Web self-service for an
amazing 95% of respondents. 1. Client Relationship Management (CRM)
2. Document management building a single view of all systems (73%),
foundation for greater distributed service 2. Data warehouse / data mining for customer
(think contact center and simultaneous segmentation (72%), and
processing) for 88% of respondents. 3. e-Delivery of customer materials (71%).
3. Web portals and online electronic transac-
tions enabling consumer and distributor
self service for 85% of respondents.



A. Client Relationship Management
(CRM) – single view all systems Insight: As the practical applications
B. Data warehouses/data mining for of Web-enabled service and online
customer segmentation and target applications grow, it is likely that, like
sales e-delivery of consumer materials, the
C. e-Delivery of customer materials adoption rate of instant messaging and
(annual/ quarterly statements,
prospectus, etc.) e-mail or their successors will increase.
Given the current state of Web service,
23% 25% 26% the lower ranking is more indicative of
the premature nature of these
73% 72% technologies versus any actual statement
71%
of their long-term viability.

A B C The remaining technology investment
Very Likely/Likely Don't Know/Somewhat Likely responses show a consistent desire for tech-
nology strategies that have been popular across
Even for these strategies, the “Not Likely” a number of surveys and years.
responses remain negligible (3–4%).
A. Expert (rules based) systems for UW
Insight: While e-signatures and B. Contact Center automated work force
online applications are likely to represent C. Consolidation of admin systems
the largest investment, the electronic D. Straight through Processng (STP)
delivery of customer materials in support E. Business Process Management
of the online purchase ranks somewhat F. Replacement of legacy administration
lower. This is probably a direct result of
2% 4% 10% 10%
the technology adoption curve, with the 13% 19%
first priority being online applications, 33% 31%
transitioning to electronic delivery of 23% 32% 33%
materials as more consumers sign on as 33%
“electronic customers,” bringing with
them expectations of electronic service. 65% 65% 64%
58% 57%
48%
Instant Messaging and e-mail-based
consumer services
A B C D E F
42% Very Likely/Likely Not Likely
Don't Know/Somewhat Likely

50%

Insight: : Expert systems have been a
Very Likely/Likely Don't Know/Somewhat Likely target of investments for a number of
years with mixed but improving results. A
There remains mixed priorities with regards to key contributor to the improved results
supporting electronic messaging technologies has been the focused application of
as a service tool, specifically instant messaging technology in lieu of the earlier broad-
and e-mail, with only 50% of respondents brush efforts to design “artificial
indicating Likely to Very Likely to implement, intelligence.” With clarity of purpose has
matched by 42% in the Do Not Know and come improved applicability.
Somewhat Likely category and 8% Not Likely.



Contact (or call) center work force manage- or improvement of core administrative
ment systems have become more important systems has moved to the forefront of
over the last few years in parallel with the administrative strategies.
recognition of potential efficiencies and
service improvements buried in most Insight: Enhancements like STP, which
call/service centers. This change also supports can be done as an add-on to existing
systems or a complete front-end replace-
the service strategy regarding increased ment, move companies forward in terms of
consolidation of telephone centers. service, cycle time, and consistency. Such
enhancements are also relatively cost-
Insight: : With the inevitable blending effective.
of transactions and calls to achieve service
and productivity goals, organizations will
need advanced tools to manage how, when, Business process management followed right
and where the work is done. Work force behind STP at 57% “likely to very likely.”
management tools are likely to continue to This reflects recognition that continuous
increase in importance over the next improvement and a focus on effectively
several years. managing the core processes that drive a
company represent significant opportunities.
Consolidation of administration systems is
now the more likely path chosen over a flat !!!
replacement of legacy systems (65% vs. 48%). Companies have a wide variety of
The cost of replacing older systems combined demands for technology, and yet there
with a growing availability of front-end and are common themes.
..............
add-on products has given extended life to the • Imaging, document management and
many generations of processing systems workflow;
currently in use. • Straight through processing;
• e-signatures and electronic commerce;
Insight: A phased plan of con- • Contact centers for calls, e-mail, faxes;
solidating multiple platforms onto a single, • BPM and process improvement; and
existing strategic platform, and then • Web tools for the field first and
gradually enhancing and/or modularly customers second.
replacing the older system, seems to be the ..............
prevalent approach. As one Company President stated:
Nothing stands out above others - it is a
Straight-through processing (STP) continues combination of back office efficiency and
to receive relatively strong favor as a systems better front-end efficiency with customers
investment, with 58% of the respondents (self-serve, contact center automated
management, etc).
likely or very likely to invest in it. As
!!!
mentioned, the focus on modular replacement



Conclusion: focused, particularly in the key knowledge
Not surprisingly, technology remains an management areas of claims and underwriting.
important strategic enabler to business growth Bottom line: companies pondering where to
and profitability. With an emphasis on place their systems investment dollars should
operationally-based strategies, companies are look first at expanded service access and
looking more to their systems investments to streamlined transaction processing.
make their services a competitive
differentiator. Even clearer is the desire to
extend into the electronic world of Web-based
services, electronic data collection (online An Operations Director summed
apps), and electronic delivery (e-mailed it up this way:
statements) as more companies incorporate
these features into their core capabilities. Use technology to provide
More mature technologies like document
service that is low-cost but feels
management, workflow, CRM, and common
customized to the policy-owner or
front ends (the “graphical user interface” or
GUI concept) also remain top candidates for producer.
consideration and investment dollars. Expert
systems seem to be finding its niche as
applicability becomes better defined and more

Quality of Current Business Processes
and Technology Support
According to the respondents of Nolan's Technology Strategy and Implementation in
the Insurance Industry survey, the weighted score for the level of technology support
provided to a portfolio of key business processes reinforced the need for continued
improvement in applying technology as a competitive enabler.

IT Business
Respondents Respondents
Business Tech. Business Tech
Business Process Process Support Process Support
Quality Quality Quality Quality
New Business Underwriting C+ B- B- C
Policy/Member Service B- C+ C+ C
Claims Disbursements B C B C
Agent/Field Support Management C C C C
Premium Billing Collections B- C+ C C
Financial Reporting B B B- C+
Customer Serivce (Call Center) B- B- C+ C+

Source: Nolan Insurance Industry Technology Study



7. Outsourcing
Outsourcing remains an active topic, with On the other hand, processes typically
proponents and opponents presenting equally considered core remain less likely targets:
valid perspectives based on their individual
situations. A. Agent Contracting (Licensing
Appointments)
B. New Business
In Nolan’s 2003 Technology Study, we
C. Policy Administration (Active Blocks)
reported that less than a third of the
D. Call Centers (Consumer, Producer)
respondents felt their organizations had been
successful with information technology E. Claims
outsourcing. This lack of success led to very
low comfort levels with business process
outsourcing (BPO). This experience seems 3% 5%
8%
15% 16%
even more common for this survey. On
average, only 16% of respondents felt they
64% 58% 66%
were likely to outsource any key functions 49% 49%
within the next three years—the rest (84%)
were not likely to do any outsourcing or did A B C D E
not know one way or the other. Not Likely Including Don't Know

Looked at another way, by combining “very
Despite a number of highly publicized service
likely,” “likely,” and “somewhat likely”
responses, we can see the most popular contracts and rapid growth in the overall
candidates. The target function for most sourcing industry, respondents showed a
outsourcing remains selective information relatively strong disinclination towards the use
systems functions, although there has been a of external, non-U.S.-based resources for
strong shift towards a few non-core functions business support. Information systems mainte-
like document management (mailroom, nance and development remained the most
imaging) and policy administration for popular target area, with document manage-
legacy/inactive blocks of business: ment (image processing) also showing up as a
candidate on the list for near-shore options:
A. Document/Management (Mailroom,
Imaging)
A. Document Management
B. Systems Maintenance
B. Systems Maintenance
C. Systems Development
C. Systems Development
D. Systems Infrastructure (Data Center,
Network) D. Systems Infrastructure
E. Policy Administration (Legacy/Inactive
Blocks)

11%
56% 56% 49% 11%
42% 42%
24% 9%
16% 17% 9%
A B C D E A B C D
Somewhat Likely, Likely, Very Likely Off Near



Slightly more popular with respondents was Conclusion:
the use of on-shore resources; respondents Insurers will continue to use outsourcing
continued to target systems-related functions selectively, and will look to it primarily as a
at an even higher percentage while adding to solution for IT functions and areas deemed
the list corporate functions (accounting, HR, non-core to growth. Companies considering
payroll) and policy administration of inactive the outsourcing of core functions that feed
blocks. On-shore document management growth or competitive advantage, like new
(mailroom, imaging) showed up as the most business or agent licensing, need to evaluate
likely candidate, although with less than one- this strategy with care. Even the outsourcing
third of the respondents (28%): of call centers seems to represent a less
popular strategy as companies begin to realize
A. Document Management
B. Corporate Functions
the revenue opportunities represented by
C. Policy Administration (inactive blocks) customer-facing functions.
D. Systems Maintenance
E. Systems Development Although technology has advanced to the
F. Systems Infrastructure
stage where geographically distributed service
staff is feasible, we don’t see a significant
shift in that direction within the industry, at
least not within the next three years.
28% 22%
21% 18% 19% 20%

A B C D E F
On

Underwriting Priorities
In Nolan's Property and Casualty Industry Survey Findings, respondents reinforced
the relatively low interest in functional outsourcing when they ranked it as the
lowest priority when compared to other major business strategies.
High

Organic Growth

Expense Management

Customer Service

New Tools

Training

Growth Through Acquisition
Low

Outsourcing

Source: Nolan PC Study 2005



Next Steps: Strategies in Transition
Industry Trends measures of effectiveness. One-stop shopping
The aging of America is a trend that concepts combined with service tiers that
companies need to address quickly, including match level of service to profitability should
modified product features as well as be investigated. Other key strategies include
customized distribution and service. Equally expanding self-service on the web and call
important, companies need to determine centers into contact centers that handle calls,
whether they will participate in the e-mail and even instant messaging. Similarly,
opportunity represented by ethnic markets, the consolidation of functions that bring
taking into consideration linguistic demands economies of scale to the company remains a
operational capacity, distribution, service, and solid strategy.
segment.
Technology
Competitive Landscapes Leading edge investments should be made in
Given the need for efficiency and areas that provide competitive differentiation,
effectiveness, a core strategic decision to be shifting the focus to services and support:
made is whether to be niche-focused or to • Expanded access,
serve broad, possibly even international, • Streamlined transactions, simplified
markets. Marginally profitable lines should usage, reduced cycle time, and
be eliminated as companies focus on core • Web services, and electronic delivery.
competencies and strengths. Banks and
alternative distributions like the Internet Sustaining investments should be made in
should continue to be monitored for potential mature technologies, providing the base for
impact. operational excellence:
Sales and Marketing • Document management and workflow,
The greatest market opportunities rest with the • Common front ends (“graphical user
changing demographics, specifically the interface” or GUI’s), and
growth in aging and ethnic populations. Sales • Selectively applied expert systems in
efforts and product designs need to areas like claims and underwriting.
incorporate the opportunities represented by
this shift, including expanded focus on Outsourcing
account retirement and lifestyle protection Selective IT functions including help desks,
products. Optimizing existing distribution network management, data center
channels with tiered investment of resources management and telecommunications remain
and services will be the key to improving primary candidates for outsourced support.
channel productivity, incorporating increased Contact Center outsourcing, beyond overflow
use of web support services, modified services, is reversing its trend as companies
compensation structures, and enhanced start leveraging its inherent competitive
training and retention strategies. opportunities. Great care should continue to
be taken when it comes to core service
Operations functions like new business or agent licensing.
Service as a competitive advantage should be Near- and on-shore services are becoming
the focus, with speed and simplicity as the key more viable options preferred over off-shore.



BACKGROUND ACKNOWLEDGEMENTS
Nolan is an operations and technology The information, results and insights found in
consulting firm specializing in the insurance, this study are based on detailed surveys
health care, and banking industries. Since completed with senior level executives across
1973, we have helped companies redesign a wide range of stock and mutual companies
processes and apply technology to improve within the life and annuity insurance industry.
service, quality, productivity, and costs. Our To each of those executives who took the time
consultants are senior industry experts, each to respond, we extend our thanks and
with over 15 years of specialized experience. appreciation.
We are trusted advisors to our clients and we Lead Author: Steve Callahan
are committed to delivering measurable and Contributors: Steve Discher, Ron Zimmer
sustainable results.

This report is one of a series of insurance QUOTING THIS REPORT
industry research studies conducted by the Recipients may quote briefly from this study
Robert E. Nolan Company. For the purposes (one or two sentences) without express
of this survey, insurance industry executives permission. However, all such quotes must be
were asked to weigh in on a variety of key accompanied by the phrase: “Source: Robert
issues and challenges they expect to face over E. Nolan Company - www.renolan.com.”
the next three to five years. Their responses More extensive quoting or other reuse in any
were tabulated and are detailed in this report, form is not permitted without the express
along with insights into the possible written consent of the Robert E. Nolan
implications of their consolidated responses. Company, Inc.

Publication date: December, 2006.


Please visit www.renolan.com to view original articles,
case studies, and industry surveys. For further
information, please contact us:

info@renolan.com

(877) 736-6526 (877-RENOLAN)


Robert E. Nolan Company, Inc.

www.renolan.com

Simsbury, CT • Dallas, TX

200612 nolan life&annuity-surveyfindings

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