200612 nolan life&annuity-surveyfindings

Life & Annuity IndustrySurvey Findings

Strategies for a Changing Industry

Robert E. Nolan CompanyManagement Consultants

Robert E. Nolan Company

Life & Annuity Industry Survey Findings

Increased regulation. Aging systems. Changing demographics. Product commoditization. Intensified competition. Compressed interest rates. Distribution consolidations. Life and Annuity insurers are facing increasingly complex and challenging conditions as demands for returns and profitability magnify the pressure on growth. In this turbid realm of an industry in transition, it is not a lack of strategic options so much as the often conflicting diversity of choices available that today’s senior executives are faced with sifting through. Where to best apply the limited available resources of time, money and people is now more than ever a decision process requiring the greatest of care and focus.

The Robert E. Nolan Company's Life & Annuity Industry Survey Findings suggest that strategic priorities are starting to shift from an internal, operational focus to an external, market driven one. With this shift, executives are challenged with the need to balance the tradeoffs between service, support, product features and returns. Within this context, five strategic trends stand out as differentiators in the years ahead:

Shifts in demographics paired with chang-ing customer expectations demand intensi-fied attention for growth-oriented compa-nies, with 95% of respondents profiling the aging of America and 88% the expan-sion of ethnic markets as each demanding attention.

Translating strategy into action specifi-cally in the areas of expense management

Executive Summaryand the effective use of technology remains a challenge, even with 85% of respondents saying their companies have a clear vision, goal, and strategy.

Leveraging sales and marketing invest-ments for optimal returns stands out, particularly with respect to (1) optimizing the existing distribution channels, (2) enhancing product features to provide competitive advantage and meet market demands, and (3) expanding the tools, techniques, and training of the existing field force.

Utilizing service as a competitive advan-tage to offset the convergence of product features and pricing stands out as one of the key differentiators of forward-thinking companies, with almost unanimous respondent agreement that speed of service will be a strategic imperative. Timeliness was closely followed by the need for access methods from phone, Web, e-mail, and voice response to traditional written requests.

Intensely focused technology strategies encompassing key service platforms like: (1) e-signatures, (2) document manage-ment, (3) Web self-service, (4) multi-product common front-ends, and (5) consolidated commission systems. On the other hand, while it remained a limited strategy, only 16% of respondents felt they were likely to outsource any key functions within the next three years.

3.

4.

5.

1.

2.



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

Table of Contents

Robert E. Nolan Company, Inc.Management Consultants

90 Hopmeadow StreetSimsbury, CT 06070

(877) 736-6526 (877-RENOLAN)[email protected]

17746 Preston RoadDallas, TX 75252



1

Based on answers to our self-classification questions, we see that respondents repre-sented a healthy mix across levels, roles, and business size.

Responses received represent a broad mix of all key functional areas...

A broad diversity of business line blends, with a solid majority Life and Annuity, followed by Single Line companies and then Property Casualty, is represented.

Allocation of Responses by Department

Allocation of Responses by Officer Level

Operations23%

C-Level Execs24%5%

StaffFinanceU/W

IT

Sales & Marketing

C-Level 29%

EVP/SVP22%

VP

AVP/Director

Other7%

18%16%

7% 7%

15%

27%

Allocation of Responses by Business Line

Life/AnnuityBlends69%

PC Primary, Multi-line

Life/AH Blends

Single Line Only14%

12%5%

Stock and mutual companies were equally repre-sented. Based on annual premium revenue:

• A little over half (54%) of the respondents were under $500 million a year,

• Just over a quarter (25%) were in excess of $2.5 billion, and

• Leaving the remaining fifth (20%) between $500 Million to $2.5 Billion.

Stock and Mutual Companies

Company Type

No. of Home Office Staff

Under $500 Million

$500 Million to $2.5 Billion

Over $2.5 Billion

Grand�Total

Mutual

Stock

• 500 or fewer• 501 to 1,000• 1,001 to 2,000• 2,001 or moreSubtotal

• 500 or fewer• 501 to 1,000• 1,001 to 2,000• 2,001 or moreSubtotal

27%2%

29%

17%5%3%

25%

54%

2%2%2%2%8%

3%3%

6%12%

20%

2%12%14%

12%12%

26%

29%4%4%

14%51%

20%8%3%

18%49%

100%Grand Total

Breakdown of Survey Respondents

...with almost all respondents in senior leader-ship positions (51% at EVP or higher and almost 80% at the officer level).



2

1. Company Self-AssessmentWhen asked about the strategic direction of their company, respondents gave a reassuring response. Eighty-five percent (85%) of the respondents said their companies have a clear vision, goal, and strategy:

At least for the companies involved in the survey, the importance of clarity in purpose and direction is apparent. However, answers to the follow-up questions showed that trans-lating strategy to action in areas such as expense management and the effective use of technology remain a challenge:

Strongly Agree / AgreeStrongly Disagree / DisagreeDon't Know

u Has clear vision, goal and strategy for where it wants to be in three years

85%

3%

12%


u Effectively uses process improvement to generate measurable results

u Expense ratios will decrease measurably over the next 3 years

54% 27% 19%

50% 31% 19%

would not decrease. The eye-opening statistic is almost 20% of respondents are not aware if their company has a strategy.

In the same vein, only slightly more than half the respondents (54%) felt that process improvements were being used effectively to generate measurable results. Twenty-seven percent (27%) said their companies were not using process improvement effectively to reduce expense, compared to the almost 20% who had process improvement projects but did not know if they were effective.

* Insight: The competitiveness of the marketplace, driven by both consumers and investors, continues to demand focused management of expenses. This requires a clear understanding of the current situation, desired results, and actions to be taken. Absent a connection between expense ratio, action plan, goal, and strategy, companies are susceptible to higher costs, noncompetitive prices, and, ultimately, a gradual erosion of market share and/or profitability.

* Insight: The use of continuous improvement, especially in operationally intense environments like insurance companies, plays a key role in improving cost-effectiveness. With no continuous revalidation and redesigning of processes, the overhead associated with services provided can grow significantly.

When asked the same question in 2001, 75% of companies felt that expense ratios would decline significantly for successful companies over the next three to five years. In the current survey, that percentage dropped to 50% while more than 30% believed their expense ratios

Given the competitive environment, in three years would you rather be leading a company that has been consistently reducing expenses and improving processes or one that hasn’t? For the half of the companies without clear expense and service strategies and goals, this might be the time to reconsider your priorities.



3

Responses to questions about technology strategies profiled a similarly interesting inconsistency:

while slightly fewer (57%) stated that IT generates measurable results. However, 38% either did not know or felt that their IT departments were poorly aligned with the business strategies. Equally troubling is that 43% either did not know or did not believe IT generated real results. Even more dramatic is the gap when it comes to technology as an enabler of competitive advantage, with only 45% agreeing and 55% either not knowing or not believing that IT is an effective enabler of competitive advantage.


u IT Department is well aligned with the business

u Plans on making significant tech investments to remain competitive

u Uses technology effectively as an enabler of competitive advantage

u Effectively uses IT to generate measurable results

* Insight: Aligning IT with the busi-ness continues to remain fundamental to effective realization of marketplace and operational benefits. Strategic alignment requires significant information sharing, broad-based involvement, and, above all, common goals and rewards.

65% 21% 14%

61% 12% 27%

57% 23% 20%

45% 24% 31%

Almost two-thirds (65%) of the respondents plan to continue their investment in technology, offset by a significant percentage (35%) who are uncertain or do not plan to continue their technology spending. This is a surprising finding given the investment and results of the past few years. When we asked a similar question in 2001, more than 90% predicted that successful life companies would invest in new technologies to remain competitive.

A good majority (61%) said that their IT departments are aligned with the business

FFFWhen asked "What long standing

practices do you believe are likely to require revision in the next 1 to 3

years?"..............

"How we price, underwrite and service our products…changes have caused us to re-think the services we offer."

VP of Underwriting..............

"Growing shift to direct / retail for sales and service, further impacting broker compensation practices."

Head of Product Management..............

"Product-focus will begin to change to solutions-focus...change may be very rapid once it takes hold."

Sr. Manager, Sales/Marketing FFF



4

The existence of a clearly communicated vision, goals, and strategy helps a company focus on a collaboratively adopted and cost-effective transition to their future business model. Translation of these concepts into actionable plans with measurable results is at the crux of growth and profitability. Given the competitive nature of the industry and tightening profit margins, managing expense ratios must be a key goal of any strategy implementation, which means a high-profile linkage to actions and their impact across the company. Failure to tie, in some way, the impact of strategy execution to expense ratio could easily constrain paybacks and limit future opportunities. Along these same lines, the use of technology and process improve-ment to enhance service delivery and cost-effectiveness must play a core role in any ongoing strategy.

Conclusion:Given the importance of information tech-nology as an enabler of growth, profitability, and competitiveness, this disparity of results concerns us—it represents a potential disconnect in a critical business component. This is especially true considering the opinions expressed in the Technology section of the survey. Respondents expressed a strong need for IT to act as the foundation upon which competitive advantage is built going forward. This need becomes extremely acute as products become more commoditized and profit margins narrow. Companies should consider investing in the necessary structure and communications to ensure that they are clearly identifying, communicating, and supporting the link between IT, results, and competitive advantage.

Customers

IndependentProducers

Better Service through Process Innovation & Technology

Expense Reduction through Process Improvement & Technology

Organization Structure & ManagementThat is Accountable, Responsive, & Agile

NicheFocus

IntegratedFinancial Services

CustomerFocus

DistributionStrategies

MarketingStrategies

ServiceStrategies

EnterpriseStructure

Life Industry Strategy Map

Global Alliances

AlternativeChannels

RelationshipManagement

Inte

grat

ed S

yste

ms

MarketSegment

MarketSegment

MarketSegment

MarketSegment

MarketSegment



5

Overwhelmingly, respondents indicated that demographic change was the one trend that stands above all others. Each demographic change shown was rated highly as a significant opportunity for growth:

An almost equally significant trend is the growth in diversity of ethnic markets, each bringing language and presentation require-ments that span distribution, call center, correspondence, and all other major functions involved in selling to and servicing insurance buyers. Hispanics are the group that respondents pointed out as the fastest growing underserved population, followed closely by Asians. With more than one foreign language involved, the complexity of the situation is compounded.

While lower- and middle-income segments have been recognized in the past as underserved markets, more companies are viewing them as a viable source of new customers. This recognition of opportunity, though measurably behind that of the aging and ethnic markets, is significant. For lower- to middle-income customers, respondents recognize distribution through work site sales channels and sponsored groups each represent a cost-effective opportunity for growth.

2. Industry Trends


u Work site and bank sales will be a significant opportunity for growth

u Low- to middle-income markets

u Ethnic markets

u Aging U.S. population as an industry impact driving change 2%

22%10%68%

19%18%63%

5%7%88%

4%95%

* Insight: Changes in national demo-graphics resulting from the aging U.S. population are bringing significant oppor-tunities and challenges to the industry. The payout and maturity stages of products, as well as features and benefits tailored for an older population, should be key areas of concern in product design. Furthermore, with the diminished value of government-sponsored programs like Social Security, the need for privatized wealth creation, protection, and management will provide tremendous opportunity. Successful insurers will need to have available a diverse suite of products covering the full range of retirement concerns, such as cash manage-ment, lifestyle protection, wealth transfer, and inflation protection.

* Insight: The importance of the ethnic diversity trend is clearly recognized, yet the industry as a whole has made only slight progress in improving its ability to service the various segments. Solutions range from significant internal IS investment or outsourcing on the high end to minor translation of marketing materials without supporting multi-lingual service capacity on the low end. The most successful companies will be the ones that offer the full spectrum of multi-lingual materials and service capacity.

* Insight: The margins available in these markets, however, are so low as to require extremely efficient distribution and service, bringing additional chal-lenges to the table. However, for the most part, the same basic product structure and features can be leveraged across these markets.



6

The second most significant industry trend identified involves compliance-related items:

Given the formality and structure of the regulatory environment, it is easier to estimate the impact of compliance with regulations such as SOX, the Patriot Act, anti-money laundering, and privacy laws. The result, it is agreed, will be that compliance will cost more in systems, staff, and processes. Less clear is the impact of possible tax reform, where respondents are spread across “agree,” “disagree,” and “do not know.”

Even less known is the potential impact of class-action lawsuits. Litigated contentions have centered on a range of issues, from fee disclosures to agent compensation agreements. Historically, there has been a sense of comfort in the industry’s ability to self-regulate, but this has changed with the frequency and size of penalties in recent class-action lawsuits. In 2001, 70% said that class-action suits would change the way companies market and sell products. Today, while a third of the companies are concerned about the risks these lawsuits represent, the largest percentage (45%) are unsure what the outcome will be.


u Class action suits will significantly change how companies market

u Tax reform (estate or flat) and lifetime savings accounts major impact

u Privacy issues will require increasingly larger investments

u Cost of compliance with regulations will continue to increase

45%19%36%

* 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.

34%21%44%

12%4%84%

7%5%88%

FFFWhen asked the most important trend(s) facing the industry over the next three

years, there were some varying responses.

.............."How to make life insurance more affordable and reduce the cost of processing insurance claims, new business and service."

CIO..............

"Affordable and simple to understand Life and Health Insurance Products that meet the needs of an aging population."

Medical Director..............

"Will consumer driven healthcare resolve inflationary healthcare expenses? will employers get out of providing healthcare to employees?"

VP Sales/Marketing FFF



7

changes in processes and associated increased costs will be incurred as companies move to satisfy the new requirements. Less clear are potential changes in the estate and income tax arenas, where potential changes are too uncertain to drive product changes at this time.

Conclusion:The survey identified three significant demographic opportunities that companies should act on:

1. The graying of America, 2. Growth in ethnic populations, and 3. Lower- and middle-income markets.

While not new, the aging of America is a trend that companies need to address quickly. Product features as well as distribution and service techniques need to match the needs of the senior market.

Less clear is the impact of ethnicity, clearly a large and growing market, but one fraught with high sales and support costs and complex challenges. A careful demographic evaluation of this market should be part of every company’s plan; the evaluation should look for a match between capacity, distribution, service, and segment.

Regarding compliance, careful cost manage-ment is required to ensure that overhead does not grow inappropriately as a key element in fulfilling regulatory obligations. Growth in regulatory based compliance will drive

FFFAcross all company respondents, there was one very consistent message regarding future marketing and product considerations that had to be taken into account – the words were written a number of different ways, but all pointed to the same situation:

.............."population aging...growth of life settlements...aging of the population...aging of U.S. population...retirement income management as baby boomers retire...aging U.S. population and the market opportunities it creates...aging population and wealth transfer...aging population...boomers aging and retiring...aging population with longer life spans and better health..."

FFF

Common Drivers of Value Improvement

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

Cutting or containingthe tail of the product

portfolio

Cutting or containingthe tail of the product

portfolio

Managing expensesthrough automation

and processredesign

Managing expensesthrough automation

and processredesign

Profitable growth inpremium

Profitable growth inpremium

Enhancing channelprofitability and

throughput

Enhancing channelprofitability and

throughput

Tapping the hiddenvalue in current

customer / channelrelationships

Tapping the hiddenvalue in current

customer / channelrelationships

Manage financialperformance on an

ongoing basis

Manage financialperformance on an

ongoing basis

Life andAnnuity ValueImprovement

Life andAnnuity ValueImprovement



8

3. Competitive LandscapesOn the competitive front, most respondents see industrywide refocusing as likely:

The message here is that many companies will be concentrating their efforts on their best lines and eliminating marginally profitable ancillary lines. For those companies, a back-to-the-basics approach supersedes the goal to be a financial supermarket. A majority also state that niche companies will be more successful than companies offering full financial services. Two factors probably underlie this response: the company’s current position in the market (specialized vs. broad) and its distribution system.

The impact of merger and global expansion trends is less clear:

About half (49%) of respondents believe mergers and acquisitions will improve economies of scale and the other half are either unsure or believe the opposite—that bigger is not necessarily better.

Another interesting and unclear response is the almost completely even split on the impact of globalization, despite the continued incursion of non-U.S. companies into the U.S. industry. This response seems to be a result of the surveyed company’s strategy, with about a third of respondents working on global expansion (possibly with a partner company), a third content to remain domestic, and a third still uncertain whether it’s necessary to expand into international markets.

Niche companies will be moresuccessful than full financial services

* Insight: Companies with career chan-nels (and particularly those covering small towns and rural areas) may need a broader 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.

59%24%17%

Strongly Agree / AgreeStrongly Disagree / Disagree

Don't Know

Divestitures, discontinued productswill grow as companies focus on returns


Don't Know

Target mergers and acquisitions willimprove economies of scale


Don't Know

Global expansion of U.S. companies will be a major source of growth


Don't Know

66%5%

29%

49%20%

31%

37%

30%

33%



9

Today, only 19% feel this is a threat and almost half (47%) do not see these businesses as major threats.

Conclusion: From a marketing perspective, companies need to make a strategic decision between being either niche-focused or broad market based, possibly even international. Respondents are split between the impact of globalization and merger and acquisitions. That said, the majority of companies will be most successful by focusing on their core competencies with a clearly defined market and strategy, eliminating marginally profitable ancillary lines. A majority also state that niche companies will be more successful than companies offering full financial services. Interestingly, there is less concern over the impact of banks and Internet on distribution.

Two long-standing competitive threats now seem more uncertain than they used to.

In 2001, 50% of respondent felt that the Internet would not destabilize the profitability of life companies’ traditional distribution channel. Today, this has dropped to 22% believing that the Internet will not have a destabilizing effect.

A majority (63%) remain uncertain of whether traditional channels are threatened by online distribution, a concern that’s existed since web-based sales first arrived on the scene. The ultimate impact remains to be seen.

We see a similar shift in attitude regarding the entry of banks and other non-insurance companies; compared to the Internet, however, respondents are less concerned with 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.

Banks and other non-insurance entitieswill become major threats


Don't Know

19%

47%34%

Internet sales will destabilizetraditional channel profitability


Don't Know

15%22%63%



10

Very Likely / LikelyNot & Somewhat LikelyDon't Know

4. Sales and Marketing StrategiesAnswers to questions about product strategy offer both consistency and an interesting disparity between market trends and likely strategies. In interpreting the results, keep in mind the changes in market demographics previously discussed.

Leveraging existing products takes advantage of market presence, distributor expertise, and operational infrastructure. Increasing the emphasis on retirement and lifestyle products, particularly products like annuities which meet the payout needs of seniors, indicates adaptation to changes in the marketplace. The interesting disparity involves the caution shown with respect to variable investment products, a recent core element in the rapid growth in annuity product portfolios. Although over 40% indicate a likelihood of increased marketing of variable products, the “not likely” answers are over 50%.

u Expand into P&C or A&H lines either directly or with private labels

9%68%24%


u Increase marketing of variable investment-related products

u Increase focus on retirement/lifestyle products (annuities)

u Enhance existing products with unique features and/or reduced charges

* Insight: Significant barriers to entry of variable products, including a higher cost of entry, intensified regulatory scrutiny with associated distribution risks, and greater investment management and servicing complexity, may keep carriers out of the market.

* Insight: While the virtual tie is a little surprising, the overall result indicates that some companies are pursuing product manufacturing as a core strength and others might follow another core strategy, such as distribution.

As a strategy, manufacturing products for other carriers to distribute had split results in the survey. The 40% of companies who reported being likely to do this was offset by the 43% that said they were not likely.

For those carriers not already in the business, expansion into Property and Casualty or Accident and Health lines was not a supported strategy, with 68% saying “not or somewhat likely.” Most of the supporting votes (24%) came from companies already in this business.

* Insight: Consistent with the overall theme of staying focused on core competencies and leveraging existing expertise and infrastructure, expansion into an entirely new line falls low on the list of preferred strategies.

u Build private label products for distribution by other carriers

17%43%40%

9%51%41%

12%16%73%

83% 14%3%




11


Another strategy related to product perform-ance, aggressive investment practices, received only 24% “likely” votes, with the majority (55%) saying “not or somewhat likely.” Overall, investment strategy remains conservative for the time being.

A look at distribution strategies further sup-ports the leveraging of existing resources as the main direction for companies to pursue.

The three primary distribution strategies indicated by respondents were:

1. Providing online access to production (84%),

2. Web conferencing and e-learning (81%), and

3. Expanding the existing field force (74%).

These strategies build on current resources and core competencies while leveraging current technologies, infrastructure, and expertise to drive growth.

When asked in 2001 about Internet sales, only a quarter of respondents (25%) believed that, as need-based products, Life, Annuity, and Disability would sell well over the Internet. Today, 46% of respondents plan to increase Internet-based products and sales. That is almost balanced by the 42% not likely to follow that strategy. Companies are still almost as likely to use direct marketing (phones and mail) to reach new customers (52%).

* Insight: It is likely that these changes will be gradual, selective, and very closely watched as their impact on product, pricing, and profitability is measured over time.

85%

12%Very Likely / LikelyNot & Somewhat LikelyDon't Know

u Expand existing field force

u Integrate use of web conferencing and e-learning into field mgt. practices

u Provide distributors access to web- based prod., commission & client info.

u Increase Internet-based products and sales

u Increase direct marketing efforts (inbound and outbound phones, mail)

12%42%46%


21%28%52%

17%8%74%

9%10%81%

9%7%84%

u Pursue aggressive investment practices - shorter duration and hedging

55% 19%24%

* Insight: Companies show a willing-ness to continue to supplement their sales efforts via these alternative distribution sources, although responses indicate a stronger preference to support their field forces.

A look at distribution strategies further supports the leveraging of existing resources as the main direction for companies to pursue.



12


More surprising is the response on the need to incorporate full commission disclosure in sales practices. Despite intensified pressure on sales practices, suitability, and disclosure, only 41% indicated this as a strategy likely to be pursued over the next three years.

Conclusions:The focus is on (1) optimizing the existing distribution channels and (2) enhancing product features to provide competitive advantage and meet market demands while (3) expanding the tools, techniques, and training of the existing field force. Consistent with the strategies depicted in the Operations and Technology sections of this survey, growing the investment in the Web combined with better use of the Web’s portfolio of tools that enhance distribution channel effectiveness is clearly a top priority at the respondents’

companies. Inevitably, these strategies force a choice between being ‘leading edge’ versus ‘fast follower’ in deploying these technologies, because not providing equal or better functionality will erode a company’s com-petitiveness from a distributor’s perspective.

As a result of the graying of America, there is also a recognized shift to retirement and lifestyle protection product features, although insurers are approaching growth in variable products with greater caution. Other strategies, like Internet and direct mail, continue to play a role, although at a much lower priority than existing methods. Lastly, while there is increased attention to the use of more aggressive investment management practices and the need for full commission disclosure, both strategies rank the lowest of all reviewed.

* Insight: This might be an indication of a general desire to be a reactive follower on this topic as opposed to a change leader, particularly given the potentially controversial nature of disclosure and the impact it could have on distributors if not done consistently through the industry. FFF

In response to describing the greatest challenge(s) facing Sales and

Marketing executives, the responses all carried a consistent theme:

.............."Agent recruiting, retention…aging distribution...cost of distribution...effective distribution…figuring out the appropriate blend of distribution...allocating investment and resources over competing channels…finding and keeping distribution…dwindling sales force… recruiting and retaining quality producers…retaining good reps…sales productivity...reducing agent turnover.

FFF

u Incorporate full commission disclosure into sales practices

36%22%41%



13

Operationally, respondents are working across the board on service delivery, technology, and structure. Of all the operations strategies, two emerged as clear winners. Almost unani-mously, speed of service is seen as a strategic imperative (97%). Speed is closely followed by providing more service access methods such as phone, Web, e-mail, VRU, and so forth (93%).

The second most popular strategies looked first at the cost-effectiveness of service delivery by combining functions to gain economies of scale (75%), tied with service tiers based on profit (consumers) (75%) and followed closely by contribution to profits (producers) (70%).

5. Operations

* Insight: A move towards self-service is evident in this response and supported by recent industry trends. The Web and Internet act as enabling technologies, with the expanded access provided driving the industry toward faster delivery of service.

* 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 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 allow a company faced with expense constraints to preserve its service-based competitive advantage for the top tier while generating savings in the broader, less profitable groups. The second approach, complicated by the cost factor, would be to create a new, higher tier with added services above the current level. For example, a “concierge” service line for personalized support, direct access, expanded hours, and higher service levels (such as faster answer time) might be created. One drawback to this approach is that, unlike the first approach where service is reduced for all but the top agents, creating a new, higher service tier would add to costs.

95%

2%

86%

A B

7%

A. Accelerate service delivery (time needed to complete a transaction including NB)

B. Provide more service access methods (phone, Web, e-mail, voice response)

Very Likely / Likely Add In Somewhat Likely

65%

10%

60%

A B C

15%

55%

15%

A. Consolidate similar functions across channels and products for economy of scale

B. Adjust consumer service standards to reflect customer tiers based on profit

C. Adjust producer service standards to reflect contribution to profits (tiered service)




14

The other strategies rated by the survey participants were spread rather evenly, reflecting a diversity of planned approaches:

The relatively close ranking of two distinct organizational strategies—by channel (54%) and by market (65%)—indicates that these solutions are custom to the company and based on other existing product, channel, or service strategies. The interesting finding is that collectively, most companies are reorganizing in some fashion to improve costs, service, or both.

Over half (64%) of the companies surveyed are moving towards expanded service hours. This works in conjunction with expanding access through Web, e-mail, and interactive voice response previously mentioned (93%).

Some form of consolidating telephone service operations will be undertaken by a majority of respondents (58%). Still, companies remain split on the tradeoffs in combining distributor and consumer telephone service operations, with the typical determinant being whether most of the calls are sales support and new business (keep them split) or service-related (combine them). Organizational questions of this nature remain unique to each company’s distribution systems and contact center (computer-telephony) integration capabilities.

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

* Insight: : Giving broader hours a lower priority than broader access is based on the fact that easy self-service options reduce the need for expanded direct service.

51%

14%

50%

A B C D

14%

41%

17%

40%

14%

A. Align operations with customer markets (employer, individual, wirehouse)

B. Increase hours and days of service availability (move towards 24/7)

C. Consolidate distributor and consumer telephone service operations

D. Align operations with channels of distribution (e.g., career, bank, etc.)


FFFTechnology and effectiveness �remain a consistent source of

competitive advantage, as indicated �by the consistency of responses to the question regarding the top priority for

gaining competitive advantage �through service.

........."Straight through processing…. technology that meets targeted consumer needs at cost effective price… use of technology… technical automation and process improvement… use of technology... economies of scale and use of technology."

"Reduced cycle time… reduced costs… better service… faster time service…. delivery efficiency… speed to market...

superior service." FFF



15

"The top priorities for gaining competitive advantage through service will be:

1. Training for consistent delivery of service,

2. Having adequate technologies

to effect good service, and

3. Monitoring to make sure good service is delivered.”

– Insurance Company President

Service / Cost Levers

portfolio

New Service DeliveryModels

New Service DeliveryModels

Supply-sideImprovements

Supply-sideImprovements

Demand-drivenImprovementsDemand-drivenImprovements

• Continuous efforts to lowercosts, improve quality, developpeople– Capture scale– Streamline processes– Automation– Best Practice Adoption– Raise average productivity– Eliminate layers / increase

spans of control– Sourcing to improve unit cost

• End-to-end understanding ofcost and value

• Reinforce affordability mindset• Work w/products to make

better, more informed choicesaround design

• Increase advance planning ofnew product rollouts

• Revisit services and servicelevels delivered

• Charge for services

• Leverage new servicemodels, e.g., self-servicevia web, STP

• Rethink underlyingbusiness model

• IT innovations (e-signature)• Creative sourcing and JVs

CONTINOUSLY TUNETHE FACTORY

WORK ACROSSTHE BUSINESS

Cost / Service Cost Cost / Service

Primary Impact

FIND “New Ways”

OF DOINGBUSINESS

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

Conclusion: Service as a competitive advantage is coming of age as product features and pricing dif-ferences converge. Speed and simplicity are two key measures of effective delivery on this strategy. We know that some companies have yet to venture into the self-service arena of the Web, and many have not expanded their call centers into contact centers that handle calls, e–mail and even instant messaging. The lack of strategies and actions in these venues are risky and could cause these companies to fall behind as they fail to meet producer and consumer expectations, compromising growth and market share potential. Similarly, the con-solidation of functions that bring economies of scale to the company and one-stop shopping to the consumer remains a solid strategy. Finally,

service tiers which provide a sense of privilege to top producers and high-value consumers is becoming more prevalent, although secondary to the price/service tradeoff.



16

95%

5%

88%

A B C

11%

85%

15%

A. e-Signatures and online applications

B. Document management, work flow and imaging

C. Web self-service for distributors and/or customers (portals)

Very Likely/Likely Don't Know/Somewhat Likely

A. Common consolidated front-ends (simple multi-product entry)

B. Consolidated commission systems with accelerated electronic payment

Continuing the direction of the past several years, technology remained the most consistently supported strategy surveyed. That said, it is important to recognize that companies often express desires to implement new technologies prior to the reality of discussing organizational priorities and resource constraints. It is easy to see favorite solutions without the constraints of a clear timeline for implementation or resource costs to add perspective. Adding these realities more often than not significantly reduced the number of solutions that were actually implemented.

Respondents ranked three technology strategies significantly above the rest:

Trailing close behind these three technologies were two almost just as highly ranked that attempt to simplify the core processes involved in issuing insurance and paying agents:

The next three technology strategies were still highly ranked, with over 70% of respondents indicating they were Likely to Very Likely to implement, although the percentages are starting to soften with a higher percentage of “Do Not Know” responses:

Common consolidated front-ends to address the problems of multiple legacy systems associated with aging product portfolios (83%), and Consolidated commission systems tied to accelerated electronic payments (80%).

1.

2.

Client Relationship Management (CRM) single view of all systems (73%), Data warehouse / data mining for customer segmentation (72%), and e-Delivery of customer materials (71%).

1.

2.

3.

6. Technology

E-signatures supporting the operations strategy to provide fast service with broader access to Web self-service for an amazing 95% of respondents.Document management building a foundation for greater distributed service (think contact center and simultaneous processing) for 88% of respondents. Web portals and online electronic transac-tions enabling consumer and distributor self service for 85% of respondents.

1.

2.

3.

A B

83%

16%

80%

17%




17

There remains mixed priorities with regards to supporting electronic messaging technologies as a service tool, specifically instant messaging and e-mail, with only 50% of respondents indicating Likely to Very Likely to implement, matched by 42% in the Do Not Know and Somewhat Likely category and 8% Not Likely.

The remaining technology investment responses show a consistent desire for tech-nology strategies that have been popular across a number of surveys and years.

* Insight: While e-signatures and online applications are likely to represent the largest investment, the electronic delivery of customer materials in support of the online purchase ranks somewhat lower. This is probably a direct result of the technology adoption curve, with the first priority being online applications, transitioning to electronic delivery of materials as more consumers sign on as “electronic customers,” bringing with them expectations of electronic service.

* Insight: : Expert systems have been a target of investments for a number of years with mixed but improving results. A key contributor to the improved results has been the focused application of technology in lieu of the earlier broad-brush efforts to design “artificial intelligence.” With clarity of purpose has come improved applicability.

Even for these strategies, the “Not Likely” responses remain negligible (3–4%).

73%

23%

72%

A B C

25%

71%

26%

A. Client Relationship Management (CRM) – single view all systems

B. Data warehouses/data mining for customer segmentation and target sales

C. e-Delivery of customer materials (annual/ quarterly statements, prospectus, etc.)

Instant Messaging and e-mail-based consumer services

50%

42%



* Insight: As the practical applications of Web-enabled service and online applications grow, it is likely that, like e-delivery of consumer materials, the adoption rate of instant messaging and e-mail or their successors will increase. Given the current state of Web service, the lower ranking is more indicative of the premature nature of these technologies versus any actual statement of their long-term viability.

65%

33%

65%

A B C D E F

31%

64%

23%

58%

32%

57%

33%

48%

33%

2% 4% 13% 10% 10% 19%

A. Expert (rules based) systems for UW B. Contact Center automated work forceC. Consolidation of admin systemsD. Straight through Processng (STP)E. Business Process ManagementF. Replacement of legacy administration

Very Likely/Likely Not LikelyDon't Know/Somewhat Likely



18

Consolidation of administration systems is now the more likely path chosen over a flat replacement of legacy systems (65% vs. 48%). The cost of replacing older systems combined with a growing availability of front-end and add-on products has given extended life to the many generations of processing systems currently in use.

Straight-through processing (STP) continues to receive relatively strong favor as a systems investment, with 58% of the respondents likely or very likely to invest in it. As mentioned, the focus on modular replacement

or improvement of core administrative systems has moved to the forefront of administrative strategies.

Business process management followed right behind STP at 57% “likely to very likely.” This reflects recognition that continuous improvement and a focus on effectively managing the core processes that drive a company represent significant opportunities.

* Insight: A phased plan of con-solidating multiple platforms onto a single, existing strategic platform, and then gradually enhancing and/or modularly replacing the older system, seems to be the prevalent approach.

* Insight: Enhancements like STP, which can be done as an add-on to existing systems or a complete front-end replace-ment, move companies forward in terms of service, cycle time, and consistency. Such enhancements are also relatively cost-effective.* Insight: : With the inevitable blending

of transactions and calls to achieve service and productivity goals, organizations will need advanced tools to manage how, when, and where the work is done. Work force management tools are likely to continue to increase in importance over the next several years.

Contact (or call) center work force manage-ment systems have become more important over the last few years in parallel with the recognition of potential efficiencies and service improvements buried in most call/service centers. This change also supports the service strategy regarding increased consolidation of telephone centers.

FFFCompanies have a wide variety of

demands for technology, and yet there are common themes.

..............• Imaging, document management and

workflow;• Straight through processing;• e-signatures and electronic commerce;• Contact centers for calls, e-mail, faxes;• BPM and process improvement; and• Web tools for the field first and

customers second...............

As one Company President stated: "Nothing stands out above others - it is a combination of back office efficiency and better front-end efficiency with customers

(self-serve, contact center automated management, etc)."

FFF



19

An Operations Director summed it up this way:

"Use technology to provide service that is low-cost but feels

customized to the policy-owner or producer."

Quality of Current Business Processes and Technology Support

Source: Nolan Insurance Industry Technology Study

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+

Business Process

IT Respondents

Business Process Quality

Tech. Support Quality

Business Process Quality

Tech Support Quality

BusinessRespondents

Conclusion: Not surprisingly, technology remains an important strategic enabler to business growth and profitability. With an emphasis on operationally-based strategies, companies are looking more to their systems investments to 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 apps), and electronic delivery (e-mailed statements) as more companies incorporate these features into their core capabilities. More mature technologies like document management, workflow, CRM, and common front ends (the “graphical user interface” or GUI concept) also remain top candidates for consideration and investment dollars. Expert systems seem to be finding its niche as applicability becomes better defined and more

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.

focused, particularly in the key knowledge management areas of claims and underwriting. Bottom line: companies pondering where to place their systems investment dollars should look first at expanded service access and streamlined transaction processing.



20

7. OutsourcingOutsourcing remains an active topic, with proponents and opponents presenting equally valid perspectives based on their individual situations.

In Nolan’s 2003 Technology Study, we reported that less than a third of the respondents felt their organizations had been successful with information technology outsourcing. This lack of success led to very low comfort levels with business process outsourcing (BPO). This experience seems even more common for this survey. On average, only 16% of respondents felt they were likely to outsource any key functions within the next three years—the rest (84%) were not likely to do any outsourcing or did not know one way or the other.

Looked at another way, by combining “very likely,” “likely,” and “somewhat likely” responses, we can see the most popular candidates. The target function for most outsourcing remains selective information systems functions, although there has been a strong shift towards a few non-core functions like document management (mailroom, imaging) and policy administration for legacy/inactive blocks of business:

On the other hand, processes typically considered core remain less likely targets:

Despite a number of highly publicized service contracts and rapid growth in the overall sourcing industry, respondents showed a relatively strong disinclination towards the use of external, non-U.S.-based resources for business support. Information systems mainte-nance and development remained the most popular target area, with document manage-ment (image processing) also showing up as a candidate on the list for near-shore options:

A. Document/Management (Mailroom, Imaging)

B. Systems Maintenance

C. Systems Development

D. Systems Infrastructure (Data Center, Network)

E. Policy Administration (Legacy/Inactive Blocks)

A

A. Agent Contracting (Licensing & Appointments)

B. New Business

C. Policy Administration (Active Blocks)

D. Call Centers (Consumer, Producer)

E. Claims

Somewhat Likely, Likely, Very Likely

A B C D E

56% 56% 49% 42% 42%

A B C D

B C D E

A. Document Management

B. Systems Maintenance

C. Systems Development

D. Systems Infrastructure

16% 17%11%

24%

11%

9%9%

49%

15%

64%

3%

58%

8%

49%

16%

66%

5%

Not Likely Including Don't Know

Off Near



21

A

A. Document ManagementB. Corporate FunctionsC. Policy Administration (inactive blocks)D. Systems MaintenanceE. Systems DevelopmentF. Systems Infrastructure

B C D E F

28% 21% 18% 19% 20% 22%

On

Slightly more popular with respondents was the use of on-shore resources; respondents continued to target systems-related functions at an even higher percentage while adding to the list corporate functions (accounting, HR, payroll) and policy administration of inactive blocks. On-shore document management (mailroom, imaging) showed up as the most likely candidate, although with less than one-third of the respondents (28%):

Conclusion: Insurers will continue to use outsourcing selectively, and will look to it primarily as a solution for IT functions and areas deemed non-core to growth. Companies considering the outsourcing of core functions that feed growth or competitive advantage, like new business or agent licensing, need to evaluate this strategy with care. Even the outsourcing of call centers seems to represent a less popular strategy as companies begin to realize the revenue opportunities represented by customer-facing functions.

Although technology has advanced to the 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.

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.

Underwriting Priorities

Organic Growth

Hig

hL

ow

Expense Management

Customer Service

New Tools

Training

Growth Through Acquisition

Outsourcing

Source: Nolan P&C Study 2005



22

Next Steps: Strategies in TransitionIndustry TrendsThe aging of America is a trend that companies need to address quickly, including modified product features as well as customized distribution and service. Equally important, companies need to determine whether they will participate in the opportunity represented by ethnic markets, taking into consideration linguistic demands operational capacity, distribution, service, and segment.

Competitive LandscapesGiven the need for efficiency and effectiveness, a core strategic decision to be made is whether to be niche-focused or to serve broad, possibly even international, markets. Marginally profitable lines should be eliminated as companies focus on core competencies and strengths. Banks and alternative distributions like the Internet should continue to be monitored for potential impact.

Sales and MarketingThe greatest market opportunities rest with the changing demographics, specifically the growth in aging and ethnic populations. Sales efforts and product designs need to incorporate the opportunities represented by this shift, including expanded focus on account retirement and lifestyle protection products. Optimizing existing distribution channels with tiered investment of resources and services will be the key to improving channel productivity, incorporating increased use of web support services, modified compensation structures, and enhanced training and retention strategies.

OperationsService as a competitive advantage should be the focus, with speed and simplicity as the key

measures of effectiveness. One-stop shopping concepts combined with service tiers that match level of service to profitability should be investigated. Other key strategies include expanding self-service on the web and call centers into contact centers that handle calls, e-mail and even instant messaging. Similarly, the consolidation of functions that bring economies of scale to the company remains a solid strategy.

TechnologyLeading edge investments should be made in areas that provide competitive differentiation, shifting the focus to services and support:

• Expanded access,• Streamlined transactions, simplified

usage, reduced cycle time, and• Web services, and electronic delivery.

Sustaining investments should be made in mature technologies, providing the base for operational excellence:

• Document management and workflow,• Common front ends (“graphical user

interface” or GUI’s), and • Selectively applied expert systems in

areas like claims and underwriting.

OutsourcingSelective IT functions including help desks, network management, data center management and telecommunications remain primary candidates for outsourced support. Contact Center outsourcing, beyond overflow services, is reversing its trend as companies start leveraging its inherent competitive opportunities. Great care should continue to be taken when it comes to core service functions like new business or agent licensing. Near- and on-shore services are becoming more viable options preferred over off-shore.



23

BACKGROUNDNolan is an operations and technology consulting firm specializing in the insurance, health care, and banking industries. Since 1973, we have helped companies redesign processes and apply technology to improve service, quality, productivity, and costs. Our consultants are senior industry experts, each with over 15 years of specialized experience. We are trusted advisors to our clients and we are committed to delivering measurable and sustainable results. This report is one of a series of insurance industry research studies conducted by the Robert E. Nolan Company. For the purposes of this survey, insurance industry executives were asked to weigh in on a variety of key issues and challenges they expect to face over the next three to five years. Their responses were tabulated and are detailed in this report, along with insights into the possible implications of their consolidated responses.

ACKNOWLEDGEMENTSThe information, results and insights found in this study are based on detailed surveys completed with senior level executives across a wide range of stock and mutual companies within the life and annuity insurance industry. To each of those executives who took the time to respond, we extend our thanks and appreciation.

Lead Author: Steve CallahanContributors: Steve Discher, Ron Zimmer

QUOTING THIS REPORTRecipients may quote briefly from this study (one or two sentences) without express permission. However, all such quotes must be accompanied by the phrase: “Source: Robert E. Nolan Company - www.renolan.com.” More extensive quoting or other reuse in any form is not permitted without the express written consent of the Robert E. Nolan 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:

[email protected]

(877) 736-6526 (877-RENOLAN)

Robert E. Nolan CompanyManagement Consultants

www.renolan.com

Simsbury, CT • Dallas, TX

Robert E. Nolan Company, Inc.Management Consultants

200612 nolan life&annuity-surveyfindings

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