We are living in interesting times. The U.S. insurance industry is in a state of transformation as the competitive landscape changes. This transformation presents a significant upside market opportunity for insurance companies.The industry is very mature, has rich customer information, established distribution channels, favorable product positioning, and years of sound business practices and solid investment reputation.
These elements have been the critical success factors for insurers and need to be leveraged as the industry positions for the future.
Insurers must continue to deliver first-rate customer service, align product offerings to appropriate service channels and manage their IT investments-all effectively-to maintain and grow market and wallet share.
The competitive landscape for the insurance industry is changing at an unprecedented rate. Insurers now face stiff competition in the global financial services marketplace. It behooves them to evaluate the traditional product-centric business model of the insurance industry and assess opportunities to increase customer-centricity.
In today's marketplace, there are nimble financial services players that are making inroads by developing customer-centric models and advice-driven approaches not bound by insurance tradition. Customers now have new choices, and insurers must take steps to update the traditional business model, which is saddled with legacy systems, and position their firms against the future.
Competing realities
In addition to the changing external competitive landscape in the financial services industry, insurance companies need to continue to manage the competing realities of the insurance business.
Demands from the marketplace, customer, regulations and the boardroom will continue to put pressure on the insurance companies. These demands influence business strategies and technology decisions that have a direct impact on the business, the customer and the bottom line. The challenge for insurers is how best to manage these competing realities and leverage technology-strategically and appropriately.
Insurers looking to maintain and expand their customer base must become customer-centric with a laser focus on the customer needs, demands and changing demographics. There will be 6 million people per decade moving into retirement, a projection of 13.3% of the U.S. population in 2010, and 16% in 2020.
More importantly, the shift of the children of the Baby Boomers will become the buyers of insurance product offering.
This shift will require two sets of products, distribution channels and servicing models-one more traditional for the aging population and the other more flexible and real time for the new Generation X and Y buyers.
Leveraging technology to understand and manage customer relationships and customer data will be critical to grow market share and increase share of wallet and achieve client satisfaction.
Marketplace convergence
The lines between financial services institutions are blurring as firms seek to offer a wide array of products and services. Products are now less of a differentiator, and insurers find themselves having to increase their range of service options with competitive pricing.
The continuation of financial services convergence, consolidation, and demutualization have all contributed toward the changing competitive landscape. Check out the Web home page of any of the top financial service players-they all support banking, insurance, mutual funds and retirement planning centers. Without looking at the names of the companies, you cannot tell if they are a bank, an insurance company or a mutual fund company.
Insurance companies are not only competing against other insurers, they are competing against the financial services industry. Leveraging Web services will provide alternatives for linking customers to the business and expanding distribution channels.
Regulatory environment
Insurers are used to the constraints of the state and federal regulations. Insurance company executives know how to stay in compliance.
But with marketplace convergence, these constraints present a competitive disadvantage for insurance carriers competing with more nimble financial service institutions.
However, with the shift in many of the new federal mandates driven by consumer demands on the financial services industry and publicly traded companies, such as BASAL II, Gramm-Leach-Bliley, Sarbanes Oxley, and USA PATRIOT Act, there is a new twist to regulatory compliance. These new laws are currently not fully applicable to property/casualty and life/annuity insurers, especially the mutual companies-but they do apply to their competition.
But it is important to remember that these laws are consumer-driven, focusing on protection, privacy and trust. Embracing these trends is one way to stay in step with the overall financial services industry and staying one step ahead of compliance issues.
Boardroom pressures
For both property/casualty and life/annuity carriers, written premium continues a steady rise with the L&A business achieving higher premium growth as insurers work to keep step with the broader financial services marketplace.
The P&C business maintaining a consistent rate of growth as insurers respond to customers' needs for asset protection. However, the cyclical pattern of return on equity (ROE) is currently on the decline, with record combined losses for P&C carriers.
At the same time, insurers' investment in technology has held relatively constant as a percentage of written premium regardless of ROE. In the past, the patterns of written premium, ROE, and IT spending have been predictable-but the rules are changing.
With the downturn in the economy and the spiral decline in investments, boardrooms and stakeholders are pressuring insurers to contain costs and run more cost-efficient operations while continuing to grow their bottom line and improve customer service levels.
Leveraging technology investments and making the right strategic decisions are critical.
Positioning for future
Insurers need to continue doing what they do best-be an insurance company-but they must strategically leverage what made them successful in the past to position themselves for the future.
There are three key challenges that present themselves as opportunities for the insurance industry:
* Understand the Customer. Superior customer service and aligning product offerings to the right customers are imperative. Insurers must understand their customers. Integrating systems and data by developing enterprisewide data strategies, effectively managing and harvesting data, and developing robust analytics and business intelligence tools are necessary to develop a customer-centric business model to improve client acquisition and retention.
* Expand Distribution. Scaling services is an effective way to provide the right products and services to all customer touch points. Directing customer activity, leveraging high-touch or high-tech appropriately, and balancing costs with service are key. The integration of the Internet, call center, and the advisor network will be critical to achieve operational efficiency and to contain distribution costs.
* Managing IT Investments. Leveraging past IT and positioning IT to be used as a competitive weapon rather than a cost burden are essential. Past IT investments should be viewed as the foundation of any organization, always looking to leverage past investments then buy then build. Understanding how the competition is using technology and creating a tightly aligned business and IT organization will strategically position insurers, help reduce costs and offer a faster time to market solution.
Deborah Smallwood is the Insurance Practice Leader for Needham, Mass.-based TowerGroup, which provides a comprehensive range of research and advisory services focused on the financial services industry.
