The underlying economics of the insurance business is changing, making traditional strategies and operational approaches unsustainable in the New World. Consumers are demanding more for less. Technology is enabling increases in revenue with decreases in cost. The labour force is shrinking, and career aspirations are changing.
These dynamics are combining to make the competitive landscape different in terms of the game, the playing field and the players. The competition is now a financial services game, played on a global scale against recognized competitors, as well as against “attacker” competitors, who don’t value the “old” rules of the game, but want to win every bit as much as the traditional players and have less to lose.
The following is a Top Ten list outlining Deloitte Research’s outlook for the new century.
1. The Global Landscape
With growth an imperative, insurers need to expand globally or face the prospect of becoming marginal players. The greatest opportunities are in China, India and other developing economies, where penetration of insurance products is low and strong GDP growth is expected. So far, the giant European insurers have been the global leaders. U.S. firms need to get aggressive about international expansion or they will be left behind.
Industry consolidation is now a permanent fact of life, with insurers continually merging in search of larger market share, new product capabilities and the advantages of increased scale. To remain independent or become acquirers themselves, firms need to generate consistently strong returns by growing their business and becoming more efficient. Only the strong will survive.
The removal of the Glass-Steagall restrictions separating banking, insurance and securities has finally opened the door to mergers between banks and insurance firms in the U.S. Yet the most active acquirers may be European banks and insurers, who are already familiar with selling both insurance and banking products to consumers. It remains to be seen whether consumers really want to consolidate their finances in one institution. But one thing is already clear: insurers face an uphill battle to convince consumers that they can serve all of their financial needs.
4. Products & Services
With people living longer and retiring earlier, consumers are now more interested in products that will build wealth and retirement income and less interested in traditional protection products. Equally important, they are seeking advice on how to navigate the maze of competing financial products. Insurers that can continually develop innovative new products, while evolving from “product peddlers” to trusted advisors, will be the winners in the years ahead.
5. Customer Reach
Accustomed to buying through catalogues and over the Internet, consumers are coming to demand access to insurance firms 24 hours a day, through the channel of their choice. Yet most insurers still depend overwhelmingly on agents to distribute their products, making little use of call centres, direct mail or the Internet. Beyond simply providing multiple channels, insurers need to install the technology tools that will integrate data across channels to provide higher levels of service and insight into customer needs.
Insurers are well behind other financial services firms in leveraging the power of the Internet, which will transform the insurance industry over the next few years. With consumers coming to expect Internet access as a minimum requirement, insurers need to catch up quickly. They must also decide what business model to adopt for Internet competition. Simply moving their current business model on-line won’t be viable.
7. Technology Plays
From achieving economies of scale to integrating customer data across multiple channels, technology will be critical to success. Yet insurance firms are underinvesting in the tools on which their future success depends: customer relationship management (CRM), data mining, enterprise resource planning (ERP) and the infrastructure required to support products and operations. Insurers need to prioritize their long list of IT needs and increase efficiency to generate the funds required for investment.
8. The Search for Talent
The labour market is tighter than it has been in decades for technology, sales and management professionals. The lure of joining an Internet start-up offering stock options has only added to the competition. To get the talent they need, insurers will have to be creative, rethinking salary and benefits, leave, working conditions, training and recruitement.
Despite a few star performers, most insurers are lagging in returns to shareholders. Generating additional income is the long-term solution, but in the near term firms are focused on initiatives to become more efficient — using less expensive distribution channels, deploying technology to automate operations and installing ERP tools to improve performance measurement. Insurers who don’t generate competitive shareholder returns will be acquired by those who do.
Lurking behind all of these fundamental industry trends are several unknowns that could significantly affect the strategic environment. The key wildcards in the coming years are: increasing debt loads, the mounting U.S. trade deficit, the battle over electronic bill presentment and payment, the rate of technology innovation and deployment, the potential liability from Y2K litigation and geo-political turbulence. Watch these closely or you might be unpleasantly surprised.
Simon Ford is a senior Deloitte Consulting practitioner and author of the company’s Millennium Top Ten Global Insurance Industry Outlook report. This excerpt from the report was published by arrangement with Deloitte Consulting.