Talent search: insurers must develop a talent management strategy to protect their most important investment--the quality of people they attract and retain.

Key Points

* A variety of demographic, industry, cultural and other factors have come together to create a perfect storm in recruiting for traditional insurance companies.

* Today's environment of cost-cutting and increased regulation and the perception that insurance is a slow-growth, unglamorous business are factors contributing to recruiting difficulties.

* Developing talent at all levels through formal programs, opportunities for varied experience and other initiatives is an important part of a strong talent management strategy.

Even large and well established insurance companies are having a difficult time recruiting top talent. Top-level executive searches take longer than ever. More candidates now say no when first approached and more candidates are saying no at the conclusion of the recruiting process. Companies casting about for ways to buck these trends are having a hard time because there's no single cause at which to aim a silver bullet. Instead, a variety of demographic, industry, cultural and other factors have come together to create a perfect storm in recruiting for traditional insurance companies.

Reasons for Recruiting Difficulties

Turnover at the Top--Like other industries, insurance companies are seeing more turnover among chief executive officers. According to Booz Allen Hamilton's annual survey of CEO turnover, some 15.3% of chief executives at the world's 2,500 largest public companies left office in 2005, a 4.1% increase from 2004, and 70% higher than 10 years before. For North America, the turnover rate was 16.2%. Although no definitive figures for the insurance industry are available, we have observed that insurance CEO turnover is only slightly below these figures.

Today's environment of cost-cutting, increased regulation mad reporting, the necessity to do acquisitions for scale, pressure for short-term results, and the need for the CEO to get directly involved in lobbying has led many top candidates and incumbents to conclude that being an insurance CEO is simply not as appealing as it used to be. As a result, insurance CEOs serve shorter terms and face pressure to produce immediately. This not only makes it more difficult to recruit CEOs, but also other top executives who prefer to stay with the organizations they know rather than jump into an unpredictable new situation, even if the moves would mean more money and opportunity for advancement.

The Pull of Private Equity--Awash in more money to invest than ever, private equity companies have been aggressively acquiring insurance businesses or starting insurance businesses themselves. They've raised compensation levels for top executives and offered them real premiums in the form of significant equity. This opportunity for wealth-building has caused many leaders to overcome their reluctance to change companies, thus shrinking the pool of candidates for traditional insurance companies and raising the price for talent.

A Global Squeeze--As the market for general managerial talent becomes more global, American insurance companies must compete with global companies who are increasingly interested in hiring American executives. And although the globalization of the talent market enables American companies to cast a wider net, some of the best talent is being recruited and it is often difficult to recruit them back, especially when they fear there may not be a soft landing for them in the domestic industry.

Demographics as Destiny--With the first big wave of baby-boomer executives due to pass from the stage soon, most industries are naturally looking to the cohort of 30-year-olds to 50-year-olds for the next generation of top leaders. Not only is there a smaller pool from which to draw, but also traditional insurance companies have been having trouble getting their share of these potential leaders.

Perception--Finding the next generation of leaders has been further complicated by the perception that insurance is a slow-growth, unglamorous business. As a result, the insurers are losing the recruiting battle to other industries, not only among the second tier of leadership but also among recent MBAs and even entry-level personnel.

Word on the Street--In recent years some insurance companies responded to the difficulty of recruiting by enticing top executives from other financial-services sectors. In some cases, these executives fared poorly, finding that insurance differed far more from more familiar financial-services businesses than expected. Others, disenchanted by what they regarded as slow decisionmaking and bureaucracy, returned to other financial sectors--and weren't reluctant to communicate their unhappiness to their colleagues. In the face of this rapidly and widely spreading folk wisdom, recruiting from other financial-services companies has become far more difficult. Moreover, according to the Booz Allen study, between 1995 and 2005 financial-services companies had the lowest overall CEO turnover rate (9.4%), offering a more stable environment for executives who might otherwise have considered jumping to an insurance company.

Forgiving, Forgetting, Fighting Back--In the past, when informed that a top executive was entertaining an offer from another company, many insurance companies responded, in effect, with the old line--"don't let the door bit you on the way out" No more. Today, realizing how difficult it is to replace proven performers, they are far more willing to forgive and forget--and to make substantial counteroffers to retain talent and avoid the learning curve costs for new executives. This greater willingness to make counteroffers is responsible for more candidates saying no to prospective employers late in the recruiting process.

The Disappearing Middle--in pursuit of growth and of economies of scale and scope, insurance companies continue to aggressively seek acquisitions. To take costs out of the merged company, they often eliminate several layers of management. These leaner organizations offer fewer opportunities for development of the next generation of potential leaders via rotation through profit and loss responsibilities. As new waves of consolidation wash over the industry, the talent pool will continue to shrink internally as well as across the industry as a whole, and the flow of future leaders in the talent pipeline will slow to a trickle.

My Way--The shift from the organization man of old, who was willing to go anywhere and do anything for his employer, to today's professionals, both men and women, whose first loyalties are to their families, their quality of life, or other interests has been long in the making. But in the past five years, this trend has accelerated dramatically. Many executives are simply uninterested in moving to a new company if it means giving up a favored lifestyle or uprooting their families, no matter how attractive the job might be in scope, responsibilities and compensation. "If it's not near the mountains, I'm not interested," or "my wife's job demands that we stay here" or "I want to let my son finish at the same high school where he began" are typical responses to such offers. It's difficult enough to compete against other companies for talent, but it's almost impossible to compete against what people regard as fundamental parts of their identities.

What Insurance Companies Can Do

Just as there is no single cause for the top-level recruiting difficulties companies face, there is no one thing that they can do to overcome them. But by undertaking a wide range of development, recruiting and retention activities and integrating them into an overall talent management strategy, savvy companies can win the war for talent that is increasingly likely to determine the winners in a world of otherwise competitive parity.

Essential elements of an effective strategy include:

Emphasize best practices in corporate governance so that boards can focus on CEO tenure, succession planning and talent development. Increasingly, boards of directors ask us to assess talent for CEO succession. For example, for a major life insurance company we were asked to assess the top internal candidate and simultaneously look at the external talent market and be ready to quickly execute a search should the internal candidate not succeed during a trail period.

Boards of directors, under pressure to increase the quality and scope of their oversight, are taking a far more active role in overall management succession below the CEO. Increasingly, they want to ensure that talent management throughout the top levels of their companies is being systematically addressed and that the CEO is on top of it.

Commit to developing and mentoring talent sooner and lower in the organization. A number of companies we work with have recently implemented talent programs designed to provide more lead time for the development of talent, assuring that the right person will be available when an opportunity arises. Moreover, we've observed that companies practicing wider and deeper talent management tend to use search services less often and are achieving stronger business results.

Move senior-most managers around so that more people can have more experiences in more functional departments. Traditionally, insurance companies have developed people in functional silos, promoting them upward in a straight line in one functional or business area. Today, however, more companies rotate high-potential talent through multiple functions of the company, exposing them to many different aspects of the business and giving them a real sense of how the pieces fit together. Unfortunately, the leaner organizations that have resulted from industry consolidation have narrowed the number and scope of such experiences.

Make departments more willing to give up star performers so they can pursue development opportunities in other parts of the company. Because no one wants to give up a star, the CEO must set the expectation that top performers must be rotated in order to facilitate talent development for the overall organization. In some best-practices companies business unit leaders are being rewarded financially for developing talented performers and pushing them out to other parts of the organization.

Put promising people in "stretch" roles, while providing them with a soft landing within the company if they fail. Just as weight training requires steadily increasing amounts of resistance if the individual is to get stronger, talent development requires the undertaking of steadily more demanding roles. Such a policy, however, requires a new mindset. The company must be willing to forgo immediate productivity from someone ill a new role to achieve a learning curve that will pay off in the longer term. Moreover, "up-or-out" should give way to "up-or-back-or-lateral," allowing people thrust into tougher roles to fail and to either return to a former role at which they excelled or to find a less demanding alternative.

Constantly review compensation systems for their impact on the current market for talent. In all industries, the playing field has been leveled in terms of technology and other factors that once conferred competitive advantage. As more companies realize that they likely will succeed or fail on the basis of talent, compensation systems will change more rapidly than ever. It's essential to establish a real-time intelligence system for staying abreast of how the competition is compensating its best people. Whether the system involves participation in compensation studies or leveraging the informal networks a company's people have throughout the industry, the system should be formal and institutionalized--not relegated to conjecture and informal conversation.

Strongly promote the company as a great place to work and to have a career--and make good on the promise. It's not enough simply to be a great place to work: it's also advisable to relentlessly communicate that fact throughout the organization. Publicize the success of the company and the successes of individuals as the), move into larger roles. Emphasize the quality of compensation, benefits and perks. Leverage those employee surveys that turn up positive attitudes and correct whatever is creating negative ones.

By pursuing a comprehensive talent management strategy, insurance companies can protect the most important investment any company makes--the investment in the quality of the people it attracts and retains. Moreover, it's an investment that continues to pay ever bigger dividends, as we've found with companies that follow best practices in talent management. For example, in searches for an external candidate to lead ambitious new business initiatives for which a company lacks sufficient time to groom an internal candidate, it's imperative to find the best possible person. In those critical external searches, the make-or-break element in the recruiting of top talent often comes down to the quality of the people who were already there. Best practices companies not only win the current battle, but position themselves more strongly for the next one.

Contributor M. Evan Lindsay is vice chairman of Heidrick & Struggles. He can be reached at [e-mail].