The New Breed of CEO.

Insurance companies are recruiting executives from banking, retail, investment and other industries, who often bring a new way of thinking about the business.

In recent years, the boards of larger insurance companies have been extending their searches for chief executive officers beyond the industry to the wider world of financial services, especially banking. Leading companies such as Prudential, MetLife, Axa Financial, Allstate and Nationwide now boast top executives who came from the noninsurance side, bypassing the oncetraditional route of rising through the ranks of an insurance company.

Experts say that convergence and the continuing blurring of boundaries on products and marketing in insurance, the capital markets and investment banking are fueling this everincreasing trend, which is spreading from the life side to the property/ casualty arena. For example, Gary Wendt, former chairman and CEO of GE Capital Services, has taken the helm at Conseco, and Jay Fishman, who once served as senior vice president of merchant banking at Shearson Lehman Bros., now heads Travelers Property Casualty Corp. Opinions vary on the impact that this new breed of insurance CEO is having on the industry, but one thing is clear: Many of these newcomers take a different tack on key issues, including the desire for federal oversight of an industry that traditionally has been monitored by state regulators.

"This whole convergence issue has insurance companies very much interested in being the winners, as opposed to being the followers, and having other parts of financial services usurp what had been historically their territory," said Fran Lattanzio, a partner of Heidrick & Struggles' Financial Services Practice, who is based in the search firm's New York office. "I think that's part and parcel of why boards are very interested in bringing on someone who has the perspective from another part of financial services and can ingrain that in insurance to strengthen the overall vision and growth patterns for the company."

While some recruiting firms may take the silo approach, enlisting only the members of their insurance practice in the search for insurance CEO candidates, Lattanzio said his company thinks of every opportunity "as a financial-services opportunity, because the reality is that even below the CEO level, it is becoming much more commonplace for us to be looking outside of the particular sector within financial services."

Qualified CEOs Are Scarce

Against this backdrop, many recruiters acknowledge that it's a growing challenge to find enough top-caliber candidates. In recent years, the competition to snare highly qualified executives has escalated, said Brooks Chamberlin, a partner iN Korn/Ferry International, New York who is directly responsible for its global insurance practice. One reasox for this change lies in demographics said Brooks Chamberlin, a partner in Korn/Ferry International, New York, who is directly responsible for its global insurance practice. One reason for this change lies in demographics. With the aging baby boomer population about to retire, U.S. Census figures show that the number of 35- to 45-year-olds who could succeed top executives will be declining through the year 2015, he said.

"We're finding a significant shortage of talent in the industry--for every CEO post that's opening, probably only five to 10 executives might be right for the job," Chamberlin said. "And it's going to get worse before it gets better."

During the 20th century, manufacturing technology, efficient distribution, marketing expertise and information technology provided a competitive advantage to an organization, he said. But since the landmark study, "The War for Talent," was issued by McKinsey Quarterly in 1998, boards have been heeding its basic finding, namely, that hiring excellent people provides a significant competitive edge, Chamberlin said. "Now, there's a realization among larger companies in particular, companies like General Electric, Goldman Sachs, Allied Signal and Johnson & Johnson, that really good people do make a difference and are worth fighting for."

More Outsiders Expected

If anything, Chamberlin expects to see greater numbers of executives from the broader financial-services industry heading up more property/casualty companies or even reinsurance companies. "These individuals--the best people in the insurance industry--are in short supply," he said. "The ability to make difficult decisions quickly, to steer the enterprise through periods of gut-wrenching change and high uncertainty is a very difficult task, and we just don't see large numbers of executives who have the training, the experience, the mindset and the ability to be truly successful. They're in short supply, and they're demanding relatively high compensation packages."

Chamberlin singled out Wendt, Conseco Inc.'s chairman and CEO, as an example. Wendt took over leadership of the insurance firm in 2000, following the resignation of its two top executives amid financial instability. The Wall Street Journal reported that Wendt received a $45 million signing bonus and was promised a supplemental pension that will pay him $1.5 million a year for life.

Michael Magsig, a partner in the New York office of Heidrick & Struggles, specializing in the insurance practice, noted that the nature of the compensation package for insurance CEOs is changing and becoming "more and more incentivized," he said. "To the extent that there is any trend there, I would say that it's gravitating more toward a blend of compensation that's representative of what's found in capital markets, although it has not yet reached those same levels."

To Frank Marsteller, global insurance principal with the Philadelphia-based search firm, Spencer Stuart, the primary property/casualty business is likely to see some significant management shifts in the months ahead. Results are at issue more than ever now, and there's a greater focus on performance, leading to possible greater divergence between highly successful companies and those that are producing only average returns, he said. "The companies that produce average or below-average returns are starting to look for new talent" Marsteller said. "I think we're going to see more change in the property/casualty industry in the next two years than probably what we saw in the last four years."

In many cases, strong operating management from the financial-services sector likely will be applied to the property/casualty side--"like the recruiting of GE Capital-type executives," Marsteller said.

Magsig said that in recent years he has noticed a change in the expectations of search committees. Four or five years ago, he pointed out, boards would tell recruiters that they wanted to see candidates who could be real hands-on executives. "Today, we're beginning to see more of an interest in someone who's a leader, who can articulate a vision, who can create a very effective team and bring together people who are highly skilled in various functional areas or in running businesses that may be a part of the enterprise," Magsig said. "In part, that's due to the growing complexity of this industry, and perhaps some awareness that companies were kind of caught off guard by this downturn."

No Glamour

Yet another challenge looms in luring top-quality talent to insurance, Heidrick & Struggles' Lattanzio said. Both he and Magsig were veterans in the insurance industry before becoming search partners. Early in his professional career, Lattanzio was the chief financial officer of Aetna Life & Casualty's personal lines division, and at one time served as director of Aetna Life Insurance & Annuity Co.

Magsig was chairman, president and CEO of the Cologne Life Reinsurance Co. for nearly 10 of the 30 years he spent in the industry. Both say they know the view from that side of the aisle and understand that it does not appeal to everyone.

"Insurance--rightly or wrongly--has not been viewed as one of the glamour parts of financial services, even though if you look globally at the assets in each of the segments, insurance has potentially more assets behind it than any other single segment of financial services," Lattanzio said. "It's very significant and yet, at the same time, it has not necessarily attracted its fair share of stars in the financial-services arena."

Chamberlin calls today's environment "a seller's market" in terms of executive talent in insurance. After corporate downsizing in the early 1980s, the executive ranks at stock property/casualty and life insurance companies were thinned, he explained. Having fewer people to move into the top slots, insurance companies soon found it necessary to scout prospects at other insurance companies, then look beyond the industry for candidates, he said.

Given that they're coming from parts outside, these new-breed CEOs tend to see the insurance business in a different light, especially when it comes to the regulatory system they would favor.

State vs. Federal

Paul J. Mason, executive director of the Insurance Marketplace Standards Association for life insurers, said he's found that CEOs who come from non-insurance fields are impatient with the requirements of state regulators and are much more open to the idea of answering to a central regulatory bodsy at the federal level. Executives who come over from the banking world, for example, are accustomed to federal oversight of their business and are comfortable with that. "My impression is when talking to people who come from banking or securities, there's a whole different mental set," Mason said.

For more than 60 years, insurance in the United States has been regulated at the state level. Some states elect their insurance commissioners; others have them appointed.

As Edward M. Liddy, Allstate's CEO and chairman, observed, "the insurance industry is the only industry that's regulated on a state-by-state basis. There are 50 state insurance commissioners. In some cases, they do an extremely good job and they're well-funded, bright, conceptual people. In other cases, they're woefully underfunded and they're just inundated by trying to keep up with the fast changes in the insurance industry.

"If you could take what some states are doing and roll it out on a national basis, boy, we would love to have that happen," he said. "But I think [regulatory change] is going to be slow in coming. It will be very hard to change that, although there's good reason to try to change it, but getting from where we are to where we'd like to be is a very complicated path to travel."

Very early in his lengthy career, Douglas Leatherdale, CEO of the commercial insurer St. Paul Cos., St. Paul, Minn., was an investment manager for pension and benefit plans at one of the largest church bodies in the United States. But he credits his experience inside the insurance world, rather than outside it, for largely shaping his views in favor of optional federal chartering of insurance companies. This would give insurers the flexibility of remaining under state regulation or choosing federal oversight, Leatherdale said. "It's very simple," he said of his opposition to "the cumbersomeness" of state-only regulation. "We incur inordinate amounts of costs in complying with this myriad of regulations, and the quality of the regulation varies dramatically from state to state."

Admittedly, Leatherdale is frustrated by the current system and said he has become "more vocal" on this issue in recent years. "We are looking increasingly at corporations asking for products that they may get from a bank, an investment banker or an insurance company," he said. While insurers are dealing in finite insurance and financial guarantee-type products, so are the major commercial or investment banks, he noted. "I don't mind competing with those folks. I just want to do so with a level playing field."

Dual Regulation

Like Liddy, J. Harold Chandler, chairman, president and CEO of UnumProvident Corp., is a member of the new breed, having joined Provident in 1993 after 21 years with NationsBank Corp, and its predecessor, The Citizens & Southern Corp. UnumProvident, created by the merger of Unum Corp., Portland, Maine, and Provident Cos., Chattanooga, Tenn., in 1999, is the leading provider of group long-term, short-term and individual disability-income products in the world.

Chandler also favors a dual regulatory system and thinks that his banking experience, in great measure, has made him more receptive to the notion.

During his years in banking, he spent "a fair amount of time" working with federal regulators, giving him the ability "to make a comparison from actual experience, not just from some theoretical model," he said. "I think the fact that some of us have had experience under another system helps us feel more confident in the merits of a system different from the one we have today."

He also thinks that his opinion has been bolstered by the number of mergers and products that his company has tried to have approved across the 50 states. The "redundancy of the process does add expense and time when trying to run an efficient business," he said. "Our most efficient turnarounds would end up in a four- to six-month time frame, but we have some that go a year to two years.

"We understand that we're in a line of business where consumer protection is extremely important," Chandler said. "We're not trying to minimize that, but there should be a process that is more efficient, more effective, when companies are trying to bring better products--in many cases, better-priced products--to the marketplace. Ultimately, you conclude that this excessive burden is not in the best interest of those people we are here to serve--that's consumers throughout America."

Soon after he joined Provident, Chandler joined the board of the American Council of Life Insurers, where he favored having the industry look into the possibility of implementing a more streamlined regulatory process. But there was "a natural reluctance" to consider an alternative model back in 1994-95, Chandler recalled.

"Since then, a number of people have joined our industry who had experience outside insurance as well as specific recent experience in what seems to be a slowdown in our product-approval process," he said. "That gets to the very heart of competitiveness, not only with other insurance companies, but with other financial institutions." Because of that, Chandler thinks that regulatory change would be more acceptable to many in the industry today, compared with five or six years ago.

A Fresh Pair of Eyes

Promoting regulatory reform may be just one of many contributions from these newcomers. Recruiter Chamberlin predicts that these CEOs also will help foster a higher degree of creativity. "There will be more innovation in the company which will spread to the industry, because you have individuals coming in with a fresh pair of eyes, who aren't dedicated to the traditions and typical ways of doing things in the insurance industry," he said.

Liddy is a prime example. He was a top executive at retailer Sears, Roebuck & Co. before he joined Allstate in 1994. When Allstate CEO Jerry Choate retired, Liddy succeeded him on Jan. 1, 1999. Liddy then proceeded to lead the nation's second-largest personal lines insurer on an expansion spree, announcing a joint venture with Boston-based Putnam Investments Inc. to sell variable annuities, acquiring CNA's personal-lines business and buying American Heritage Life Investment Corp. to venture into workplace sales of insurance.

And in November 1999, Liddy announced a sweeping reorganization plan that included the slashing of spending by $600 million by the end of 2000 and channeling those savings into call center and Internet capabilities. The most controversial segment of the plan was the phasing out of thousands of company-employed insurance agents with the goal of converting them to independent contractors.

"When you come in from outside an industry and outside a company, it's probably easier for you to ask, 'Why?' and to challenge conventional wisdom. When you've grown up inside a company, you're part of the decision-making fabric and part of what's there," Liddy said. "I think just being able to say, 'Well, why do we do it that way and where are we going?' sometimes creates a fresh look at things that can be very helpful."

Better Management, Marketing

Chamberlin also foresees that this new wave of CEOs will improve the financial management of companies. People coming in from banking, mutual funds or investment advisory businesses are likely to institute a tighter process within their companies for turning a profit, he said. "They won't rely on the time-honored way of trying to raise rates," Chamberlin said. "They will look for ways to cut costs, better manage their claims and create adequate returns for the company."

Marketing is bound to improve, too, he said. Banks have taken the lead in the marketing of retail financial services in this country and, in some respects, insurance companies are 10 to 15 years behind in efforts to reach the customer and win the business, he said. "The idea of being more user-friendly to customers will come from innovative companies, and there will be people in those innovative companies who learned their marketing skills, not in the insurance industry, but in a bank, credit card company or some other type of financial institution," Chamberlin said.

To Marsteller, the new breed is making an impact on the industry, because these executives are not "buying into the traditional excuses--'You can't make money at this business' or 'You won't be able to cut costs in the distribution chain,"' he said. "I think the new executives will be relying on all the leadership in a company in every area to contribute to the overall bottom line and will not be accepting poor performance."

More Similarities

The more varied an executive's experience, the more he or she will come to appreciate that with business, in general, there are more similarities than dissimilarities, Liddy said. "The key is that you have seen a lot, so you have a perspective that you can apply to things," he said. "But what you have to do is recognize what's unique or different about the industry that you are in. You can't just assume that one size will fit all. You really have to take the time to understand and appreciate the nuances and the differences."

For example, Allstate for years was distributing its auto, homeowners and life products only through its exclusive agents. "They do a terrific job, but customers want to have access now around the clock, 24 hours a day, seven days a week," Liddy said. "So with opening up our distribution, customers can also reach us via the Internet or through call centers. It's perhaps easier for someone who arrives with a perspective on how other industries and other companies are dealing with customer convenience to ask the critical question: 'Why don't we do it that way?"'

As financial services converge, there likely will be insurance leaders with all different kinds of backgrounds, Liddy said. "I think what companies are trying to do is to find broad thinkers who can lead them in new and interesting directions, but who also can honor and leverage and build on what others who came before them have created," he said.

Chandler of UnumProvident believes that the new breed will bring in the same financial orientation and discipline as executives who came up the traditional insurance company ladder. So far, he has not noticed a major difference as a result of this influx. He finds that whether they carry insurance or banking backgrounds, these executives usually bring a disciplined financial orientation.

"Those who have come from banking do take a slightly different approach to some of the marketing and product-development issues, but I don't know that one is necessarily better than the other," Chandler said. "My sense is that there has been a positive blending of those backgrounds and those experiences to the point where I'd like to think we're a healthier industry today. But it's not because of one background or the other--it's a balanced mix."

State vs. Federal: The Debate Heats Up

The debate over regulation of the insurance industry has intensified in recent months. Concerns about competition and cost are sparking the discussion as life insurers in particular complain that the often lengthy product-approval process at the state level is putting them at a competitive disadvantage with other financial-services industries.

For more than a year, the National Association of Insurance Commissioners has been committed to its "Statement of Intent: The Future of Insurance Regulation," which is a plan to implement the Gramm-Leach-Bliley federal financial-services law and retain state regulators' oversight of the insurance marketplace. The NAIC has developed a blueprint for fixing the state-based system and is moving ahead in creating the model laws and other necessary framework. But cracks have opened in the industry's facade, revealing that some of the parties are not fully committed to this effort and may favor federal oversight.

At an NAIC committee meeting in March, Paul Mattera, chief public affairs officer at Liberty Mutual Group, Boston, and a representative of the Alliance of American Insurers, called the work of the NAIC very encouraging, but noted that a "significant segment" of the industry has rejected the notion that the NAIC can make the reform changes. lie said these industry members have concerns that the reforms are "too little and too late," they lack confidence that the reforms can be achieved in a timely fashion and they are looking seriously at the prospect of embracing an optional federal charter rather than state-regulated oversight.

Optional Federal Charter

According to some sources, many of the largest property/casualty insurers are willing to accept some form of federal regulatory oversight. And at least two trade associations--the American Insurance Association and the American Council of Life Insurers--are showing interest in some type of optional federal chartering. This would involve both state and federal regulation for companies that choose that route, with state-mandated insurance lines--workers' compensation and auto-reparation systems--remaining under state purview.

In fact, the American Insurance Association is working on an optional federal charter proposal for property/casualty insurers.

"Both our small and large members strongly favor the optional federal charter," said Barbara Levering, spokeswoman for the association. "There's been a change in the external forces at work in the business of insurance, and it's galvanized people within the industry." She pointed to such factors as heightened competition, globalization, the growth of e-commerce and advances in technology.

With the ABA Insurance Association, a unit of the American Bankers Association, pushing draft legislation to create an optional federal charter for regulating national insurance companies, the AIA wants to make sure that any federal charter proposal that moves through Congress is one authored by the insurance industry, not some other industry.

For its part, the ACLI has developed a working draft of a comprehensive legislative proposal to establish optional federal chartering. The trade association, with more than 400 member companies representing 80% of life premiums in the United States, was seeking comment from its members, the NAIC, consumer groups, state legislators and regulators, members of Congress and other insurance trade organizations through June, before preparing a final report.

Optional federal chartering would provide life insurers with the same type of dual regulatory system currently available to commercial banks, thrifts and credit unions. The ACLI said a consensus of its membership favors serious consideration of an optional federal charter, but it has not yet decided whether to seek introduction and passage of enabling legislation in Congress.

Optional federal chartering as proposed by the working draft would call for Congress to pass a National Insurer Act and a National Insurer Solvency Act, which would allow each life insurer to obtain either a federal or a state charter. Those laws would establish an Office of National Insurers in the Department of the Treasury.

Modernization Is Key

While considering a federal regulatory role, the ACLI supports efforts by states and the NAIC to streamline regulation at the state level. "The improvement and modernization of life insurance regulation is crucial to the health of the industry, and the NAIC has identified the same issues as priorities," said ACLI spokesman Herb Perone. "Whether this is achieved by one road or two roads is not that important. What's important is that improvement and modernization occur."

ACLI member companies have no interest in exclusive, mandatory federal regulation, the organization said in a statement.

Some other trade groups, including the Alliance of American Insurers, Downers Grove, Ill., are in favor of maintaining state regulation of all insurers. The alliance remains a supporter of modernized state regulation for property/casualty insurers, as opposed to a dual charter or federal system of oversight. "We don't think an optional federal charter is the answer to anything," said Rodger S. Lawson, alliance president. "It will undermine a lot of institutions that already exist in the industry."

Lawson stressed that the alliance's goal in this debate is to effect change within the current state system. "We need to appreciate the nature of products and product differences," Lawson said. "Our products are a creation of state law. I don't see how the federal authorities can effectively regulate state-based products as long as the state legislatures design these products."

E-Commerce Issues

Mark Parsells, the new president and chief executive officer of Fusura, the online personal lines agency backed by American International Group, Prudential Financial and Kemper Insurance Cos., is coming fresh on the scene and has a different slant on the regulatory debate. To Parsells, this isn't about federal vs. state. "As traditional companies make the effort to respond to consumer demand for electronic access, it will be important to work together to create environments for these companies to survive," he said. "It is the role of this new breed of companies to create national regulation we can all live with, particularly on e-commerce issues."

He said he recognizes that with respect to insurance issues, state regulation is important for consumer protection. "However, we hope that over time we can work with both federal and state regulators to help create a unified approach to the regulation of online insurance," Parsells said.

Parsells brings heavyweight e-financial experience to Fusura. Through his experiences at First USA and Wingspan, he said he was involved in a considerable amount of insurance. "Developing a banking and financial site--Citibank Online--as well as previous e-commerce sites, I realize that there is significant cost and effort relating to complying with numerous regulatory approaches," he said. "The regulatory environments associated with credit cards, banking and insurance are familiar areas. My combination of insurance and noninsurance industry background allows me to bring together what works best in each of these business segments. That is why we hope to work with state and federal regulators to create a unified approach that supports consumer interests."

The Insurance Information Institute has member companies on both sides of the aisle, said Robert Hartwig, the institute's chief economist. "But they all agree that there needs to be an extraordinary amount of streamlining in the regulatory process if it remains in the hands of the states," he said.

If the states do not adopt "significant and sweeping reforms," Hartwig said, "history will cast them aside." The NAIC is under tremendous pressure to demonstrate why the net benefits for consumers and insurers would be greater under a state-regulated industry rather than a federally regulated one, he said.

With the battle going before Congress, insurers may well wind up with a parallel regulatory system in the form of an optional federal charter, he said. "This is a Darwinian struggle that could see existing insurers and new insurers decide which part they want to participate in," Hartwig said. "We're still some time away from it, but someday this could happen."