Many Formulas For Success.
Financial-services reform is only one of many forces changing the competitive landscape for insurers, key players in financial services, insurance leaders and ratings officials said at an A.M. Best conference held in February in Scottsdale, Ariz. While there are many paths to the goal, many agreed that the only sure-fire prescription for failure is to assume that the world of tomorrow will be no different than today.
An Evolution, Not a Result
The financial-services reform package enacted last year is a "long overdue piece of legislation that will allow the insurance industry to do what it can and should do," said Alfonse D'Amato, the former thee-term U.S. senator from New York. "The synergies that we so often hear about are real in this case."
But D'Amato is not surprised that many unanswered questions remain regarding the exact rollout and scope of financial-services reform. "The point of [the legislation] was not to regulate, but to bring order to the industry," he said. "Therefore, states will continue to exercise a significant level of control."
The next emerging battle in financial-services regulation is over privacy. As of mid-February, 17 states had adopted privacy restrictions that are more stringent than national standards. Those more stringent standards are permitted under the national legislation package and are certain to handicap financial-services providers as they operate across state and national boundaries.
"It's what we call the law of unintended consequences," D'Amato said. "I just hope states don't come for-ward with a plethora of legislation hostile to business interests." D'Amato predicted that consumer advocates such as Ralph Nader would oppose sharing consumer information, even among divisions of the same company.
"The convergence of the financial-services industry, combined with the technological improvements we're seeing today, will ensure our global competitiveness and global leaderships," D'Amato said. "Your challenge will be to meet the demands of a business community and consumer market that look for answers in an instant."
Building on Forces in Play
Financial-services reform in the United States may have less of an effect on insurers and competitors than headlines suggest, largely because changes embodied in the legislation have been in play for years, said Edward D. Miller, chief executive of Axa Financial Inc.
"I don't see [financial-services reform] as having a significant effect at all," Miller said. "The fascination of [the legislation] always seems to focus on [merger and acquisition] activity. I'm not convinced at all that we'll see the level of activity that some observers seem to expect."
The new environment increases the pressure on companies to innovate, execute and evolve, Miller said. "There's no patent protection in what we do," he said. "It's the only business I know where somebody can come up with an innovative product, but by the time they get it to market, somebody is already there."
Miller said the "real change agent" is financial-services companies' ability to convert from producing and selling commoditized products to a model focused on value-added services.
In fact, financial-services convergence began well before the passage of the reform bill, Miller said. "Axa Financial was the first company to undertake this process when it acquired DLJ [Donaldson, Lufkin & Jenrette] and Alliance [Capital] in 1984." Other next-wave financial-services companies include Citi-group, Chase Manhattan and Charles Schwab, he said. "[The legislation] eliminates the last line of defense for companies that are in denial as to what's been happening."
To succeed, even full-service operations such as Axa Financial need to follow an "open-architecture" strategy in which the mix of products offered by representatives includes financial products manufactured by other providers, he said. For instance, funds managed by Alliance Capital represent slightly more than half of the inventory offered by Axa Financial, with the remainder coming from other providers.
Miller laid out several keys to success in the new world of financial services, including:
* maintaining a customer-centric focus
* using technology to enable new products and services, not just to reduce the cost of existing operations;
* developing scale, so companies have the strength and clout to attack markets and defend existing positions;
* constantly upgrading distribution by focusing on new ways to acquire, broaden and maintain customer relationships, including intensive training for representatives and focusing on recruiting representatives sophisticated enough to meet affluent, demanding customers on their own terms;
* offering a full range of product solutions. "Whether we manufacture or outsource them, you couldn't win with proprietary products alone," Miller said; and
* thinking long term. Customer life cycles run 30 to 40 years, so insurers can build long-term shareholder value by fostering close, productive relationships with those customers.
Miller believes companies such as Axa Financial have an edge because of their proprietary, highly trained distribution system of financial representatives. "Financial services really requires distribution," he said. "That force has to be educated, credentialed, trained and relationship-oriented--not transaction-oriented--to really be able to match up to what the market is seeking."
Miller expects acquisitions to continue, particularly as European financial-services companies look to extend their reach into the United States. If Axa Financial makes any acquisitions, the reason will be to extend its distribution, he said. But it won't be forced into any transactions." In this environment, Axa Financial has all the pieces we need."
Equitable Life Assurance Society of the U.S., New York, the well-known insurance unit of Axa Financial, has a Best's Rating of A+ (Superior).
Digging Deeper Means Breaking a Sweat
The buzz over Internet-based selling may be about price, but success will come from developing long-term, loyal customers who buy several products from the same provider, said Martin D. Feinstein, chairman, president and chief executive of Farmers Group Inc.
"You'd better be able to wrap your client by providing solutions to their problems, not just by providing a low-cost product," he said. "You do not need to own everything, but you need to provide it on a universal basis."
Farmers services 9 million households and averages two products per household, Feinstein said. "We have potentially nine products to sell. Just imagine if we increased our product density."
Feinstein wants his company to be a source for more than auto or homeowners insurance out of necessity. "A lot of companies just sell auto insurance, and I believe--this is just my opinion--in the long run they'll lose; they'll be marginalized," he said.
His challenge to insurers: "The question is not, 'To change or not to change?' The real question is, 'To sweat or not to sweat?'"
Feinstein said many insurers are waiting for the financial-services landscape to settle and are missing the point that "maybe convergence is spelled: c-h-a-n-g-e. In the next couple of years, there will be nowhere to hide."
A window of time remains during which many insurers can move themselves to a better position in the evolving, demanding financial-services environment. "It's not going to happen overnight, so don't panic," he said. "But if you're not doing something today, you should be worried."
Feinstein also supports the "open architecture" approach to products, in which Farmers' representatives offer a portfolio of financial-services products, including many made by other companies. But there are limits: "We don't want to be all things to all people. We want to be all things to our targeted people," he said.
The Farmers organization is still finding its way in the post-financial-services-reform world, and it expects to make a few missteps. "I haven't met a company that has broken the code yet, but I've met a lot of companies that don't have a clue," he said. "We're risk-bearing organizations but we're not risk takers. Those companies that fail to adapt and change will not only fall behind--they will actually end up fighting for their survival."
Strength in Numbers
If demography is destiny, then the United States is likely headed for a prolonged period of low interest and inflation rates and changing areas of risk, said Richard F. Hokenson, chief economist at Donaldson Lufkin & Jenrette.
An increase in residents throughout the developed world will have a real impact on insurers and other financial-services providers, as investors aggressively pursue higher yields in a low-yield environment, Hokenson said.
Aging baby boomers are wonderful candidates for retirement products, but they are moving out of the years when they would freely take on debt and additional spending. That type of economic activity is typically a factor in fueling inflation and interest rates. "Interest rates will be falling everywhere," Hokenson predicted. "There will be a real scarcity of callable long-term debt.
"It's a different kind of liquidity trap: They will not borrow money, no matter the price," Hokenson said.
An era of low inflation is bad for product manufacturers, and that may affect the entire economy. "An aging population produces disinflation because the aging person trades things," Hokenson said. "One house, one car, one office."
Worldwide, nations such as Japan and China also are facing a youth shortage and must deal with populations that are increasingly distributed toward the elderly. Until now, the world has experienced an increasing base of young people. "In the whole annals of history, we don't know what that world looks like," he said of the new trend toward a graying population.
Those born in 1933--the year the U.S. birth rate hit its lowest point in the 20th century--are now passing into retirement. From here on, there will follow a 40-year "supercycle" of rising numbers of retirees, a result of ever-rising birth rates that began after 1933. That's good news for life and annuity insurers. "There are lots of segments out there focusing on asset management--broker/dealers, mutual funds--but only one that understands risk," he said.
Property/casualty insurers will face increasing exposure growth because of booming coastal development. That's because 15% of U.S. retirees change their homes every year, most to areas within 100 miles of the three ocean borders. "That's a big increase in the portion of the population that's in harm's way" Hokenson said.
Lower rates of inflation and interest will further squeeze pricing in the already competitive market in which investment and annuity providers compete. "How will I charge a 2% wrap fee in a 4% total-return world?" Hokenson said. "The answer is: quietly, of course."
Risk as Opportunity
Insurers must bring expertise and innovation--not just products-to commercial insurance relationships, said the president of Aon Corp., the second-largest U.S.-based brokerage and insurance group.
"Clients are--believe it or not--smarter, more complicated and more sophisticated," Michael D. O'Halleran said. "Information has made the client more powerful in his demands. They're less interested in just a product. They want expertise. We are looking at an age where the larger companies are going to need more opportunity from us to understand what they do."
More than enhancing operations, technology is redefining services. "It allows us to tailor products," O'Halleran said, adding that Aon now handles much of its distribution and smaller commercial servicing electronically. "For us, Aon Enterprise has dramatically changed the distribution method of how we handle small commercial insurance."
While the melding of Citibank and Travelers was viewed as part of the reason for the urgency in enacting financial-services reform legislation, O'Halleran warned that there's little inevitable about further bank-insurer mergers. "At any time in the course of my 27 years in this industry, a bank or financial-services organization could have bought a broker--but they didn't."
Consolidation among brokers has turned that industry upside down. For instance, of the 20 largest U.S. brokers as of 1987, 10 have become part of the Aon organization, and three have joined with Marsh & McLennan.
The need to be knowledgeable about more than products is driving broker consolidation. "The cost of doing business has changed dramatically. No longer can you simply be a broker and transact business. You have to provide actuarial services and technology."
The geographic scope of operations also has changed. In 1987, Aon was considered a regional broker; today, it operates in 120 countries.
O'Halleran sees two trends continuing: the need to expand into more services and specialties, such as capital-markets services, investment-banking operations and software development; and a continued squeezing of margins. Insurers may be reporting improved commercial pricing, but O'Halleran remains skeptical of the overall impact and predicts that it will be necessary for brokers to scramble even harder to remain profitable. For instance, prices were down an average 3% in the past year, but Aon managed 4% growth, he said.
"It's very hard to get a client to say, 'I value what you do,'" he said. "I think there's a race to see whose price can get to zero first."
Allianz AG is pursuing what may sometimes seem like a conflicting task: giving local units as much operating freedom as possible while at the same time building a global, cohesive brand, a member of the company's board of management said.
Allianz is now an 80 billion euro company (about $77.13 billion), with 106,000 employees in 60 nations, Dr. Helmut Perlet said.
"The bulk of our business is still multilocal," Perlet said. "The more local your business, the less value you get from centralization."
That means there are two sets of objectives: one for the holding company and one for the local operation.
The holding company is responsible for managing the strategic portfolio, managing synergy and "know how" management, managing global risks, and allocating capital and setting capital targets.
For local operations, independence carries operating risk, which local managers must control. In turn, they're given control over their own market and are allowed to focus exclusively on customer needs.
Allianz has taken several steps to build and streamline its brand globally. Internally, the company has adopted English as its business language and standardized financial practices groupwide. Ten years ago, the group introduced "Allianz Olympics," a companywide sports event. "We are moving away from a multibrand approach and started last year on a campaign of building name awareness for the Allianz brand name," Perlet said.
Europeans may be comfortable with a global economy--"They've been globalizing for more than 500 years," Perlet said--but they are affected by the same forces reshaping the global financial-services industry.
The major factors changing Germany-based insurers, such as Allianz, are changes in that nation's tax codes. German tax rates are being lowered, and proposals call for reducing or eliminating taxes on capital gains. That should create new opportunities for German companies looking to sell or buy companies. German's Finance Ministry recently said change wouldn't take effect until 2002.
Perlet also remains confident that the euro will recover its strength. "There is still a long way for the European governments to go, but [the euro] will eventually emerge as an equally strong competitor to the U.S. dollar."
Allianz AG (Consolidated) has a Best's Rating of A++ (Superior).
The Quest for Customization
The trend toward customized products and services is just beginning--and those who can't meet customers' needs won't succeed, a member of Munich Re's board of management warned insurers.
Karl Wittmann, a director and member of Munich Re's board of management, said the flexibility and customization of many insurance products and services is poor compared with, say, an Audi car. For instance, Audi offers 1.4 million options to customers.
"Every car leaving the factory has a customer waiting for it," Wittmann said. "How many millions of alternatives are we offering to our clients?"
Munich Re operates in 160 countries, but the biggest driver of globalization is the communications revolution fostered by the Internet, Wittmann said. "Globalization is the story of the Internet," he said. "Sheer size is not what's important."
But consolidation and larger risks are driving the move toward increasing scale, he said. "Reinsurers as a whole are less likely to deal with small and midsized insurers," he said. "Larger risks from larger insurers need better under-writing, better actuaries, doctors, engineers and scientists. This is costly"
That requires a change in orientation. "We are no longer going to be product peddlers but solution providers," he said. "We as an industry can be quite bullish about our future. The demand for insurance and reinsurance is likely to increase."
The Munich Re Group has a Best's Rating of A++ (Superior).
Technology Rewrites Rule Book
William C. Hartnett, director of financial services at Microsoft Corp., believes that the online revolution means there are several new rules for delivery of financial services.
For instance, everyone is now a middleman, he says. Insurers are middlemen between consumers and reinsurers, he said ."Does what you do justify a 30% or 40% margin?
"I think the agents are probably more secure than a lot of people think they are," said Hartnett, a former agent.
But not everyone will survive as a middleman. For instance, banks that delve into offering insurance are "shocked--shocked!--that there are losses in the insurance industry," Hartnett said with a touch of humor. "That's the classic sign of somebody thinking like a middleman."
Electronic communications net-works such as Archipelago and others have captured sizable portions of the electronic-trading market, becoming virtual stock exchanges. Applying that model to insurance, there's little to stop a group of brokers and agents with established accounts from steering their business into a private exchange of their own.
Financial products are approaching commodity status, and insurers have been slow to change their forms and products to meet the realities of daily lives. Hartnett doesn't believe the online breakthroughs will come from exchanges or aggregators who sell directly, because, at most, they'll be able to save insurers or customers only the sales commission. "Instead, the price crash will come in the middle," he said. That means new online models for risk transfer could threaten established products and services, endangering insurers closely tied to the status quo.
Hartnett also offered several predictions, including:
* by 2004, the amount of insurance sold online will surpass that sold through other channels;
* by 2006, more Americans will access the Internet through high-speed connections rather than through lower-speed connections such as dial-up modems; and
* the personal computer will remain the favorite tool of knowledge workers for at least another decade.
Hartnett also called for insurers to support the movement to develop online standards, noting that Microsoft supports the efforts of Acord, a Pearl River, N.Y-based insurance association whose self-stated mission is to facilitate communications.
Insurers have unique advantages but have never consistently exploited them, he said, noting that a chief executive once told him: "This industry has created more data than all the other industries in the world combined, data that we never look at."
Moving With a Changing Industry
The insurance world is evolving quickly, and A.M. Best Co. is keeping up with those changes, two senior executives told insurers.
The vision driving A.M. Best's creation of many new products and services is to build a leading global information and rating services company specializing in the insurance and financial-services industry, Executive Vice President John H. "Jack" Snyder said.
The key words are "global" and "services company," which reflect the geographic growth and diversity of products and services the company has developed, Snyder said.
The three main elements of the company are:
* Best's Ratings, including financial strength and debt ratings;
* information through publications and electronic media; and
"We're evolving into a global-services company," Snyder said.
A.M. Best is based in Oldwick, N.J., and has units in Toronto, London and Hong Kong.
Major global initiatives include the acquisition of Trac Ltd., a Canadian insurance information and ratings provider, which has been renamed A.M. Best Canada, and "Insight Global," a new global insurance information product developed by Financial Intelligence & Research Ltd., which is now part of A.M. Best International. In November, A.M. Best announced it would take over publication of the Captive Insurance Company Directory from Tillinghast-Towers Perrin as part of its expanded coverage of the alternative risk-transfer market.
A.M. Best Group Senior Vice President Larry Mayewski said the company is expanding its coverage of health maintenance organizations; Canadian and U.K. insurers; and other areas of insurance, including protection and indemnity clubs, which are mutual-type insurers mainly focused on marine coverage. The company now has 120 insurance analysts in four offices worldwide, Mayewski said.
Another major initiative has been to provide free access to Best's Ratings via the World Wide Web as well as the introduction of Best's Security Icon program, which enables insurers to communicate their financial strength to the consumer over the Web. A.M. Best also has been actively rating debt and other securities, Mayewski said. That effort includes ratings coverage for long-term debt, medium-term notes, preferred stock, surplus notes, shelf registrations and other credit-rating services.
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|Title Annotation:||insurance industry deregulation|
|Comment:||Many Formulas For Success.(insurance industry deregulation)|
|Date:||Apr 1, 2000|
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