Thursday, July 11, 2013

Visions For The Future Of The Life Insurance Sector



Insurance Companies In 2020


Introduction

On behalf of the Financial reporting, product development and reinsurance sections of  the  society of Actuaries,
we are pleased to present the top 10 essays selected from those submitted by members of the society of Actuaries
in response to:  Life insurance 2020 foresight – A  call for  essays.  The call was open to all members of the society
of Actuaries as well as affiliate members of the sponsoring sections.
The current economic crisis that dominated the news during 2008 and 2009, the expansion of technology, changing
accounting standards, access to capital and changing demographics are some of the challenges to the life insurance
sector. Thoughtful visions of the future provide a catalyst for dialogues that can shape what should be and what
could be the future of the life insurance sector. The sponsoring sections initiated this call to stimulate and expand
those dialogues.  each author submitted a short essay in response to the following questions.
  •  What is your vision of a financially sound, operationally efficient, growing and profitable company operating
      in the life insurance sector in the year 2020?
  •  What are the critical issues that this company must address between now and 2020?
The  authors provided stimulating and thought-provoking insights into the future state of the life insurance  industry.
There are many challenges and opportunities that face the life insurance sector. While there is no one perfect vision
of the future, actuaries can provide insightful views that meet the challenges and maximize the opportunities. Their
deep understanding of the complexities and the risks uniquely enables them to envision the future.
Monetary awards were presented to four authors for their outstanding papers:
  Ken  beckman,  Risk Management For The Individual: The Key To Life Insurer Success In 2020 And Beyond
  Chiu-Cheng Chang,  Adjustable Biological-Age Pricing For The Global Market
  s haron Giffen, “ Sustain”: An Industry Speech About Success As A Niche Player In 2020
  Maria Thomson, Industry Will Experience Zippy Gr owth Through Zip Processing
We hope you will enjoy reading the essays and taking time to reflect on your vision of a financially sound, operationally
efficient, growing and profitable company operating in the life insurance sector in the year 2020. We believe the
thought leadership exhibited in this collection of essays will motivate you to be involved in the management of
your company and the regulation of the life insurance sector to create solutions on the way to reaching your vision.

Insurance Companies In 2020


A financially sound, operationally efficient, growing and
profitable company operating in the insurance sector in
2020 must have the following attributes:
•  It must KNOW its customers and its production system.
•  It must KNOW  its risks and how it will address its risks
  BEFORE they actually occur.
•  It must be nimble.
•  It m ust grow real profits from the current products it sells.
•  And most importantly, it must be able to integrate each
  of these cohesively.

The Company Of 2020

Knowledge Of Customer
This has  several dimensions. It must deal with today’s
known risks and tomorrow’s unknown risks. Scenario testing
will only be a starting point; the real test must be in the
extremes. The action plan must also be specific for the next
quarter and next several years. There will be no forgiveness
for a solution that addresses a problem in one period and
falls apart in the next reporting period.



The company cannot guess what its customers want
nor hope that the products it produces will be welcomed
in the marketplace; it must know its customers and their
needs and it must create products that its customer base will
purchase. The insurance company must be able to produce
a product batch of one—a broker or agent selling one contract
to one individual. This is not the generic term product nor
is it the asset.
Also, it must be totally attuned to the changing social
mores. For examples, baby boomers are about to retire
and will create the largest group that will CHANGE the
way we retire and die. Over the next 10 years, there will be
profound changes to the way retirement and life choices are
considered. The main thrust is the baby boomers moving


through the later stages of life. This will have an impact on
both the insurance risks and equity investments.
Investments will change. Equity product pricing will de-
cline. The normal price to earnings multiples will decline. Why
pay for 10 years’ worth of future earnings if we can no longer
predict how long an organization will remain in business? This
will reduce the value of stocks. To increase portfolio yield,
there will be a need for speculation, which will encourage as-
sets moving into small- and medium-sized companies.
Instead of a large group of people saving for retirement,
the assets will be cashed out. This will put pressure on asset
prices, as the number of retirees increases relative to the
purchasers of assets.
Insurance risks will change. There will be continuing
discussion of the quality of life and whether death is an
appropriate alternative to a poor quality of life. This has
come to the forefront in recent health care discussions—is
a hospice more appropriate than continuing medical care?
Death may no longer be determined by medical doctors. It
will be determined in part by each individual. We already
see  signs  of  this  occurring—the  growth  of  hospices,
individuals  taking  charge  of  their  medical  care  and,
regrettably, the high cost of a final illness.
This might mean that the mortality experience for the
older ages may be worse than expected and pricing will
need to reflect it. Before it does, the impact will be a loss
to life insurers and health insurers (especially Medicare), a
gain to retirement and social security.


Knowledge Of Risks
This group may not live as long as originally priced. Many
pricing models assume mortality improvement over time.
But what happens if the mores of the population change to
remove the social stigma of an earlier death than medicine
would allow? And, how quickly would our pricing models
adjust to this change?


The nature of financial shocks and their frequency will
accelerate. Why? Because there is such fear concerning
the current financial fiasco, there will be a need for greater
amounts of hedging, even at the individual level. As indi-
viduals move to a specific solution, the mass exodus risk
may not be considered. So, if everyone heads for the exit
doors at the same time as occurred in portfolio insurance,
the hedging will fail and result in a market downturn.
Also, individuals do not always act in directions that may
be rational, which may cause market anomalies for little
apparent reason.
A Nimble Company
It must be able to move quickly from one product to another
or one distribution system to another. It must contemplate
an exit strategy and be able to execute it. It cannot commit
to a strategy that may become obsolete in a short period of
time. It cannot have the huge costs to exit that exist today.
In  the  present  economy,  we  have  learned  that
organizations that become too large are not good for the
economy because if there is a failure, the impact is huge.
This  philosophy  will  be  carried  out  through  capital
restrictions and no doubt through the anti-trust policy
preventing new large institutions by disapproving them. As
a result, we should expect to see many more small- to mid-
sized organizations. These organizations will be able to
react quickly to changes in the environment and not be
subject to legacy issues discussed below.


Profits From Products Currently Sold

This means the profits must come from the products that
are sold today, rather than the products that were sold
generations ago when interest rates were low, mortality was
decreasing, and expenses were decreasing products. This is
the often ignored revenue portion of the balance sheet. To
meet profit goals today, costs are cut; to meet profit goals
in the future, the profits must flow from the products sold
today. And the increasing revenue stream means increasing



profits. Only with a thorough knowledge of the customer
base and the risks insured is this possible.
An Integrated Company
Each of these items is a formula for success if applied
at the same time, and yet a formula for failure if applied
selectively. It is possible to know your customers intimate-
ly and deliver products that meet their every need, but if
they are not profitable in the near term and the long term,
the company cannot be successful.
Critical Issues To Be Addressed
The critical issues that must be faced are the workforce,
technology and legacy product administration.
Workforce
The workforce will continue to be an issue. There will be
an increasing need for actuaries, but it takes time to produce
new actuaries. Baby boomer actuaries will retire, reducing
the workforce at the same time that the need for actuaries will
increase. This may increase actuarial salaries over the short
term, but it will also increase the workload for actuaries.
This is a good news side to the workforce equation.
Actuarial work and evaluation of risk exposures have
become extremely sophisticated and require thousands of
iterations. The time frame for reporting has progressively
shortened. Systems can only take the process so far. At
some point the human element is required to explain what
has taken place and what actions are needed to resolve them.
There will be a need for experienced actuaries to work.
This is the perfect job for experienced “retired” actuaries.


Technology
Technology has moved forward to make production faster
and has also made testing feasible, but it has not addressed
a fundamental issue—instant results are not always un-
derstood and may not be actionable. The development of


artificial intelligence systems is needed to assist the human
component, but these systems are not there yet and will
not be fully functional over the next 10 years. Insurance
companies will be spending a lot of research dollars to
achieve this goal.
Legacy Product Administration
Legacy product administration will become even more
burdensome than it is today. Imagine another 10 years

of product development that must be administered even
if only one product is sold. Whenever an administrative
system or valuation system must be updated, every product
must be moved. This will benefit newer companies without
legacy baggage over companies that have been in business
with generations of legacy products.









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