Deloitte Consulting Lists Top 10 Global

January 4, 2002

While wealth management is fairly advanced in the U.S., the funding of pensions will increasingly move from public to private pension providers for the rest of the world. Becoming more proficient at managing enterprise risk and deploying capital will also be at the forefront for insurers, along with adapting to a 21st Century M&A model.

In a Business Wire report, those are among the Top 10 Trends for 2002 in the insurance industry, according to Deloitte Consulting and Deloitte & Touche.

Mike LaPorta, global director of insurance for Deloitte Consulting, noted that insurers have a golden opportunity to increase their asset management businesses in a big way as work forces shrink and more countries move toward privatization of pensions.

Owen Ryan, managing partner, National Insurance Practice for Deloitte & Touche, added that the recent terrorist attacks — combined with natural and man-made disasters — have put extreme pressure on the insurance industry’s capital, raising questions as to how insurers will meet these new challenges.

Following are the Top 10 trends to watch for in 2002, according to LaPorta and Ryan:

1.Retirement planning is golden opportunity for insurers as shrinking workforces drive a shift from public to private pension providers. Much of the world still looks to the state to fund the majority of the income for those individuals that have reached retirement. But this will change. The ability to exploit this golden opportunity will be an important differentiator between winners and losers. Worldwide, insurers need to significantly better performance to exploit this opportunity.

2.Investors and customers alike will demand access to financial and portfolio information in real time. As insurance firms respond to a world where the customer is king, the key enabler of success will be a transparent business. Building the glass firm requires a total overhaul of IT infrastructures and business processes. A handful of leading firms are already adopting transparent business models based around open standard financial, accounting and technology systems.

3. The human touch will become of increasing importance for the sale of long-term investment and insurance products. In contrast to the disintermediated future promised by advocates of the New Economy, the uncertainties of 2002 will drive the majority of people to seek the familiarity and reassurance of face-to-face advice. Only a small number of customers will choose to utilize the Internet directly for insurance purchases, but the medium will become an important tool for insurers to reach and support both captive and third-party product distributors alike. The key issue for insurers, however, is whether to use their own distribution channels or leverage other firms’ channels, such as affinity groups, banks and professional advisers. An “asset-light” distribution model allows greater focus and makes available significant chunks of capital to be deployed elsewhere in the business.

4.Leading insurers integrate rules into the company culture. Much as it is bemoaned, regulation is a fundamental part of the financial services industry. Regulation, at its core, exists to ensure that consumers have the confidence to place business and insure risks with insurance institutions. Many insurers’ compliance departments have operated to meet only minimum standards set by the regulator, rather than living the rules. This will change in 2002 and beyond, as insurance firms integrate compliance into the culture of their business — buttressing investor and customer confidence and further aiding the “flight to quality” seen in 2001.

5. Insurance companies will move from closed and boring to open and innovative. Building on their current strengths of trustworthiness and security, insurers will add new dimensions to their brand’s equity, such as openness, innovation and responsiveness. Many leaders in the industry are already repeating the benefits of brand-building exercises. The challenge for insurance companies is to optimize marketing spending to exploit the continuing “flight to quality” brands, within increasingly tight financial constraints.

6. Successful insurers will utilize innovative tools to manage their risks and re-allocate capital. The effective management of capital has never been more important for insurers. Around the globe, insurers’ financial strength is declining due to a combination of jittery markets and low interest rates. Many firms’ balance sheets are under severe pressure, with falling solvency levels focusing attention on optimizing the allocation of capital across the business activities. Insurers will utilize innovative tools such as stochastic modelling to uncover vital information on the risks within different parts of their business and deploy capital accordingly.

7. Welcome to the “new” world of M&A. The fundamental transition of many financial services markets means that the traditional value chain will fragment. Many insurers will center on specific parts of the value chain, and many will move from absolute size to building scale in manufacturing, administration and/or asset management capabilities. In meeting this challenge, insurers are likely to use a variety of corporate transactions. Traditional M&A strategies have not always yielded the income and cost benefits promised. The future will see successful organizations optimizing a portfolio of transactions from joint ventures and asset swaps through to mega-M&As from the old days.

8. Synthetic products will be created as new vehicles for insuring risk. Insurance companies have continued to increase their products and product features to exploit their own perceived competency in valuing risk. Products such as funding agreements, credit risk derivatives, enhanced yield annuities, synthetic leases, among others; strive to generate additional spread by creating vehicles for insuring risk. Only those companies that manage their increased enterprise risk exposure and concentration will survive and prosper.

9. Death of inflation will have massive implications for insurance companies. A world of permanently low inflation, plus declining bond yields and equity risk premiums, and potential deflation will greatly impact insurance companies. Successful insurers will need to develop fee-based income streams. These could be around financial advice or leveraging the vast reservoir of skills contained within most major insurance giants.

10. Who pays for insurance? The litany of natural and man-made disasters that have ushered in the new millennium has conspired to place new pressures on the insurance, and particularly the re-insurance industry. Can the insurance business survive as the size, predictability and global nature of risk continue to develop beyond rational expectations? Tough decisions will have to be made around policy exclusions, sector coverage, pricing risk and the adoption of new underwriting skills. Insurers will mutate and survive, but insurance markets are likely to look very different.

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