Executives across the life insurance and annuity industry have accepted the urgent need for broad-based change across their companies in recent years. Transformation can sound like a buzzword, but it is also a strategic imperative for insurers of all types and sizes.
Why? Because the industry must learn to innovate both faster and more effectively if it is to keep up with rising consumer expectations, compete effectively with new market entrants and restore historical levels of profitability.
Results from Ernst & Young’s 2016 Life Insurance and Annuity Executive Survey confirm the consensus to embrace and accelerate change as a means to drive innovation. Further, the study confirms the conventional wisdom that core technology must be upgraded in some cases. However, there is new recognition that new thinking and capabilities must be applied across functions and at every level of the enterprise. For example, senior leaders are growing more comfortable with data-
driven decision-making, advanced analytics and new technology. New hires and junior staff must bring different skills and attitudes to help re-energize the business.
But in seeking to drive transformation and innovation, people and cultural factors are every bit as important as data and technology. Talent transformation is critical to retooling life insurance and annuity companies for the next era of an evolving marketplace.
EY’s 2017 Life-Annuity Insurance Outlook highlights closing the talent gap as one of the top six strategic priorities for the industry. The remaining priorities include preparing for regulatory change, remaining centered on the customer, re-evaluating strategies in a changing marketplace, advancing digital transformation and focusing on cybersecurity.
Addressing the Talent Gap
First and foremost, insurers must prepare for the looming talent gap as large numbers of older workers retire and take their institutional knowledge with them. At the same time, younger workers have shown little interest in insurance careers. As a result, some carriers may confront a full-fledged talent crisis where they simply don’t have enough or the right workers to fill critical roles in areas such as product development, underwriting and claims. Even though robots, algorithms and technology may replace some workers, the vast majority of insurers will still be heavily reliant on human talent for the foreseeable future.
To mitigate the risks of generational turnover, insurers must work actively to create clear pathways to transfer knowledge. A culture that emphasizes and rewards collaboration and teamwork will streamline the transfer of technical and digital knowledge between seasoned professionals and new hires.
A new generation of workers can make major contributions in boosting the industry’s use of digital and social channels and analytical tools, but only if insurers learn to compete effectively for the most in-demand skills. Data scientists — professionals able to apply predictive analytics and other sophisticated quantitative tools to support underwriting processes and identify promising new market opportunities — are among the most expensive talent on the market today.
Not only are big names in finance, technology and consulting after the same talent, even small startups may offer a more attractive proposition and work environment than well-established life insurers. Thus, insurers must be proactive in recruiting and retaining next-generation innovators and leaders while helping enhance existing teams with new skills and knowledge.
Perception is part of the problem. Many EY survey respondents believe the industry needs to communicate a clearer and more compelling value proposition. The industry is largely viewed as dull, slow-moving and non-innovative. This is a long-term problem that has contributed to the current talent shortage.
For millennials, who greatly value a sense of purpose in their work, a clearly articulated corporate mission (helping more people save for a comfortable retirement, for example) may be a necessary part of recruiting pitches. Also, given their preference for transparency, millennials may be drawn to companies that openly acknowledge their commitment to the future.
Recruiting is not the only variable in the equation, however. Insurers must think in terms of a clear and comprehensive human capital strategy that identifies the skills that insurers must have in-house versus the ones they can source from outside.
Defining the tasks and activities most likely to be handled by machines or robots is another critical action. These are important steps insurers can — and should — take in the near term as they plan future hiring strategies and chart their way forward. In some areas, the winning formula will likely be one that combines highly skilled human resources focused on specific high-value tasks and exceptions with high-powered machines to handle the heavy lifting of high-volume data and transaction processing.
Evaluating partnership and acquisition opportunities with an eye toward their talent and knowledge implications may help insurers move up the technology learning curve. Bringing in digital experts in critical areas such as advanced analytics and cybersecurity, and developing greater collaboration between internal teams such as those headed by the chief risk officer and chief information officer, also will be essential.
Failing to Innovate
If insurers are to benefit fully from new talent and ongoing technological advancements, they must rethink their approaches to innovation. That means culture change and new ways of thinking. More experimentation, a willingness to take on prudent risk and the ability to learn quickly from mistakes (“failing faster”) were common themes among EY survey responses to questions around innovation. There is a clear understanding that, although not every new idea and technology will prove beneficial, it’s important that companies commit time and resources to experiment with the most promising ones.
If life insurance and annuity companies are going to thrive in the future, they must be prepared to change — and change faster and at larger scale than they have in the past. It is a huge challenge, but I sense new energy across the industry as more executives accept that transformation is no longer a choice. It’s also becoming clear that new talent management strategies may be just as important as new technology in fostering this evolution. After all, transforming a business is simply not possible without the right talent.
Doug French is the managing principal of the Insurance and Actuarial Advisory Services within Ernst & Young in New York. Doug may be contacted at email@example.com.
Key Takeaways From the EY 2016 Life Insurance and Annuity Executive Survey
1. Insurers must take on more risk, fail faster and rethink core operational approaches.
2. Life insurers have significant work to do to meet 21st-century customer expectations.
3. To reduce costs and increase performance gains, insurers must modernize systems and invest in technology.
4. Innovation is necessary to change the public’s perception of the industry.
External factor Impact on the life-annuity market in 2017
(1 = low impact, 10 = high impact)
If they take effect, the new DOL fiduciary rules will have serious implications for distribution channels, costs and product design. New cybersecurity regulations at the national level will further complicate the regulatory landscape. A Trump administration will bring a change in the regulatory agenda.
8 Customer expectations
The convergence of demographic, regulatory and technological change will raise expectations for a more digital, personalized and seamless customer experience. Simpler products and a holistic financial orientation will become prerequisites as insurers strive for true customer centricity.
Insurers will continue to drive cost savings and innovation through core technologies, such as robotics and analytics, while exploring new tools such as artificial intelligence and blockchain.
7 Cyber risks
Ongoing digital transformation and cybercrime will expose insurers to unprecedented levels of cyber risk. Developing a robust cyber strategy will be critical, not only for complying with regulations and protecting customer information, but also for building customer confidence and brand reputation.
7 Competition and M&A
Facing continued disruption, insurers will reassess their market position and explore M&A options, partnerships and greenfield investments to meet strategic objectives. Acquiring distribution channels and spinning off unprofitable businesses to improve long-term positioning will be top of mind.
Stubbornly low interest rates, combined with mediocre U.S. growth, will put continued pressure on insurers’ margins, investment returns and credit fundamentals. A new Trump administration adds greater economic uncertainty, with economists divided on the potential impact.
With insurance professionals retiring, and digital transformation accelerating, insurers will face a wider talent shortfall in 2017. Forward-looking insurers will focus on attracting and retaining data scientists, cyber risk specialists and other talent to capture their future.